-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, IQD2fj+FeQyoJJOauHZpBH1seiiFwjbL3RsH2rsiHjgtA+JibiF8U8yByXghsTeU Hd8DUX38Iv7TbdPQHwlUtQ== 0000080249-94-000007.txt : 19940825 0000080249-94-000007.hdr.sgml : 19940825 ACCESSION NUMBER: 0000080249-94-000007 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19940425 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE T ROWE NEW INCOME FUND INC ET AL CENTRAL INDEX KEY: 0000080249 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 520980581 FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-48848 FILM NUMBER: 94524094 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02396 FILM NUMBER: 94524095 BUSINESS ADDRESS: STREET 1: 100 EAST PRATT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 3015472000 FORMER COMPANY: FORMER CONFORMED NAME: PRICE T ROWE NEW INCOME FUND INC ET AL DATE OF NAME CHANGE: 19920703 485APOS 1 PAGE 1 Registration Nos.: 002-48848/811-2396 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X / Post-Effective Amendment No. 42 / X / REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X / Amendment No. 19 / X / Fiscal Year Ended February 28, 1994 ______________________________________ T. ROWE PRICE NEW INCOME FUND, INC. ___________________________________________________ (Exact name of Registrant as Specified in Charter) 100 East Pratt Street, Baltimore, Maryland 21202 __________________________________________ _________ (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code 410-547-2000 ____________ Henry H. Hopkins 100 East Pratt Street Baltimore, Maryland 21202 _______________________________________ (Name and Address of Agent for Service) Approximate Date of Proposed Public Offering July 1, 1994 _____________ It is proposed that this filing will become effective (check appropriate box): / / immediately upon filing pursuant to paragraph (b) / / on (date) pursuant to paragraph (b) / / 60 days after filing pursuant to paragraph (a) /X/ on July 1, 1994 pursuant to paragraph (a) of Rule 485 CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933+ ________________________________________ Pursuant to Section 24f-2 of the Investment Company Act of 1940, the Registrant has registered an indefinite number of securities under the Securities Act of 1933 and intends to file a 24f-2 Notice by April 29, 1994. + Not applicable, as no securities are being registered by this Post- Effective Amendment No. 42 to the Registration Statement. PAGE 2 The Registration Statement of T. Rowe Price New Income Fund, Inc., on Form N-1A (File Number 2-48848) is hereby amended under the Securities Act of 1933 to update the Registrant's financial statements, make other changes in the Registrant's Prospectus and Statement of Additional Information, and to satisfy the annual amendment requirements of Rule 8b-16 under the Investment Company Act of 1940. This Amendment consists of the following: Cross Reference Sheet Part A of Form N-1A, Revised Prospectus Part B of Form N-1A, Statement of Additional Information Part C of Form N-1A, Other Information Accountants' Consent PAGE 3 CROSS REFERENCE SHEET N-1A Item No. Location _____________ ________ PART A Item 1. Cover Page Cover Page Item 2. Synopsis Summary of Fund Fees and Expenses Item 3. Condensed Financial Information Financial Highlights Item 4. General Description of Registrant Investment Objective and Program; Summary of Fund Fees and Expenses; Investment Policies; Performance Information; Capital Stock; Debt Securities Item 5. Management of the Fund Summary of Fund Fees and Expenses; Management of the Fund; Expenses and Management Fee Item 6. Capital Stock and Other Securities Capital Stock; Dividends and Distributions; Taxes Item 7. Purchase of Securities Being NAV, Pricing, and Effective Offered Date; Shareholder Services; Conditions of Your Purchase; Completing the New Account Form; Opening a New Account; Purchasing Additional Shares Item 8. Redemption or Repurchase NAV, Pricing, and Effective Date; Receiving Your Proceeds; Conditions of Your Purchase; Exchanging and Redeeming Shares Item 9. Pending Legal Proceeding + PART B Item 10. Cover Page Cover Page Item 11. Table of Contents Table of Contents Item 12. General Information and History + Item 13. Investment Objectives and Policies Investment Objective and Policies; Investment Program; Investment Restrictions; Risk Factors; Yield Information; Investment Performance Item 14. Management of the Registrant Management of Fund Item 15. Control Persons and Principal Principal Holders of Holders of Securities Securities Item 16. Investment Advisory and Other Investment Management Services Services; Custodian; Independent Accountants; Legal Counsel Item 17. Brokerage Allocation Portfolio Transactions Item 18. Capital Stock and Other Securities Dividends; Capital Stock Item 19. Purchase, Redemption and Pricing Redemptions in Kind; of Securities Being Offered Pricing of Securities; Net Asset Value Per Share; Federal and State Registration of Shares Item 20. Tax Status Tax Status Item 21. Underwriters Distributor for Fund Item 22. Calculation of Yield Quotations of Money Maket Funds + Item 23. Financial Statements Incorporated by Reference from Annual Report PAGE 4 PART C Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C to this Registration Statement. ___________________________ + Not applicable or negative answer. PAGE 5 Prospectus for the T. Rowe Price New Income Fund, Inc., dated July 1, 1994, should be inserted here. PAGE 1 NEW INCOME FUND Investment Summary The Fund's objective is the highest level of income over time consistent with the presentation of capital through investment primarily in marketable debt Prospectus securities. July 1, 1994 ___________________________________________ T. Rowe Price New Income T. Rowe Price Fund, Inc. 100% No Load. This Fund has no sales charges, no redemption fees, and no 12b-1 fees. 100% of your investment is credited to your account. Table of Contents Services. T. Rowe Price provides easy access to your money through checkwriting, Fund Information bank wires, or telephone redemptions and Investment Objective and offers easy exchange to other T. Rowe Price Program Funds. Summary of Fund Fees and Expenses T. Rowe Price Associates, Inc. (T. Rowe Financial Highlights Price) was founded in 1937 by the late Investment Policies Thomas Rowe Price, Jr. As of February 28, Performance Information 1994, the firm and its affiliates managed Capital Stock over $40 billion for approximately two and Debt Securities a half million individual and institutional NAV, Pricing, and investors. Effective Date ___________________________________________ Receiving Your Proceeds This prospectus contains information you Dividends and should know about the Fund before you Distributions invest. Please keep it for future Taxes reference. A Statement of Additional Management of the Fund Information for the Fund (dated July 1, Expenses and Management 1994) has been filed with the Securities Fee and Exchange Commission and is incorporated How to Invest by reference in this prospectus. It is Shareholder Services available at no charge by calling: 1-800- Conditions of Your 638-5660. Purchase Completing the New THESE SECURITIES HAVE NOT BEEN APPROVED OR Account Form DISAPPROVED BY THE SECURITIES AND EXCHANGE Opening a New Account COMMISSION, OR ANY STATE SECURITIES Purchasing Additional COMMISSION, NOR HAS THE SECURITIES AND Shares EXCHANGE COMMISSION, OR ANY STATE Exchanging and Redeeming SECURITIES COMMISSION, PASSED UPON THE Shares ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PAGE 2 ________________________ ___________________________________________ INVESTMENT OBJECTIVE AND The following table summarizes the quality, PROGRAM yield, price characteristics, and maturity of the Fund which might be expected under normal circumstances. PROGRAM SUMMARY Share price Expected Credit fluctuation average quality Yield (NAV) maturity ___________________________________________ 4 highest Higher Greater No than a fluctuation restriction fund with than a shorter-term fund with securities shorter-term securities ___________________________________________ The Fund's investment objective is to seek the highest level of income over time consistent with the presentation of capital through investment primarily in marketable debt securities. 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 be relied upon as a complete investment program, nor used to play short-term swings in the bond market. The Fund cannot guarantee it will achieve its Investment objective. The Fund invests in long, intermediate and short-term debt securities. The Fund has no maturity restrictions, but the average portfolio maturity is generally expected to be between four and nine years although it may vary significantly. At least 80% of the Fund's total assets will be invested in income-producing securities. The Fund will purchase securities rated investment grade by at least one of the established public rating agencies (e.g., AAA, AA, A, or BBB by Standard & Poor's Corporation (S&P) or Aaa, Aa, A, or Baa by Moody's Investors PAGE 3 Service, Inc. (Moody's)) or, if unrated, of equivalent investment quality as determined by the Fund's investment manager, T. Rowe Price. This policy does not prohibit the Fund from retaining a security which is downgraded after purchase. Debt securities within the top two credit categories comprise what are generally known as high- grade bonds. Investment-grade securities include a range of securities from the highest rated to medium quality (BBB). Securities in the BBB category may be more susceptible to adverse economic conditions or changing circumstances and the securities at the lower end of the BBB category have certain speculative characteristics. The Fund may invest up to 5% of net assets in securities rated at the time of purchase within T. Rowe Price's top four credit categories without regard to the public agency ratings. Please see Investment Policies for a more complete description of the Fund's investments. ________________________ ___________________________________________ SUMMARY OF FUND FEES AND The Fund is 100% no-load . . . you pay no EXPENSES fees to purchase, exchange or redeem shares, nor any ongoing marketing (12b-1) expenses. Lower expenses benefit you by increasing your investment return from the Fund. Shown below are all expenses and fees the Fund incurred during its 1994 fiscal year. Where applicable, expenses were restated to reflect current fees. Expenses are expressed as a percent of fiscal 1994 average Fund net assets. More information about these expenses may be found below and under Expenses and Management Fee and in the Statement of Additional Information under Management Fee and Limitation on Fund Expenses. Shareholder Transaction Expenses ___________________________________________ PAGE 4 Sales load "charge" on purchases None ___________________________________________ Sales load "charge" on reinvested dividends None ___________________________________________ Redemption fees None ___________________________________________ Exchange fees None ___________________________________________ Annual Fund Expenses ___________________________________________ Management fee 0.50% ___________________________________________ Total other (Shareholder servicing, custodial, auditing, etc.)+ 0.32% ___________________________________________ Distribution fees (12b-1) None ___________________________________________ Total Fund Expenses 0.82% ___________________________________________ + The Fund charges a $5.00 fee for wire redemptions under $5,000, subject to change without notice. Example of Fund expenses. The following example illustrates the expenses you would incur on a $1,000 investment, assuming a 5% annual rate of return and redemption at the end of each period shown. For example, expenses for the first year in the Fund would be $8. This is an illustration only. Actual expenses and performance may be more or less than shown. 1 Year--$8 3 Years--$26 5 Years--$4610 Years--$101 Management Fee. The Fund pays T. Rowe Price an investment management fee consisting of a flat Individual Fund Fee of 0.15% of the Fund's net assets and a Group Fee, defined on page __ under Expenses and Management Fee, of 0.34% as of February 28, PAGE 5 1994. Thus, the total combined management fee for the Fund would be 0.49% of net assets. Transfer Agent, Shareholder Servicing, and Administrative Costs. The Fund paid fees to: (i) T. Rowe Price Services, Inc. (TRP Services) for transfer and dividend disbursing agent functions and shareholder services for all accounts; (ii) T. Rowe Price Retirement Plan Services, Inc. for subaccounting and recordkeeping services for certain retirement accounts; and (iii) T. Rowe Price for calculating the daily share price and maintaining the portfolio and general accounting records of the Fund. These fees totaled approximately $623,000, $2,292,000, and $141,000, respectively. ________________________ ___________________________________________ FINANCIAL HIGHLIGHTS The following table provides information about the Fund's financial history. It is based on a single share outstanding throughout each fiscal year (which ends on the last day of February). The most recent five years of the table are 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. The financial statements in the annual report have been audited by Price Waterhouse, independent accountants, whose unqualified report covers the most recent five-year period. PAGE 6 Investment Activities Distributions Net Real- ized and Net Unreal- Total Asset ized Gain from Value, Net (Loss) Invest- Net Net Begin- Invest- on ment Invest-Real- Total Year Ended, ning of ment Invest- Activi- ment lized Distri- February 28 Period Income ments ties Income Gain butions _________________________________________________________________ 1985 $8.24 $.94 $(.06) $.88 $(.94) --$(.94) 1986 8.18 .88 .77 1.65 (.88) -- (.88) 1987 8.95 .75 .22 .97 (.75) -- (.75) 1988+++ 9.17 .76 (.41) .35 (.76) -- (.76) 1989 8.76 .81 (.50) .31 (.81) -- (.81) 1990 8.26 .75 .12 .87 (.75) -- (.75) 1991 8.37 .70 .24 .94 (.70) (.01) (.71) 1992+++ 8.60 .67 .36 1.03 (.67) (.02) (.69) 1993 8.94 .57 .30 .87 (.57) -- (.57) 1994 9.24 .54 (.05) .49 (.54) (.07) (.61) End of Period Ratio of Ratio Net of Invest- Net Expenses ment Port- Asset to Income folio Value, Net Average to Aver- Turn- Year Ended, End of Total Assets (in Net age Net over February 28 PeriodReturn+ thousands) Assets Assets Rate++ _________________________________________________________________ 1985 8.18 11.3% 707,713 0.64% 11.53% 155.0% 1986 8.95 21.4% 936,137 0.66% 10.39% 184.9% 1987 9.17 11.2% 939,078 0.65% 8.22% 125.4% 1988+++ 8.76 4.3% 834,487 0.80% 8.77% 157.9% 1989 8.26 3.7% 860,231 0.91% 9.50% 91.8% 1990 8.37 10.7% 992,566 0.86% 8.85% 51.1% 1991 8.60 11.8%1,130,857 0.88% 8.33% 20.7% 1992+++ 8.94 12.4%1,306,674 0.87% 7.64% 49.7% 1993 9.24 10.1%1,527,299 0.84% 6.36% 85.8% 1994 9.12 5.4%1,457,959 0.82% 5.77% 58.3% _________________________________________________________________ + Total return reflects the following capital gain distributions: long-term gains of $0.01 and $0.07 on 1/4/78 PAGE 7 and 12/31/93, respectively, short-term gains of $0.01 and $0.02 on 12/31/90 and 12/31/91, respectively. ++ Portfolio turnover rate prior to February 28, 1986 excludes long-term U.S. government securities. +++ Year ended February 29. ________________________ ___________________________________________ INVESTMENT POLICIES The Fund's investment program and policies are subject to further restrictions and risks which are described in the Statement of Additional Information. The Fund will not make a material change in its investment objective or fundamental policies without obtaining shareholder approval. The Fund's investment program, unless otherwise specified, is not a fundamental policy and may be changed without shareholder approval. Shareholders will be notified of any material change in the investment program. The Fund may purchase any type of income producing security including, but not limited to, asset-backed securities, bank obligations, collateralized mortgage obligations (CMOs), commercial paper, corporate debt securities, foreign securities, mortgage-backed securities, private placements, savings and loan obligations, securities of supranational organizations, and U.S. government and agency obligations. The Fund may also purchase income-producing securities on a when-issued basis. Certain of the Fund's portfolio securities may have adjustable rates and period demand features. Certain of these investments and others are described below. Asset-Backed Securities. Asset-backed securities represent a participation in, or are secured by and payable from, a stream of payments generated by particular assets, for example, credit card, automobile or trade receivables. Asset-backed commercial paper, one type of asset-backed security, is issued by a special purpose entity, organized solely to issue the commercial PAGE 8 paper and to purchase interests in the assets. The credit quality of these securities depends primarily upon the quality of the underlying assets and the level of credit support and/or enhancement provided. The underlying assets (e.g., loans) are subject to prepayments which shorten the securities' weighted average life and may lower their return. If the credit support or enhancement is exhausted, losses or delays in payment may result if the required payments of principal and interest are not made. The value of these securities also may change because of changes in the market's perception of the creditworthiness of the servicing agent for the pool, the originator of the pool, or the financial institution providing the credit support or enhancement. Cash Reserves. The Fund will hold a portion of its assets in short-term money market securities maturing in one year or less. The reserve position serves three principal purposes: first, it provides flexibility in meeting redemptions, expenses, and the timing of new investments, second, it can aid in structuring the Fund's weighted average maturity, and third, it can serves as a short-term defense during periods of unusual market volatility. The Fund's investments in cash reserves will be consistent with its investment objective and program and the quality standards of the Fund. Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages or mortgage- related securities. Payments of principal and interest on the mortgages are passed through to the holders of the CMOs on the same schedule as they are received, although certain classes of CMOs have PAGE 9 priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the types 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. CMOs may also be less marketable than other securities. Convertible Securities, Preferred and Common Stock, and Warrants. Without regard to quality, the Fund may invest up to 25% of its total assets (not including cash) in preferred and common stocks and convertible securities, convertible into or which carry warrants for common stocks or other equity securities. Preferred stocks are securities that represent an ownership interest in a corporation providing the owner with claims on the company's earnings and assets before common stock owners, but after bond owners. Warrants are options to buy a stated number of shares of common stock at a specified price any time during the life of the warrant (generally, two or more years). Foreign Currency Transactions. Foreign securities of the Fund are subject to currency risk, that is, the risk that the U.S. dollar value of these securities may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations. To manage this risk and facilitate the purchase and sale of foreign securities, the Fund will engage in foreign currency transactions involving the purchase and sale of forward foreign currency exchange contracts. The Fund will normally conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the prevailing rate in the foreign currency exchange market, or through entering into forward contracts to purchase or sell PAGE 10 foreign currencies. The Fund will generally not enter into a forward contract with a term of greater than one year. 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. Generally, the Fund would use such contracts when: (1) the Fund desires to "lock in" the U.S. dollar price of a foreign security which the Fund has agreed to buy or sell; (2) T. Rowe Price believes that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, the Fund may enter into a forward contract to sell or buy the amount of the former currency (or another currency which acts as a proxy for the currency) approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. (This second investment practice is generally referred to as "cross hedging." T. Rowe Price does not intend to enter into forward contracts under this second circumstance if, as a result, the Fund will have more than 20% of the value of its net assets committed to the consummation of such contracts.); or (3) 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 by a U.S. issuer but the dollar component would be transformed into a foreign currency through a forward contract. The Fund may enter into forward contracts for other purposes as well. Although foreign currency transactions 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. PAGE 11 Foreign Securities. The Fund may invest, without limitation, in U.S. dollar- denominated debt securities issued by foreign issuers, foreign branches of U.S. banks, and U.S. branches of foreign banks. The Fund may also invest up to 20% of its net assets in non-U.S. dollar-denominated fixed income securities principally traded in financial markets outside the United States. While investments in foreign securities are intended to reduce risk by providing further diversification, such investments involve sovereign risk in addition to credit and market risks. Sovereign risk includes local political or economic developments, potential nationalization, withholding taxes on dividend or interest payments, and currency blockage (which would prevent cash from being brought back to the United States). Foreign investments may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. Foreign companies may have less public or less reliable information available about them and may be subject to less governmental regulation than U.S. companies. Securities of foreign companies may be less liquid or more volatile than securities of U.S. companies. Futures Contracts and Options. The Fund may enter into interest rate or currency futures contracts (or options thereon) as a hedge against changes in prevailing levels of interest rates or currency exchange rates. Such hedging techniques are intended to "lock in" (or establish more definitely) the effective return on securities or currencies held or intended to be acquired by the Fund or as an efficient means of adjusting its exposure to the bond and currency markets. The Fund will not purchase a futures contract or an option thereon if, with respect to positions in futures or options on futures which do not represent bona fide hedging, PAGE 12 the aggregate initial margin and premiums on such positions would exceed 5% of the Fund's net asset value. The Fund may purchase, sell or write call and put options on securities, currencies and financial indices. The aggregate market value of the Fund's currencies or portfolio securities covering call or put options will not exceed 25% of the Fund's total assets. The Fund will not commit more than 5% of its total assets to premiums when purchasing call or put options. Futures contracts and options can be highly volatile and could result in reduction of the Fund's total return and the Fund's attempt to use such investments for hedging purposes may not be successful. Successful futures strategies require the ability to predict future movements in securities prices, interest rates and other economic factors. The Fund's potential losses from the use of futures extends beyond its initial investment in such contracts. Also, losses from options and futures could be significant if the Fund is unable to close out its position due to disruptions in the market or lack of liquidity. Hybrid Instruments. These instruments can combine the characteristics of securities, futures and options. For example, the principal amount, redemption or conversion terms of a security could be related to the market price of some commodity, currency or securities index. Such securities may bear interest or pay dividends at below market (or even relatively nominal) rates. Under certain conditions, the redemption value of such an investment could be zero. Hybrids can have volatile prices and limited liquidity and their use by the Fund may not be successful. The Fund may invest up to 10% of its total assets in hybrid instruments. PAGE 13 Illiquid Securities. The Fund may acquire illiquid securities (no more than 15% of net assets). Because an active trading market does not exist for such securities, the sale of such securities may be subject to delay and additional costs. Lending of Portfolio Securities. As a fundamental policy, for the purpose of realizing additional income, the Fund may lend securities with a value of up to 33 1/3% of its total assets to broker-dealers, institutional investors or other persons. Any such loan will be continuously secured by collateral at least equal to the value of the security loaned. Such lending could result in delays in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Mortgage-Backed Securities. The Fund may invest in mortgage-backed securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or institutions such as banks, insurance companies and savings and loans. Some government securities, such as GNMA certificates, are backed by the full faith and credit of the U.S. Treasury while others, such as Freddie Mac certificates, are not. Mortgage-backed securities represent interests in a pool of mortgages. Principal and interest payments made on the mortgages in the underlying mortgage pool are passed through to the Fund. Unscheduled prepayments of principal shorten the securities' weighted average life and may lower their total return. The value of these securities also may change because of changes in the market's perception of the creditworthiness of the federal agency or private institution that PAGE 14 issued them. In addition, the mortgage securities market in general may be adversely affected by changes in governmental regulation or tax policies. Repurchase Agreements. The Fund may enter into repurchase agreements with a well- established securities dealer or a bank which is a member of the Federal Reserve System. In the event of a bankruptcy or default of certain sellers of repurchase agreements, the Fund could experience costs and delays in liquidating the underlying security, which is held as collateral, and the Fund might incur a loss if the value of the collateral held declines during this period. Utility Industry Concentration. As a matter of fundamental policy, the Fund will, under certain conditions, invest up to 50% of its assets in any one of the following industries: gas utility, gas transmission utility, electric utility, telephone utility, and petroleum. Investments in any of these industries may be affected by environmental conditions, energy conservation programs, fuel shortages, availability of capital to finance operations and construction programs, and federal and state legislative and regulatory actions. T. Rowe Price believes that any risks to the Fund which might result from concentrating in any such industry will be minimized by diversification of the Fund's investments. Portfolio Turnover. The Fund will not generally trade in securities for short- term profits but, when circumstances warrant, securities may be purchased and sold without regard to the length of time held. A high turnover rate may increase transaction costs and may affect taxes paid by shareholders to the extent short-term gains are distributed. The Fund's portfolio turnover rates for the fiscal PAGE 15 years ended February 28, 1994, February 28, 1993, and February 29, 1992, were 58.3%, 85.8%, and 49.7%, respectively. Fundamental Investment Restrictions. As a matter of fundamental policy, the Fund will not, among other things: (1) purchase a security of any issuer if, as a result, it would, with respect to 75% of its assets, cause the Fund's holdings of that issuer to amount to more than 5% of the Fund's total assets or cause the Fund to own more than 10% of the outstanding voting securities of the issuer provided that, these limitations do not apply to the Fund's purchases of securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities or (2) borrow money except for temporary non-leveraging purposes from banks in amounts not exceeding 33 1/3% of its total assets to facilitate redemption requests, or for emergency, administrative or other proper purposes. Other Investment Policies. As a matter of operating policy, the Fund will not, among other things: (1) in any manner transfer as collateral for indebtedness any securities owned by the Fund except in connection with permissible borrowings or investments, but no such transfer will exceed 33 1/3% of its total assets, and (2) purchase additional securities when money borrowed exceeds 5% of the Fund's total assets. ________________________ ___________________________________________ PERFORMANCE INFORMATION Total Return. The Fund may advertise total return figures on both a cumulative and compound average annual basis and compare them to various indices (e.g., the S&P 500), other mutual funds or other performance measures. Cumulative total return compares the amount invested at the beginning of a period with the amount redeemed at the end of the period, assuming the reinvestment of all dividends and PAGE 16 capital gain distributions. The compound average annual total return indicates a yearly compound average of the Fund's performance, derived from the cumulative total return. The annual compound rate of return for the Fund may vary from any average. Further information about the Fund's performance is contained in its annual report which is available free of charge. Yield. The Fund may advertise a yield figure derived by dividing the Fund's net investment income per share (as defined by applicable SEC regulations) during a 30-day base period by the per-share price on the last day of the base period. ________________________ ___________________________________________ CAPITAL STOCK The Fund is a Maryland corporation organized in 1973 and registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as a diversified, open-end investment company, commonly known as a "mutual fund." A mutual fund, such as the Fund, enables shareholders to: (1) obtain professional management of investments, including T. Rowe Price's proprietary research; (2) diversify their portfolio to a greater degree than would be generally possible if they were investing as individuals and thereby reduce, but not eliminate risks; and (3) simplify the recordkeeping and reduce transaction costs associated with investments. The Fund has an Advisory Committee composed of the following members: Charles P. Smith Edmund M. Notzon Robert P. Campbell Robert M. Rubino George J. Collins Peter Van Dyke Heather R. Landon Edward A. Wiese Charles P. Smith is responsible for the day to day management of the Fund and has been PAGE 17 a portfolio manager of T. Rowe Price for the last _____ years. Shareholder Rights. The Fund issues one class of capital stock, all shares of which have equal rights with regard to voting, redemptions, dividends, distributions, and liquidations. Fractional shares have voting rights and participate in any distributions and dividends. Shareholders have no preemptive or conversion rights; nor do they have cumulative voting rights. When the Fund's shares are issued, they are fully paid and nonassessable. The Fund does not routinely hold annual meetings of shareholders. The total authorized capital stock of the Fund consists of 300,000,000 shares, each having a par value of $1.00. As of February 28, 1994, there were 47,130 shareholders in the Fund and a total of 3,225,724 shareholders in the other 54 T. Rowe Price Funds. ________________________ ___________________________________________ DEBT SECURITIES Total Return Components. The total return from the Fund consists of the change in its net asset value per share and the income it generates. The net asset value of the Fund will be affected primarily by changes in interest rate levels, the maturity of individual portfolio holdings, and the quality of the securities held. Interest Rates. A bond is a contractual obligation to repay a stated debt amount (the principal) on a specified date (the maturity) plus a specified rate of interest for the use of the money. Most bonds pay a fixed rate of interest known as the coupon rate which is fixed for the term of the A general explanation. bond. A bond's yield reflects the fixed annual interest as a percent of its current price. This price (the bond's market value) must increase or decrease in order to adjust the bond's yield to current interest rate levels. Therefore, bond prices generally move in the opposite direction of interest rates. PAGE 18 Maturity. Movements in interest rates typically have a greater effect on the prices of longer term bonds than on those with shorter maturities. The following table illustrates the effect of a change in interest rates on a $1,000 bond with a 7% coupon. Principal value if rates: _________________________ Increase Decrease ________ ________ Bond--Maturity 1% 1% ___________________________________________ Short-term - 2 years $982 $1,019 Intermediate - 5 years$959 $1,043 Long-term - 20 years $901 $1,116 ___________________________________________ This table is for illustrative purposes only and should not be taken as representative of expected changes in the share price of the Fund. T. Rowe Price will actively manage the Fund's portfolio maturity, consistent with the Fund's objective, according to its interest rate outlook. During periods of rising interest rates, a shorter average maturity may be adopted to cushion the effect of falling bond prices on the Fund's share price. When rates are falling and bond prices are rising, a longer average maturity may be sought. Credit Analysis. The quality of a bond is measured by credit risk--the ability of the issuer to meet interest and principal payments on a timely basis. Issuers who are believed to be good credit risks receive high quality ratings, and those believed to be poor credit risks receive low quality ratings. High-quality bonds involve less credit risk and typically offer a lower yield than bonds of low PAGE 19 quality. In determining the quality of an issuer, T. Rowe Price considers publicly available ratings, but places primary emphasis on its own credit analysis. This analysis may differ from the evaluations of public rating agencies, such as Moody's Investors Service, Inc. or Standard & Poor's Corporation. T. Rowe Price may also buy bonds from unrated issuers, which are not necessarily of lower quality, but may be less marketable. ________________________ ___________________________________________ FUND OPERATIONS AND The following sections apply to all taxable SERVICES T. Rowe Price Bond and Money Funds. Bond Funds include all T. Rowe Price fixed income funds with a fluctuating NAV. ________________________ ___________________________________________ NAV, PRICING, AND Net Asset Value Per Share (NAV). The NAV EFFECTIVE DATE per share, or share price, for the Bond Funds is normally determined as of 4:00 pm Eastern Time (ET) each day the New York Stock Exchange is open. The NAV for the Money Funds is also calculated at 12:00 noon ET every day the Exchange is open. The Fund's share price is calculated by subtracting its liabilities from its total assets and dividing the result by the total number of shares outstanding. Among other things, the Fund's liabilities include accrued expenses and dividends payable, and its total assets include portfolio securities valued at market as well as income accrued but not yet received. The Money Funds utilize amortized cost value on those securities with remaining maturities of 60 days or less. If your order is received Purchased shares are priced at that day's in good order before 4:00 NAV if your request is received before 4:00 pm ET, you will receive pm ET in good order. (See Completing the that day's NAV. New Account Form and Opening A New Account.) If received later than 4:00 pm ET, shares will be priced at the next business day's NAV. Redemptions are priced at that day's NAV if your request is received before 4:00 pm PAGE 20 ET in good order at the transfer agent's offices at T. Rowe Price Account Services, P.O. Box 89000, Baltimore, MD 21289-0220. If received after 4:00 pm ET, shares will be priced at the next business day's NAV. Also, we cannot accept requests which specify a particular date for a purchase or redemption or which specify any special conditions. If your redemption request cannot be accepted, you will be notified and given further instructions. Exchanges are normally priced in the same manner as purchases and redemptions. However, if you are exchanging into a bond or money fund and the release of your exchange proceeds is delayed for the allowable five business days (see Receiving Your Proceeds), you will not begin to earn dividends until the sixth business day after the exchange. The Fund reserves the right to change the time at which purchases, redemptions, and exchanges are priced if the New York Stock Exchange closes at a time other than 4:00 pm ET or an emergency exists. ________________________ ___________________________________________ RECEIVING YOUR PROCEEDS Redemption proceeds are mailed to the address or sent by wire or ACH transfer to the bank account designated on your New Account Form. They are generally sent the next business day after your redemption request is received in good order. Proceeds sent by bank wire should be credited to your bank account the next business day and proceeds sent by ACH transfer should be credited the second day after the sale. In addition, under certain conditions, and when deemed to be in the best interests of the Fund, redemption proceeds may not be sent for up to five business days after your request is received to allow for the orderly liquidation of securities. Requests by mail for wire redemptions (unless PAGE 21 previously authorized) must have a signature guarantee. ________________________ ___________________________________________ DIVIDENDS AND The Fund distributes all net investment DISTRIBUTIONS income and capital gains to shareholders. Dividends are declared daily and paid monthly. Capital gain distributions, if any, are normally paid in January and/or March. Dividends and distributions declared by the Fund will be reinvested unless you choose an alternative payment option on the New Account Form. Dividends not reinvested are paid by check or transmitted to your bank account via ACH. If the U.S. Postal Service cannot deliver your check, or if your check remains uncashed for six months, the Fund reserves the right to reinvest your distribution check in your account at the then current NAV and to reinvest all subsequent distributions in shares of the Fund. Purchases. Each day, the Money Funds declare a dividend to shareholders of record as of 12:00 noon ET on that day; and the Bond Funds declare a dividend to shareholders of record as of 4:00 pm ET on the previous day. For the Money Funds, wire purchase orders effective before 12:00 noon ET receive the dividend for that day; other purchase orders receive the dividend for the next business day after receipt. For the Bond Funds, you will begin to earn dividends on the first business day after shares are purchased unless shares were not paid for, in which case dividends are not earned until the next business day after payment is received. Redemptions. Shares will earn dividends through the date of redemption; also, shares redeemed on a Friday or prior to a holiday will continue to earn dividends until the next business day. Generally, if you redeem all of your shares at any time during the month, you will also receive all dividends earned through the date of PAGE 22 redemption in the same check. When you redeem only a portion of your shares, all dividends accrued on those shares will be reinvested, or paid in cash, on the next dividend payment date. ________________________ ___________________________________________ TAXES Dividends and Distributions. In January, the Fund will mail you Form 1099-DIV indicating the federal tax status of your Form 1099-DIV will be dividends and capital gain distributions. mailed to you in January. Generally, dividends and distributions are taxable in the year they are paid. However, any dividends and distributions paid in January but declared during the prior three months are taxable in the year they are declared. Dividends and distributions are taxable to you regardless of whether they are taken in cash or reinvested. Dividends and short-term capital gain distributions are taxable as ordinary income; long-term capital gain distributions are taxable as long-term capital gains. The capital gain holding period is determined by the length of time the Fund has held the securities, not the length of time you have owned Fund shares. Shares Sold (Excluding Money Funds). A redemption or exchange of Fund shares is treated as a sale for tax purposes which will result in a short or long-term capital gain or loss, depending on how long you have owned the shares. In January, the Bond Funds will mail you Form 1099-B indicating the trade date and proceeds from all sales and exchanges. Undistributed Gains (Excluding Money Funds). At the time of purchase, the share price of a Bond Fund may reflect undistributed capital gains or unrealized appreciation of securities. Any capital gains from these amounts which are later distributed to you are fully taxable. Foreign Transactions (New Income, Short- Term Bond and High Yield Funds). PAGE 23 Distributions resulting from the sale of certain foreign currencies and debt securities, to the extent of foreign exchange gains, are taxed as ordinary income or loss. If these transactions result in reducing a Fund's net income, a portion of the dividends may be classified as a return of capital (which lowers your tax base). If the Fund pays nonrefundable taxes to foreign governments during the year, the taxes will reduce that Fund's dividends. Tax-Qualified Retirement Plans. Tax- qualified retirement plans generally will not be subject to federal tax liability on either distributions from the Fund or redemption of shares of the Fund. Rather, participants in such plans will be taxed when they begin taking distributions from the plans. ________________________ ___________________________________________ MANAGEMENT OF THE FUND Investment Manager. T. Rowe Price is responsible for selection and management of the Fund's portfolio investments. T. Rowe Price serves as investment manager to a variety of individual and institutional investors, including limited and real estate partnerships and other mutual funds. Board of Directors/Trustees. The management of the Fund's business and affairs is the responsibility of the Fund's Board of Directors/Trustees. Portfolio Transactions. Decisions with respect to the purchase and sale of the Fund's portfolio securities are made by T. Rowe Price. New Income, Short-Term Bond and High Yield Funds. The Fund's Board of Directors/Trustees has authorized T. Rowe Price to utilize certain brokers indirectly related to T. Rowe Price in the capacity of broker in connection with the execution of the Fund's portfolio transactions. PAGE 24 Investment Services. T. Rowe Price Investment Services, Inc., a wholly-owned subsidiary of T. Rowe Price, is the distributor for this Fund as well as all other T. Rowe Price Funds. Transfer and Dividend Disbursing Agent, Shareholder Servicing and Administrative. TRP Services, a wholly-owned subsidiary of T. Rowe Price, serves the Fund as transfer and dividend disbursing agent. T. Rowe Price Retirement Plan Services, Inc., a wholly-owned subsidiary of T. Rowe Price, performs subaccounting and recordkeeping services for shareholder accounts in certain retirement plans investing in the Price Funds. T. Rowe Price calculates the daily share price and maintains the portfolio and general accounting records of the Fund. The address for TRP Services and T. Rowe Price Retirement Plan Services, Inc. is 100 East Pratt Street, Baltimore, Maryland 21202. ________________________ ___________________________________________ EXPENSES AND MANAGEMENT The Fund bears all expenses of its FEE operations other than those incurred by T. Rowe Price under its Investment Management Agreement with T. Rowe Price. Fund expenses include: the management fee; shareholder servicing fees and expenses; custodian and accounting fees and expenses; legal and auditing fees; expenses of preparing and printing prospectuses and shareholder reports; registration fees and expenses; proxy and annual meeting expenses, if any; and directors'/trustees' fees and expenses. Management Fee. The Fund pays T. Rowe Price an investment management fee consisting of an Individual Fund Fee and a Group Fee. See Summary of Fund Fees and Expenses for the Individual Fund Fee. The Group Fee varies and is based on the combined net assets of all mutual funds sponsored and managed by T. Rowe Price and Rowe Price-Fleming International, Inc., PAGE 25 excluding T. Rowe Price Spectrum Fund, Inc., and any institutional or private label mutual funds, and distributed by T. Rowe Price Investment Services, Inc. The Fund pays, as its portion of the Group Fee, an amount equal to the ratio of its daily net assets to the daily net assets of all the Price Funds. The table below shows the annual Group Fee rate at various asset levels of the combined Price Funds: 0.480% First 0.350% Next $1 billion $2 billion 0.450% Next 0.340% Next $1 billion $5 billion 0.420% Next 0.330% Next $1 billion $10 billion 0.390% Next 0.320% Next $1 billion $10 billion 0.370% Next 0.310% Thereafter $1 billion 0.360% Next $2 billion Based on combined Price Funds' assets of approximately $36.1 billion at February 28, 1994, the Group Fee was 0.34%. ________________________ ___________________________________________ SHAREHOLDER SERVICES The following is a brief summary of services available to shareholders in the T. Rowe Price Funds, some of which may be restricted or unavailable to retirement plan accounts. You must authorize most of these services on a New Account or Shareholder Services Form. Services may be modified or withdrawn at any time without notice. Please verify all transactions on your confirmation statements promptly after receiving them. Any discrepancies must be reported to Shareholder Services immediately. Automatic Asset Builder. You can have us move $50 or more on the same day each month from your bank account or invest $50 or PAGE 26 more from your paycheck into any T. Rowe Price Fund. Checkwriting Service (Not available in High Yield Fund). There is no charge for this service and you may write an unlimited number of checks. Minimum check amount is $500. Remember that a checkwriting redemption in the Bond Funds will be treated as a capital gain or loss transaction for tax purposes. This service is subject to State Street Bank's rules and regulations and is governed by Massachusetts Uniform Commercial Code. Stop payment instructions must be given by calling Shareholder Services. Investor Services Discount Brokerage Service. You can trade 1-800-638-5660 stocks, bonds, options, CDs, Treasury 1-410-547-2308 Bills, and precious metals at substantial savings through our Discount Brokerage Service. Call Investor Services for more information. Exchange Service. You can move money from one account to an existing identically registered account or open a new identically registered account. Remember that, for tax purposes, an exchange is treated as a redemption and a new purchase. Exchanges into a state tax-free fund are limited to investors residing in states where those funds are qualified for sale. Some of the T. Rowe Price Funds may impose a redemption fee of .50-2%, payable to such Funds, on shares held for less than one year, or in some funds, six months. Retirement Plans. For details on IRAs, please call Investor Services. For details on all other retirement plans, please call our Trust Company at 1-800-492-7670. Telephone Services. The following services are explained fully in the Services Guide, PAGE 27 Shareholder which is mailed to new T. Rowe Price Services investors. If you don't have a copy, 1-800-225-5132 please call Shareholder Services. (All 1-410-625-6500 telephone calls to Shareholder Services and Investor Services are recorded in order to protect you, the Fund, and its agents.) 24-Hour Service. Tele*AccessR provides information on yields, prices, latest dividends, account balances, and last transaction as well as the ability to request prospectuses and account forms and initiate purchase, redemption and exchange orders (if you have established Telephone Services). Just call 1-800- 638-2587 and press the appropriate codes into your touch-tone phone. PC*AccessR provides the same information as Tele*Access, but on a personal computer. Electronic Transfers. We offer three free methods for purchasing or redeeming Fund shares in amounts of $100 to $100,000 through ACH transfers between your bank checking and fund accounts: -- By calling Shareholder Services during business hours (Tele- ConnectR); -- By touch-tone phone any day, any time (Tele*Access); -- By personal computer any day, any time (PC*Access). If your bank checking and fund account are not identically registered, you will need a signature guarantee to establish this service. Wire Transfers. Wire transfers can be processed through bank wires (a $5 charge applies to redemption amounts under $5,000, and your bank may charge you for receiving wires). While this is usually the quickest transfer method, the Fund reserves the right to temporarily suspend wires under unusual circumstances. PAGE 28 ________________________ ___________________________________________ CONDITIONS OF YOUR Account Balance. If your account drops PURCHASE below $1,000 for three months or more, the Fund has the right to close your account, after giving 60 days' notice, unless you make additional investments to bring your account value to $1,000 or more. Broker-Dealers. Purchases or redemptions through broker-dealers, banks, and other institutions may be subject to service fees imposed by those entities. No such fees are charged by T. Rowe Price Investment Services or the Fund if shares are purchased or redeemed directly from the Fund. Excessive Trading and Exchange Limitations. To protect Fund shareholders against disruptions in portfolio management which might occur as a result of too frequent buy and sell activity and to minimize Fund expenses associated with such transaction activity, the Fund prohibits excessive trading in any account (or group of accounts managed by the same person). Within any 120 consecutive-day period, investors may not exchange between Price Funds more than twice or buy and sell the Price Funds more than once, if the transactions involve substantial assets or a substantial portion of the assets in the account or accounts. This policy is applied on a multi-fund basis. Any transactions above and beyond these guidelines will be considered to be excessive trading, and the investor may be prohibited from making additional purchases or exercising the exchange privilege. This policy does not apply to exchanges solely between, or purchases and sales solely of, the Price Money Funds, nor does it apply to simple redemptions from any Fund. PAGE 29 Nonpayment. If your check, wire or ACH transfer does not clear, or if payment is not received for any telephone purchase, the transaction will be cancelled and you will be responsible for any loss the Fund or Investment Services incurs. If you are already a shareholder, the Fund can redeem shares from any identically registered account in this Fund or any other T. Rowe Price Fund as reimbursement for any loss incurred. You may be prohibited or restricted from making future purchases in any of the T. Rowe Price Funds. U.S. Dollars. All purchases must be paid for in U.S. dollars, and checks must be drawn on U.S. banks. Redemptions in Excess of $250,000. Redemption proceeds are normally paid in cash. However, if you redeem more than $250,000, or 1% of the Fund's net assets, in any 90-day period, the Fund may in its discretion: (1) pay the difference between the redemption amount and the lesser of these two figures with securities of the Fund or (2) delay the transmission of your proceeds for up to five business days after your request is received. Signature Guarantees. A signature guarantee is designed to protect you and the Fund by verifying your signature. You will need one to: (1) Establish certain services after the account is opened. (2) Redeem over $50,000 by written request (unless you have authorized Telephone Services). (3) Redeem shares when proceeds are: (i) being mailed to an address other than the address of record, (ii) made payable to other than the registered owner(s), or (iii) being sent to a bank account other than PAGE 30 the bank account listed on your fund account. (4) Transfer shares to another owner. (5) Send us written instructions asking us to wire redemption proceeds (unless previously authorized). (6) Establish Electronic Transfers when your bank checking and fund account are not identically registered. These requirements may be waived or modified in certain instances. Acceptable guarantors are all eligible guarantor institutions as defined by the Securities Exchange Act of 1934 such as: commercial banks which are FDIC members, trust companies, firms which are members of a domestic stock exchange, and foreign branches of any of the above. We cannot accept guarantees from institutions or individuals who do not provide reimbursement in the case of fraud, such as notaries public. Telephone Exchange and Redemption. Telephone exchange and redemption are established automatically when you sign the New Account Form unless you check the box which states that you do not want these services. The Fund uses reasonable procedures (including shareholder identity verification) to confirm that instructions given by telephone are genuine. If these procedures are not followed, it is the opinion of certain regulatory agencies that the Fund may be liable for any losses that may result from acting on the instructions given. All conversations are recorded, and a confirmation is sent within five business days after the telephone transaction. Ten-Day Hold. The mailing of proceeds for redemption requests involving any shares purchased by personal, corporate or government check, or ACH transfer is generally subject to a 10-calendar day PAGE 31 delay to allow the check or transfer to clear. The 10-day clearing period does not affect the trade date on which your purchase or redemption order is priced, or any dividends and capital gain distributions to which you may be entitled through the date of redemption. If your redemption request was sent by mail or mailgram, proceeds will be mailed no later than the seventh calendar day following receipt unless the check or ACH transfer has not cleared. The 10-day hold does not apply to purchases made by wire, Automatic Asset Builder-Paycheck, or cashier's, treasurer's, or certified checks. The Fund and its agents reserve the right to: (1) reject any purchase or exchange, cancel any purchase due to nonpayment, or reject any exchange or redemption where the Fund has not received payment; (2) waive or lower the investment minimums; (3) accept initial purchases by telephone or mailgram; (4) waive the limit on subsequent purchases by telephone; (5) reject any purchase or exchange prior to receipt of the confirmation statement; (6) redeem your account (see Tax Identification Number); (7) modify the conditions of purchase at any time; and (8) reject any check not made directly payable to the Fund or T. Rowe Price (call Shareholder Services for more information). ________________________ ___________________________________________ COMPLETING THE NEW Tax Identification Number. We must have ACCOUNT FORM your correct social security or corporate tax identification number and a signed New You must provide your tax Account Form or W-9 Form. Otherwise, ID number and sign the federal law requires the Fund to withhold a New Account Form. percentage (currently 31%) of your dividends, capital gain distributions, and redemptions, and may subject you to a fine. You also will be prohibited from opening another account by exchange. If this information is not received within 60 days after your account is established, your PAGE 32 account may be redeemed, priced at the NAV on the date of redemption. Unless you otherwise request, one shareholder report will be mailed to multiple account owners with the same tax identification number and same zip code and to those shareholders who have requested that their accounts be combined with someone else's for financial reporting. Account Registration. If you own other T. Rowe Price Funds, make certain the registration (name and account type) is identical to your other funds for easy exchange. Remember to sign the form exactly as the name appears in the registration section. Services. By signing up for services on the New Account Form, rather than after the account is opened, you will avoid having to complete a separate form and obtain a signature guarantee (see Conditions of Your Purchase). ________________________ ___________________________________________ OPENING A NEW ACCOUNT Minimum initial investment: $2,500; $1,000 for retirement plans and gifts or transfers to minors (UGMA/UTMA) accounts; $50 per month for Automatic Asset Builder accounts -- see Shareholder Services By Mail Send your New Account Form and check to: Regular Mail Mailgram, Checks payable to T. Rowe Express, Price Funds. Registered, or Certified Mail T. Rowe Price T. Rowe Price Account Services Account Services P.O. Box 17300 10090 Red Run Baltimore, MD Boulevard 21298-9353 Owings Mills, MD 21117 ___________________________________________ PAGE 33 Investor Services By Wire Call Investor Services for an 1-800-638-5660 account number and use Wire Address 1-410-547-2308 below. Then, complete the New Account Form and mail it to one of the addresses above. (Not applicable to retirement plans.) Wire Address Morgan Guaranty (to give to your Trust Company of bank): New York ABA #021000238 T. Rowe Price (fund name)/ AC-00153938 Account name(s) and account number ___________________________________________ Shareholder Services By Exchange Call Shareholder Services. The 1-800-225-5132 new account will have the same 1-410-625-6500 registration as the account from which you are exchanging. Services for the new account may be carried over by telephone request if preauthorized on the existing account. See Excessive Trading and Exchange Limitations under Conditions of Your Purchase. ___________________________________________ In Person Drop off your New Account Form and obtain a receipt at a T. Rowe Price Investor Center: 101 East T. Rowe Price Lombard StreetFinancial Center First Floor First Floor Baltimore, MD 10090 Red Run Boulevard Owings Mills, MD Farragut ARCO Tower Square 31st Floor First Floor 515 South 900 17th Flower Street Street, NW Los Angeles, Washington, CA PAGE 34 DC ________________________ ___________________________________________ PURCHASING ADDITIONAL Minimum: $100 ($50 for retirement plans) SHARES By Wire Call Shareholder Services or use the Wire Address (see Opening a New Account). ___________________________________________ Shareholder Services By Mail Indicate your account number 1-800-225-5132 and the Fund name on your 1-410-625-6500 check. Mail the check to us at the address below either with a reinvestment slip or a note indicating the Fund and account number in which you wish to purchase shares. T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500 ___________________________________________ By ACH Use Tele*Access, PC*Access or Transfer call Shareholder Services (if you have established Telephone Services) for ACH transfers. ___________________________________________ By Automatic Fill out the Automatic Asset Asset Builder section on the New Builder Account or Shareholder Services Form. ___________________________________________ Minimum: $5,000 By Phone Call Shareholder Services. ________________________ ___________________________________________ EXCHANGING AND REDEEMING By Phone Call Shareholder Services. If SHARES you find our phones busy during unusually volatile markets, please consider placing your order by express mail, mailgram, Tele*Access or PC*Access if you have authorized Telephone Services. For exchange policy, see Excessive Trading and Exchange Limitations under Conditions of Your Purchase. PAGE 35 Redemption proceeds can be mailed, sent by Electronic Transfer, or wired to your bank. The Fund charges a $5.00 fee for wire redemptions under $5,000, subject to change without notice. Your bank may also charge you for receiving wires. ___________________________________________ Shareholder Services By Mail Indicate account name(s) and 1-800-225-5132 numbers, fund name(s), and 1-410-625-6500 exchange or redemption amount. For exchanges, indicate the accounts you are exchanging from and to along with the amount. We require the signature of all owners exactly as registered, and possibly a signature guarantee (see Signature Guarantees under Conditions of Your Purchase). Note: Distributions from T. Rowe Price Trust retirement accounts, including Company IRAs, must be in writing. 1-800-492-7670 Please call Shareholder 1-410-625-6585 Services to obtain an IRA Distribution Request Form. For employer-sponsored retirement accounts, call T. Rowe Price Trust Company or your plan administrator for instructions. Shareholders holding previously issued certificates must conduct transactions by mail. If you lose a stock certificate, you may incur an expense to replace it. Call Shareholder Services for further information. Mailing addresses: Regular Mail Mailgram, Express, Registered, or PAGE 36 Certified Mail Non-Retirement and IRA Accounts All Accounts T. Rowe Price T. Rowe Price Account ServicesAccount P.O. Box 89000 Services Baltimore, MD 10090 Red Run 21289-0220 Boulevard Owings Mills, MD 21117 Employer-Sponsored Retirement Accounts T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300 PAGE 37 Prospectus To Open an Account: Investor Services T. Rowe Price New Income FundR 1-800-638-5660 547-2308 in Baltimore July 1, 1994 Yields & Prices: Tele*AccessR 24 hours, 7 days a week 1-800-638-2587 625-7676 in Baltimore Existing Account: Shareholder Services 1-800-225-5132 625-6500 in Baltimore Investor Centers: 101 East Lombard Street First Floor Baltimore, Maryland Farragut Square First Floor 900 17th Street, NW Washington, DC T. Rowe Price Financial Center First Floor 10090 Red Run Boulevard Owings Mills, Maryland ARCO Tower 31st Floor 515 South Flower Street Los Angeles, California T. ROWE PRICE Invest With ConfidenceR PAGE 6 The Statement of Additional Information for the T. Rowe Price New Income Fund, Inc., dated July 1, 1994, should be inserted here. PAGE 1 STATEMENT OF ADDITIONAL INFORMATION T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE GNMA FUND T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund (collectively the "Funds" and individually the "Fund") This Statement of Additional Information is not a prospectus but should be read in conjunction with the appropriate Fund's prospectus dated July 1, 1994, which may be obtained from T. Rowe Price Investment Services, Inc., 100 East Pratt Street, Baltimore, Maryland 21202. If you would like a prospectus for a Fund of which you are not a shareholder, please call 1-800-638-5660. A prospectus with more complete information, including management fees and expenses will be sent to you. Please read it carefully. The date of this Statement of Additional Information is July 1, 1994. PAGE 2 TABLE OF CONTENTS Page Page Asset-Backed Securities. . . Lending of Portfolio Capital Stock. . . . . . . . Securities. . . . . . . . . Custodian. . . . . . . . . . Management of Fund . . . . . Description of the Fund. . . Mortgage-Related Distributor for Fund . . . . Securities. . . . . . . . . Dividends and Distributions. Net Asset Value Per Share. . Federal and State Options. . . . . . . . . . . Registration of Shares. . . Organization of the Fund . . Foreign Currency Portfolio Transactions . . . Transactions. . . . . . . . Pricing of Securities. . . . Foreign Futures and Options. Principal Holders of Futures Contracts. . . . . . Securities. . . . . . . . . Hybrid Instruments . . . . . Ratings of Commercial Paper. Independent Accountants. . . Ratings of Corporate Illiquid or Restricted Debt Securities . . . . . . Securities. . . . . . . . . Repurchase Agreements. . . . Investment Management Risk Factors . . . . . . . . Services. . . . . . . . . . Tax Status . . . . . . . . . Investment Objectives Taxation of Foreign and Polices . . . . . . . . Shareholders. . . . . . . . Investment Performance . . . Warrants . . . . . . . . . . Investment Program . . . . . When-Issued Securities and Forward Investment Restrictions. . . Commitment Contracts. . . . Legal Counsel. . . . . . . . Yield Information. . . . . . INVESTMENT OBJECTIVES AND POLICIES The following information supplements the discussion of each Fund's investment objectives and policies discussed in each Fund's prospectus. The Funds will not make a material change in their investment objectives without obtaining shareholder approval. Unless otherwise specified, the investment programs and restrictions of the Funds are not fundamental policies. Each Fund's operating policies are subject to change by each Board of Directors/Trustees without shareholder approval. However, shareholders will be notified of a material change in an operating policy. Each Fund's fundamental policies may not be changed without the approval of at least a majority of the outstanding shares of the Fund or, if it is less, 67% of the shares represented at a meeting of shareholders at which the holders of 50% or more of the shares are represented. Throughout this Statement of Additional Information, "the Fund" is intended to refer to each Fund listed on the cover page, unless otherwise indicated. PAGE 3 RISK FACTORS All Funds Debt Obligations Yields on short, intermediate, and long-term securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering, the maturity of the obligation, and the credit quality and rating of the 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 their obligations for the payment of interest and principal when due. Although the Fund seeks to reduce risk by portfolio diversification, credit analysis, and attention to trends in the economy, industries and financial markets, such efforts will not eliminate all risk. There can, of course, be no assurance that the Fund will achieve its investment objective. After purchase by the Fund, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. For the Prime Reserve and U.S. Treasury Money Funds, the procedures set forth in Rule 2a-7, under the Investment Company Act of 1940, may require the prompt sale of any such security. For the other Funds, neither event will require a sale of such security by the Fund. However, T. Rowe Price will consider such event in its determination of whether the Fund should continue to hold the security. To the extent that the ratings given by Moody's or S&P may change as a result of changes in such organizations or their rating systems, the Fund will attempt to use comparable ratings as standards for investments in accordance with the investment policies contained in the prospectus. When purchasing unrated securities, T. Rowe Price, under the supervision of the Fund's Board of Directors, determines whether the unrated security is of a qualify comparable to that which the Fund is allowed to purchase. All Funds, (except Prime Reserve and U.S. Treasury Money Funds) PAGE 4 Because of its investment policy, the Fund may or may not be suitable or appropriate for all investors. The Fund is not a money market fund and is not an appropriate investment for those whose primary objective is principal stability. The value of the portfolio securities of the Fund will fluctuate based upon market conditions. Although the Fund seeks to reduce risk by investing in a diversified portfolio, such diversification does not eliminate all risk. There can, of course, be no assurance that the Fund will achieve its investment objective. Prime Reserve and U.S. Treasury Money Funds There can be no assurance that the Funds will achieve their investment objectives or be able to maintain their net asset value per share at $1.00. The price of the Fund is not guaranteed or insured by the U.S. Government and its yield is not fixed. An increase in interest rates could reduce the value of the Fund's portfolio investments, and a decline in interest rates could increase the value. 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. Adjustable Rate and GNMA Funds Mortgage securities differ from conventional bonds in that principal is paid back over the life of the security rather than at maturity. As a result, the holder of a mortgage security (i.e., the Fund) receives monthly scheduled payments of principal and interest, and may receive unscheduled principal payments representing prepayments on the underlying mortgages. The incidence of unscheduled principal prepayments is also likely to increase in mortgage pools owned by the Fund when prevailing mortgage loan rates fall below the mortgage rates of the securities underlying the individual pool. The effect of such prepayments in a falling rate environment is to (1) cause the Fund to reinvest principal payments at the then lower prevailing interest rate, and (2) reduce the potential for capital appreciation beyond the face amount of the security. Conversely, the Fund may realize a gain on prepayments of mortgage pools trading at a discount. Such prepayments will provide an early return of principal which may then be reinvested at the then higher prevailing interest rate. The market value of adjustable rate mortgage securities ("ARMs"), like other U.S. government securities, will generally vary inversely with changes in market interest rates, declining PAGE 5 when interest rates rise and rising when interest rates decline. Because of their periodic adjustment feature, ARMs should be more sensitive to short-term interest rates than long-term rates. They should also display less volatility than long-term mortgage securities. Thus, while having less risk of a decline during periods of rapidly rising rates, ARMs may also have less potential for capital appreciation than other investments of comparable maturities. Interest rate caps on mortgages underlying ARM securities may prevent income on the ARM from increasing to prevailing interest rate levels and cause the securities to decline in value. In addition, to the extent ARMs are purchased at a premium, mortgage foreclosures and unscheduled principal prepayments may result in some loss of the holders' principal investment to the extent of the premium paid. On the other hand, if ARMs are purchased at a discount, both a scheduled payment of principal and an unscheduled prepayment of principal will increase current and total returns and will accelerate the recognition of income which when distributed to shareholders will be taxable as ordinary income. High Yield, New Income and Short-Term Bond Funds Risk Factors of Foreign Investing There are special risks in foreign investing. Certain of these risks are inherent in any international mutual fund while others relate more to the countries in which the Funds 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. PAGE 6 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 Funds 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 Funds' assets denominated in that currency. Such changes will also affect the Funds' income. Generally, when a given currency appreciates against the dollar (the dollar weakens) the value of the Fund's securities denominated in that currency will rise. When a given currency depreciates against the dollar (the dollar strengthens) the value of the Funds' 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 Funds. Investments by foreign investors are subject to a variety of restrictions in many developing countries. These restrictions may take the form of prior governmental approval, limits on the amount or type of securities held by foreigners, and limits on the types of companies in which foreigners may invest. Additional or different restrictions may be imposed at any time by these or other countries in which the Funds invest. In addition, the repatriation of both investment income and capital from several foreign countries is restricted and controlled under certain regulations, including in some cases the need for certain government consents. For example, capital invested in Chile normally cannot be repatriated for one year. 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 Funds' 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 PAGE 7 commissions on foreign stock exchanges are generally higher than negotiated commissions on United States exchanges, although the Funds 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 Funds may invest in investment funds which have been authorized by the governments of certain countries specifically to permit foreign investment in securities of companies listed and traded on the stock exchanges in these respective countries. The Funds' investment in these funds is subject to the provisions of the 1940 Act discussed on pages __ and __. If the Funds invest in such investment funds, the Funds' shareholders will bear not only their proportionate share of the expenses of the Funds (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 Funds' foreign portfolio securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Funds' 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 Funds. (See "Tax Status," page __.) PAGE 8 Other. With respect to certain foreign countries, especially developing and emerging ones, there is the possibility of adverse changes in investment or exchange control regulations, expropriation or confiscatory taxation, limitations on the removal of funds or other assets of the Funds, political or social instability, or diplomatic developments which could affect investments by U.S. persons in those countries. Eastern Europe and Russia. Changes occurring in Eastern Europe and Russia today could have long-term potential consequences. As restrictions fall, this could result in rising standards of living, lower manufacturing costs, growing consumer spending, and substantial economic growth. However, investment in the countries of Eastern Europe and Russia is highly speculative at this time. Political and economic reforms are too recent to establish a definite trend away from centrally-planned economies and state owned industries. In many of the countries of Eastern Europe and Russia, there is no stock exchange or formal market for securities. Such countries may also have government exchange controls, currencies with no recognizable market value relative to the established currencies of western market economies, little or no experience in trading in securities, no financial reporting standards, a lack of a banking and securities infrastructure to handle such trading, and a legal tradition which does not recognize rights in private property. In addition, these countries may have national policies which restrict investments in companies deemed sensitive to the country's national interest. Further, the governments in such countries may require governmental or quasi-governmental authorities to act as custodian of 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. High Yield Fund 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. PAGE 9 Youth and Growth of the Lower Rated Debt Securities Market. The market for lower rated debt securities is relatively new and its growth has paralleled a long economic expansion. Past experience may not, therefore, provide an accurate indication of future performance of this market, particularly during periods of economic recession. An economic downturn or increase in interest rates is likely to have a greater negative effect on this market, the value of lower rated debt securities in the Fund's portfolio, the Fund's net asset value and the ability of the bonds' issuers to repay principal and interest, meet projected business goals and obtain additional financing than on higher rated securities. These circumstances also may result in a higher incidence of defaults than with respect to higher rated securities. An investment in this Fund is more speculative than investment in shares of a fund which invests only in higher rated debt securities. Sensitivity to Interest Rate and Economic Changes. Prices of lower rated debt securities may be more sensitive to adverse economic changes or corporate developments than higher rated investments. Debt securities with longer maturities, which may have higher yields, may increase or decrease in value more than debt securities with shorter maturities. Market prices of lower rated debt securities structured as zero coupon or pay-in-kind securities are affected to a greater extent by interest rate changes and may be more volatile than securities which pay interest periodically and in cash. Where it deems it appropriate and in the best interests of Fund shareholders, the Fund may incur additional expenses to seek recovery on a debt security on which the issuer has defaulted and to pursue litigation to protect the interests of security holders of its portfolio companies. Liquidity and Valuation. Because the market for lower rated securities may be thinner and less active than for higher rated securities, there may be market price volatility for these securities and limited liquidity in the resale market. Nonrated securities are usually not as attractive to as many buyers as rated securities are, a factor which may make nonrated securities less marketable. These factors may have the effect of limiting the availability of the securities for purchase by the Fund and may also limit the ability of the Fund to sell such securities at their fair value either to meet redemption requests or in response to changes in the economy or the financial markets. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of lower rated debt securities, especially in a thinly traded market. To the extent the Fund owns or may acquire illiquid or restricted lower rated securities, these securities may involve special registration responsibilities, liabilities and costs, and liquidity and valuation difficulties. Changes in values of debt PAGE 10 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. 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 Types of Securities Set forth below is additional information about certain of the investments described in the Fund's prospectus. Debt Securities Fixed income securities in which the Fund may invest include, but are not limited to, those described below. All Funds U.S. Government Obligations. Bills, notes, bonds and other debt securities issued by the U.S. Treasury. These are direct obligations of the U.S. Government and differ mainly in the length of their maturities. PAGE 11 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. The GNMA, U.S. Treasury Money, Intermediate, and Long-Term Funds may only invest in these securities if they are supported by the full faith and credit of the U.S. government. All Funds, except GNMA, U.S. Treasury Money, Intermediate and Long-Term Funds Bank Obligations. Certificates of deposit, bankers' acceptances, and other short-term debt obligations. Certificates of deposit are short-term obligations of commercial banks. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with international commercial transactions. Certificates of deposit may have fixed or variable rates. The Fund may invest in U.S. banks, foreign branches of U.S. banks, U.S. branches of foreign banks, and foreign branches of foreign banks. Corporate Debt Securities. Outstanding nonconvertible corporate debt securities (e.g., bonds and debentures). Corporate notes may have fixed, variable, or floating rates. Commercial Paper. Short-term promissory notes issued by corporations primarily to finance short-term credit needs. Certain notes may have floating or variable rates. Foreign Government Securities. Issued or guaranteed by a foreign government, province, instrumentality, political subdivision or similar unit thereof. Savings and Loan Obligations. Negotiable certificates of deposit and other short-term debt obligations of savings and loan associations. Supranational Agencies. Securities of certain supranational entities, such as the International Development Bank. PAGE 12 Canadian Government Securities. Issued or guaranteed by the Government of Canada, a Province of Canada, or an instrumentality or political subdivision thereof. However, the Fund will only purchase these securities if they are marketable and payable in U.S. dollars. The Fund will not purchase any such security if, as a result, more than 10% of the value of its total assets would be invested in such securities. All Funds, (except Prime Reserve and U.S. Treasury Money Funds) Mortgage-Related Securities Mortgage-related securities in which the Fund may invest include, but are not limited to, those described below. The GNMA, U.S. Treasury Intermediate and U.S. Treasury Long-Term Funds may only invest in these securities to the extent they are backed by the full faith and credit of the U.S. Government. Mortgage-Backed Securities. Mortgage-backed securities are securities representing an interest in a pool of mortgages. The mortgages may be of a variety of types, including adjustable rate, conventional 30-year fixed rate, graduated payment, and 15- year. Principal and interest payments made on the mortgages in the underlying mortgage pool are passed through to the Fund. This is in contrast to traditional bonds where principal is normally paid back at maturity in a lump sum. Unscheduled prepayments of principal shorten the securities' weighted average life and may lower their total return. (When a mortgage in the underlying mortgage pool is prepaid, an unscheduled principal prepayment is passed through to the Fund. This principal is returned to the Fund at par. As a result, if a mortgage security were trading at a premium, its total return would be lowered by prepayments, and if a mortgage security were trading at a discount, its total return would be increased by prepayments.) The value of these securities also may change because of changes in the market's perception of the creditworthiness of the federal agency that issued them. In addition, the mortgage securities market in general may be adversely affected by changes in governmental regulation or tax policies. U.S. Government Agency Mortgage-Backed Securities. These are obligations issued or guaranteed by the United States Government or one of its agencies or instrumentalities, such as the Government National Mortgage Association ("Ginnie Mae" or "GNMA"), the Federal National Mortgage Association ("Fannie Mae" or "FNMA") 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 PAGE 13 Certificates provide for the pass-through to investors of their pro-rata share of monthly payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans, net of any fees paid to the guarantor of such securities and the servicer of the underlying mortgage loans. Each of GNMA, FNMA 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. 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. PAGE 14 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. 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. PAGE 15 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. 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. 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 PAGE 16 interest) is used to retire the bonds. Under the CMO structure, the repayment of principal among the different tranches is prioritized in accordance with the terms of the particular CMO issuance. The "fastest-pay" tranche of bonds, as specified in the prospectus for the issuance, would initially receive all principal payments. When that tranche of bonds is retired, the next tranche, or tranches, in the sequence, as specified in the prospectus, receive all of the principal payments until they are retired. The sequential retirement of bond groups continues until the last tranche, or group of bonds, is retired. Accordingly, the CMO structure allows the issuer to use cash flows of long maturity, monthly-pay collateral to formulate securities with short, intermediate and long final maturities and expected average lives. In recent years, new types of CMO structures have evolved. These include floating rate CMOs, planned amortization classes, accrual bonds and CMO residuals. These newer structures affect the amount and timing of principal and interest received by each tranche from the underlying collateral. Under certain of these new structures, given classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which the Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-related securities. The primary risk of any mortgage security is the uncertainty of the timing of cash flows. For CMOs, the primary risk results from the rate of prepayments on the underlying mortgages serving as collateral. An increase or decrease in prepayment rates (resulting from a decrease or increase in mortgage interest rates) will affect the yield, average life and price of CMOs. The prices of certain CMOs, depending on their structure and the rate of prepayments, can be volatile. Some CMOs may also not be as liquid as other securities. 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 PAGE 17 Internal Revenue Code of 1986, as amended (the "Code"), POs may generate taxable income from the current accrual of original issue discount, without a corresponding distribution of cash to the Fund. The cash flows and yields on IO and PO classes are extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets. 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/Trustees. The Fund's Board of Directors/Trustees has delegated to T. Rowe Price the authority to determine the liquidity of these investments based on the following guidelines: the type of issuer; type of collateral, including age and prepayment characteristics; rate of interest on coupon relative to current market rates and the effect of the rate on the potential for prepayments; complexity of the issue's structure, including the number of tranches; size of the issue and the number of dealers who make a market in the IO or PO. 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 PAGE 18 specified, published interest rate "index" such as a Treasury rate index. The new rate is determined by adding a specific interest amount, the "margin," to the interest rate of the index. Investment in ARM securities allows the Fund to participate in changing interest rate levels through regular adjustments in the coupons of the underlying mortgages, resulting in more variable current income and lower price volatility than longer term fixed rate mortgage securities. 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 Funds, the National Median Cost of Funds, the one-month, three-month, six-month or one-year London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper rates. Some indexes, such as the one-year constant maturity Treasury rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds index, tend to lag behind changes in market rate levels. The market value of the Fund's assets and of the net asset value of the Fund's shares will be affected by the length of the adjustment period, the degree of volatility in the applicable indexes and the maximum increase or decrease of the interest rate adjustment on any one adjustment date, in any one year and over the life of the securities. These maximum increases and decreases are typically referred to as "caps" and "floors", respectively. A number of factors affect the performance of the 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 PAGE 19 compared to other indices based upon specific interest rates may be affected by changes instituted by the FHLB of San Francisco in the method used to calculate the 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 20 vary or whose terms to maturity may differ from customary long- term fixed rate mortgages. As new types of mortgage-related securities are developed and offered to investors, the investment manager will, consistent with the Fund's objective, policies and quality standards, consider making investments in such new types of securities. All Funds (except GNMA, U.S. Treasury Money, Intermediate and Long-Term Funds) Asset-Backed Securities The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities and the amount and quality of any credit support provided to the securities. The rate of principal payment on asset-backed securities generally depends on the rate of principal payments received on the underlying assets which in turn may be affected by a variety of economic and other factors. As a result, the yield on any asset-backed security is difficult to predict with precision and actual yield to maturity may be more or less than the anticipated yield to maturity. Asset- backed securities may be classified as pass-through certificates or collateralized obligations. Pass-through certificates are asset-backed securities which represent an undivided fractional ownership interest in an underlying pool of assets. Pass-through certificates usually provide for payments of principal and interest received to be passed through to their holders, usually after deduction for certain costs and expenses incurred in administering the pool. Because pass-through certificates represent an ownership interest in the underlying assets, the holders thereof bear directly the risk of any defaults by the obligors on the underlying assets not covered by any credit support. See "Types of Credit Support". Asset-backed securities issued in the form of debt instruments, also known as collateralized obligations, are generally issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Such assets are most often trade, credit card or automobile receivables. The assets collateralizing such asset-backed securities are pledged to a trustee or custodian for the benefit of the holders thereof. Such issuers generally hold no assets other than those underlying the asset-backed securities and any credit support provided. As a result, although payments on such asset-backed securities are obligations of the issuers, in the event of defaults on the underlying assets not covered by PAGE 21 any credit support (see "Types of Credit Support"), the issuing entities are unlikely to have sufficient assets to satisfy their obligations on the related asset-backed securities. Methods of Allocating Cash Flows. While many asset-backed securities are issued with only one class of security, many asset-backed securities are issued in more than one class, each with different payment terms. Multiple class asset-backed securities are issued for two main reasons. First, multiple classes may be used as a method of providing credit support. This is accomplished typically through creation of one or more classes 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. Examples of asset-backed securities with credit support arising out of the structure of the transaction include "senior- PAGE 22 subordinated securities" (multiple class asset-backed securities with certain classes subordinate to other classes as to the payment of principal thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class) and asset-backed securities that have "reserve funds" (where cash or investments, sometimes funded from a portion of the initial payments on the underlying assets, are held in reserve against future losses) or that have been "over collateralized" (where the scheduled payments on, or the principal amount of, the underlying assets substantially exceeds that required to make payment of the asset-backed securities and pay any servicing or other fees). The degree of credit support provided on each issue is based generally on historical information respecting the level of credit risk associated with such payments. Delinquency or loss in excess of that anticipated could adversely affect the return on an investment in an asset- backed security. Automobile Receivable Securities. The Fund may invest in Asset Backed Securities which are backed by receivables from motor vehicle installment sales contracts or installment loans secured by motor vehicles ("Automobile Receivable Securities"). Since installment sales contracts for motor vehicles or installment loans related thereto ("Automobile Contracts") typically have shorter durations and lower incidences of prepayment, Automobile Receivable Securities generally will exhibit a shorter average life and are less susceptible to prepayment risk. Most entities that issue Automobile Receivable Securities create an enforceable interest in their respective Automobile Contracts only by filing a financing statement and by having the servicer of the Automobile Contracts, which is usually the originator of the Automobile Contracts, take custody thereof. In such circumstances, if the servicer of the Automobile Contracts were to sell the same Automobile Contracts to another party, in violation of its obligation not to do so, there is a risk that such party could acquire an interest in the Automobile Contracts superior to that of the holders of Automobile Receivable Securities. Also although most Automobile Contracts grant a security interest in the motor vehicle being financed, in most states the security interest in a motor vehicle must be noted on the certificate of title to create an enforceable security interest against competing claims of other parties. Due to the large number of vehicles involved, however, the certificate of title to each vehicle financed, pursuant to the Automobile Contracts underlying the Automobile Receivable Security, usually is not amended to reflect the assignment of the seller's security 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 PAGE 23 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. 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. PAGE 24 There are, of course, other types of securities that are, or may become available, which are similar to the foregoing and the Fund reserves the right to invest in these securities. High Yield Fund Collateralized Bond or Loan Obligations CBOs are bonds collateralized by corporate bonds and CLOs are bonds collateralized by bank loans. CBOs and CLOs are structured into tranches, and payments are allocated such that each tranche has a predictable cash flow stream and average life. CBOs are fairly recent entrants to the fixed income market. Most issues to date have been collateralized by high yield bonds or loans, with heavy credit enhancement. Zero Coupon and Pay-in-Kind Bonds A zero coupon security has no cash coupon payments. Instead, the issuer sells the security at a substantial discount from its maturity value. The interest received by the investor from holding this security to maturity is the difference between the maturity value and the purchase price. The advantage to the investor is that reinvestment risk of the income received during the life of the bond is eliminated. However, zero-coupon bonds like other bonds retain interest rate and credit risk and usually display more price volatility than those securities that pay a cash coupon. Pay-in-Kind (PIK) Instruments are securities that pay interest in either cash or additional securities, at the issuer's option, for a specified period. PIK's, like zero coupon bonds, are designed to give an issuer flexibility in managing cash flow. PIK bonds can be either senior or subordinated debt and trade flat (i.e., without accrued interest). The price of PIK bonds is expected to reflect the market value of the underlying debt plus an amount representing accrued interest since the last payment. PIK's are usually less volatile than zero coupon bonds, but more volatile than cash pay securities. For federal income tax purposes, these types of bonds will require the recognition of gross income each year even though no cash may be paid to the Fund until the maturity or call date of the bond. The Fund will nonetheless be required to distribute substantially all of this gross income each year to comply with the Internal Revenue Code, and such distributions could reduce the amount of cash available for investment by the Fund. PAGE 25 Loan Participations and Assignments Loan participations and assignments (collectively "participations") will typically be participating interests in loans made by a syndicate of banks, represented by an agent bank which has negotiated and structured the loan, to corporate borrowers to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate activities. Such loans may also have been made to governmental borrowers, especially governments of developing countries (LOC debt). LOC debt will involve the risk that the governmental entity responsible for the repayment of the debt may be unable or unwilling to do so when due. The loans underlying such participations may be secured or unsecured, and the Fund may invest in loans collateralized by mortgages on real property or which have no collateral. The loan participations themselves may extend for the entire term of the loan or may extend only for short "strips" that correspond to a quarterly or monthly floating rate interest period on the underlying loan. Thus, a term or revolving credit that extends for several years may be subdivided into shorter periods. The loan participations in which the Fund will invest will also vary in legal structure. Occasionally, lenders assign to another institution both the lender's rights and obligations under a credit agreement. Since this type of assignment relieves the original lender of its obligations, it is call a novation. More typically, a lender assigns only its right to receive payments of principal and interest under a promissory note, credit agreement or similar document. A true assignment shifts to the assignee the direct debtor-creditor relationship with the underlying borrower. Alternatively, a lender may assign only part of its rights to receive payments pursuant to the underlying instrument or loan agreement. Such partial assignments, which are more accurately characterized as "participating interests," do not shift the debtor-creditor relationship to the assignee, who must rely on the original lending institution to collect sums due and to otherwise enforce its rights against the agent bank which administers the loan or against the underlying borrower. Pursuant to an SEC no-action letter, and because the Fund is allowed to purchase debt securities, including debt securities at private placement, the Fund will treat loan participations as securities and not subject to its fundamental investment restriction prohibiting the Fund from making loans. There is not a recognizable, liquid public market for the loan participations. Hence, the Fund would consider loan participations as illiquid securities and subject them to the Fund's restrictions on investing no more than 10% of assets in securities for which there is no readily available market. The PAGE 26 Fund would initially impose a limit of no more than 5% of total assets in illiquid loan participations. Where required by applicable SEC positions, the Fund will treat both the corporate borrower and the bank selling the participation interest as an issuer for purposes of its fundamental investment restriction which prohibits investing more than 5% of Fund assets in the securities of a single issuer. Various service fees received by the Fund from loan participations, may be treated as non-interest income depending on the nature of the fee (commitment, takedown, commission, service or loan origination). To the extent the service fees are not interest income, they will not qualify as income under Section 851(b) of the Internal Revenue Code. Thus the sum of such fees plus any other non-qualifying income earned by the Fund cannot exceed 10% of total income. Trade Claims Trade claims are non-securitized rights of payment arising from obligations other than borrowed funds. Trade claims typically arise when, in the ordinary course of business, vendors and suppliers extend credit to a company by offering payment terms. Generally, when a company files for bankruptcy protection payments on these trade claims cease and the claims are subject to compromise along with the other debts of the company. Trade claims typically are bought and sold at a discount reflecting the degree of uncertainty with respect to the timing and extent of recovery. In addition to the risks otherwise associated with low-quality obligations, trade claims have other risks, including the possibility that the amount of the claim may be disputed by the obligor. Over the last few years a market for the trade claims of bankrupt companies has developed. Many vendors are either unwilling or lack the resources to hold their claim through the extended bankruptcy process with an uncertain outcome and timing. Some vendors are also aggressive in establishing reserves against these receivables, so that the sale of the claim at a discount may not result in the recognition of a loss. Trade claims can represent an attractive investment opportunity because these claims typically are priced at a discount to comparable public securities. This discount is a reflection of both a less liquid market, a smaller universe of potential buyers and the risks peculiar to trade claim investing. It is not unusual for trade claims to be priced at a discount to public securities that have an equal or lower priority claim. PAGE 27 As noted above, investing in trade claims does carry some unique risks which include: o Establishing the Amount of the Claim. Frequently, the supplier's estimate of its receivable will differ from the customer's estimate of its payable. Resolution of these differences can result in a reduction in the amount of the claim. This risk can be reduced by only purchasing scheduled claims (claims already listed as liabilities by the debtor) and seeking representations from the seller. o Defenses to Claims. The debtor has a variety of defenses that can be asserted under the bankruptcy code against any claim. Trade claims are subject to these defenses, the most common of which for trade claims relates to preference payments. (Preference payments are all payments made by the debtor during the 90 days prior to the filing. These payments are presumed to have benefited the receiving creditor at the expense of the other creditors. The receiving creditor may be required to return the payment unless it can show the payments were received in the ordinary course of business.) While none of these defenses can result in any additional liability of the purchaser of the trade claim, they can reduce or wipe out the entire purchased claim. This risk can be reduced by seeking representations and indemnification from the seller. o Documentation/Indemnification. Each trade claim purchased requires documentation that must be negotiated between the buyer and seller. This documentation is extremely important since it can protect the purchaser from losses such as those described above. Legal expenses in negotiating a purchase agreement can be fairly high. Additionally, it is important to note that the value of an indemnification depends on the sellers credit. o Volatile Pricing Due to Illiquid Market. There are only a handful of brokers for trade claims and the quoted price of these claims can be volatile. All Trade Claims would be considered illiquid investments. o No Current Yield/Ultimate Recovery. Trade claims are almost never entitled to earn interest. As a result, the return on such an investment is very sensitive to the length of the bankruptcy, which is uncertain. Although not unique to trade claims, it is worth noting that the ultimate recovery on the claim is uncertain and there is no way to calculate a conventional yield to maturity on PAGE 28 this investment. Additionally, the exit for this investment is a plan of reorganization which may include the distribution of new securities. These securities may be as illiquid as the original trade claim investment. o Tax Issue. Although the issue is not free from doubt, it is likely that Trade Claims would be treated as non- securities investments. As a result, any gains would be considered "non-qualifying" under the Internal Revenue Code. The Fund may have up to 10% of its gross income (including capital gains) derived from non-qualifying sources. High Yield and New Income Funds Warrants The Fund may acquire warrants. Warrants are pure speculation in that they have no voting rights, pay no dividends and have no rights with respect to the assets of the corporation issuing them. Warrants basically are options to purchase equity securities at a specific price valid for a specific period of time. They do not represent ownership of the securities, but only the right to buy them. Warrants differ from call options in that warrants are issued by the issuer of the security which may be purchased on their exercise, whereas call options may be written or issued by anyone. The prices of warrants do not necessarily move parallel to the prices of the underlying securities. Adjustable Rate, High Yield, New Income and Short-Term Bond Funds Hybrid Instruments Hybrid Instruments have recently been developed and combine the elements of futures contracts or options with those of debt, preferred equity or a depository instrument (hereinafter "Hybrid Instruments"). Often these Hybrid Instruments are indexed to the price of a commodity, 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 of investing in securities, options, futures and currencies, including volatility and lack of PAGE 29 liquidity. Reference is made to the discussion of futures, options, and forward contracts 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 counter 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 by and to U.S. persons, or any other governmental regulatory authority. All Funds When-Issued Securities and Forward Commitment Contracts The Fund may purchase securities on a "when-issued" or delayed delivery basis ("When-Issueds") and may purchase securities on a forward commitment basis ("Forwards"). Any or all of the Fund's investments in debt securities may be in the form of When-Issueds and 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 take place at a later date. Normally, the settlement date occurs within 90 days of the purchase for When-Issueds, but may be substantially longer for Forwards. During the period between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund. The purchase of these securities will result in a loss if their value declines prior to the settlement date. This could occur, for example, if interest rates increase prior to settlement. The longer the period between purchase and settlement, the greater the risks are. At the time the Fund makes the commitment to purchase these securities, it will record the transaction and reflect the value of the security in determining its net asset value. The Fund will cover these securities by maintaining cash and/or liquid, high-grade debt securities with its custodian bank equal in value to commitments for them during the time between the purchase and the settlement. Therefore, the longer this period, the longer the period during which alternative investment options are not available to the Fund (to the extent of the securities used for cover). Such securities either will mature or, if necessary, be sold on or before the settlement date. PAGE 30 Additional Adjustable Rate Securities Certain securities may be issued with adjustable interest rates that are reset periodically by pre-determined formulas or indexes in order to minimize movements in the principal value of the investment. Such securities may have long-term maturities, but may be treated as a short-term investment under certain conditions. Generally, as interest rates decrease or increase, the potential for capital appreciation or depreciation on these securities is less than for fixed-rate obligations. These securities may take the following forms: Variable Rate Securities. Variable rate instruments are those whose terms provide for the adjustment of their interest rates on set dates and which, upon such adjustment, can reasonably be expected to have a market value that approximates its par value. A variable rate instrument, the principal amount of which is scheduled to be paid in 397 days or less, is deemed to have a maturity equal to the period remaining until the next readjustment of the interest rate. A variable rate instrument which is subject to a demand feature entitles the purchaser to receive the principal amount of the underlying security or securities, either (i) upon notice of no more than 30 days or (ii) at specified intervals not exceeding 397 days and upon no more than 30 days' notice, is deemed to have a maturity equal to the longer of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand. Floating Rate Securities. Floating rate instruments are those whose terms provide for the adjustment of their interest rates whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value. The maturity of a floating rate instrument is deemed to be the period remaining until the date (noted on the face of the instrument) on which the principal amount must be paid, or in the case of an instrument called for redemption, the date on which the redemption payment must be made. Floating rate instruments with demand features are deemed to have a maturity equal to the period remaining until the principal amount can be recovered through demand. Put Option Bonds. Long-term obligations with maturities longer than one year may provide purchasers an optional or mandatory tender of the security at par value at predetermined intervals, often ranging from one month to several years (e.g., a 30-year bond with a five-year tender period). These instruments are deemed to have a maturity equal to the period remaining to the put date. PAGE 31 Adjustable Rate, High Yield, New Income, Prime Reserve and Short- Term Bond Funds Illiquid or Restricted Securities Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where registration is required, the Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it decided to sell. Restricted securities will be priced at fair value as determined in accordance with procedures prescribed by the Fund's Board of Directors/Trustees. If through the appreciation of illiquid securities or the depreciation of liquid securities, the Fund should be in a position where more than 15% of the value of its net assets is invested in illiquid assets, including restricted securities, the Fund will take appropriate steps to protect liquidity. Notwithstanding the above, the Fund may purchase securities which, while privately placed, are eligible for purchase and sale under Rule 144A under the 1933 Act. This rule permits certain qualified institutional buyers, such as the Fund, to trade in privately placed securities even though such securities are not registered under the 1933 Act. T. Rowe Price under the supervision of the Fund's Board of Directors/Trustees, will consider whether securities purchased under Rule 144A are illiquid and thus subject to the Fund's restriction of investing no more than 15% (10% for Prime Reserve Fund) 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, the Fund's holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that the Fund does not invest more than 15% (10% for Prime Reserve and U.S. Treasury Money Funds) of its net PAGE 32 assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of the Fund's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities. New Income and Short-Term Bond Funds Industry Concentration When the market for corporate debt securities is dominated by issues in the gas utility, gas transmission utility, electric utility, telephone utility, or petroleum industry, the Fund will as a matter of fundamental policy concentrate 25% or more, but not more than 50% of its assets, in any one such industry, if the Fund has cash for such investment (i.e., will not sell portfolio securities to raise cash) and, if in T. Rowe Price's judgment, the return available and the marketability, quality, and availability of the debt securities of such industry justifies such concentration in light of the Fund's investment objective. Domination would exist with respect to any one such industry, when, in the preceding 30-day period, more than 25% of all new-issue corporate debt offerings (within the four highest grades of Moody's or S&P and with maturities of 10 years or less) of $25,000,000 or more consisted of issues in such industry. Although the Fund will normally purchase corporate debt securities in the secondary market as opposed to new offerings, T. Rowe Price believes that the new issue-based dominance standard, as defined above, is appropriate because it is easily determined and represents an accurate correlation to the secondary market. Investors should understand that concentration in any industry may result in increased risk. Investments in any of these industries may be affected by environmental conditions, energy conservation programs, fuel shortages, difficulty in obtaining adequate return on capital in financing operations and large construction programs, and the ability of the capital markets to absorb debt issues. In addition, it is possible that the public service commissions which have jurisdiction over these industries may not grant future increases in rates sufficient to offset increases in operating expenses. These industries also face numerous legislative and regulatory uncertainties at both federal and state government levels. Management believes that any risk to the Fund which might result from concentration in any industry will be minimized by the Fund's practice of diversifying its investments in other respects. The Fund's policy with respect to industry concentration is a fundamental policy. (For investment restriction on industry concentration, see Investment Restriction (4) on page __.) PAGE 33 PORTFOLIO MANAGEMENT PRACTICES Lending of Portfolio Securities For the purpose of realizing additional income, the Fund may make secured loans of portfolio securities amounting to not more than 33 1/3% of its total assets. This policy is a fundamental policy. Securities loans are made to broker-dealers or institutional investors or other persons, pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the value of the securities lent marked to market on a daily basis. The collateral received will consist of cash, U.S. government securities, letters of credit or such other collateral as may be permitted under its investment program. While the securities are being lent, the Fund will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities, as well as interest on the investment of the collateral or a fee from the borrower. The Fund has a right to call each loan and obtain the securities 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 and certain state regulatory agencies, the Fund may make loans to, or borrow funds from, other mutual funds sponsored or advised by T. Rowe Price or Rowe Price-Fleming International, Inc. (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 PAGE 34 least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., 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) Prime Reserve and U.S. Treasury Money Funds--the underlying securities are either U.S. government securities or securities that, at the time the repurchase agreement is entered into, are rated in the highest rating category by the requisite number of NRSROs (as required by Rule 2a-7 under the 1940 Act) and otherwise are of the type (excluding maturity limitations) which the Fund's investment guidelines would allow it to purchase directly (however, the underlying securities will either by U.S. government securities or securities which, at the time the repurchase agreement is entered into, are rated in the highest rating category by public rating agencies), Adjustable Rate, GNMA, High Yield, New Income, Short-Term Bond, and U.S. Treasury Intermediate and Long-Term Funds--the underlying securities are of the type (excluding maturity limitations) which the Fund's investment guidelines would allow it to purchase directly, (ii) the market value of the underlying security, including interest accrued, will be at all times equal to or exceed the value of the repurchase agreement, and (iii) payment for the underlying security is made only upon physical delivery or evidence of book-entry transfer to the account of the custodian or a bank acting as agent. In the event of a bankruptcy or other default of a seller of a repurchase agreement, the Fund could experience both delays in liquidating the underlying security and losses, including: (a) possible decline in the value of the underlying security during the period while the Fund seeks to enforce its rights thereto; (b) possible subnormal levels of income and lack of access to income during this period; and (c) expenses of enforcing its rights. Reverse Repurchase Agreements Although the Fund has no current intention, 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 __.) PAGE 35 High Yield Fund Short Sales The Fund may make short sales for hedging purposes to protect the Fund against companies whose credit is deteriorating. Short sales are transactions in which the Fund sells a security it does not own in anticipation of a decline in the market value of that security. The Fund's short sales would be limited to situations where the Fund owns a debt security of a company and would sell short the common or preferred stock or another debt security at a different level of the capital structure of the same company. No securities will be sold short if, after the effect is given to any such short sale, the total market value of all securities sold short would exceed 2% of the value of the Fund's net assets. To complete a short sale transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay to the lender amounts equal to any dividends or interest which accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. Until the Fund replaces a borrowed security in connection with a short sale, the Fund will: (a) maintain daily a segregated account, containing cash or U.S. government securities, at such a level that (i) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current value of the security sold short and (ii) the amount deposited in the segregated account plus the amount deposited with the broker as collateral will not be less than the market value of the security at the time its was sold short; or (b) otherwise cover its short position. The Fund will incur a loss as a result of the short sale if the price of the security sold short increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security sold short declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be PAGE 36 decreased, and the amount of any loss increased, by the amount of any premium, dividends or interest the Fund may be required to pay in connection with a short sale. Any gain or loss on the security sold short would be separate from a gain or loss on the Fund security being hedged by the short sale. All Funds Options 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, the Fund expects to generate additional premium income which should serve to enhance the Fund's total return and reduce the effect of any price decline of the security or currency involved in the option. Covered call options will generally be written on securities or currencies which, in T. Rowe Price's opinion, are not expected to have any major price increases or moves in the near future but which, over the long term, are deemed to be attractive investments for the Fund. A call option gives the holder (buyer) the "right to purchase" a security or currency at a specified price (the exercise price) at expiration of the option (European style) or at any time until a certain date (the expiration date) (American style). So long as the obligation of the writer of a call option continues, he may be assigned an exercise notice by the broker- dealer through whom such option was sold, requiring him to deliver the underlying security or currency against payment of the exercise price. This obligation terminates upon the expiration of the call option, or such earlier time at which the writer effects a closing purchase transaction by repurchasing an option identical to that previously sold. To secure his obligation to deliver the underlying security or currency in the case of a call option, a writer is required to deposit in escrow the underlying security or currency or other assets in accordance with the rules of a clearing corporation. The Fund will write only covered call options. This means that the Fund will own the security or currency subject to the option or an option to purchase the same underlying security or currency, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option, an account consisting of cash, U.S. government securities or other liquid high-grade debt obligations having a value equal to the fluctuating market value of the optioned securities or currencies. PAGE 37 Portfolio securities or currencies on which call options may be written will be purchased solely on the basis of investment considerations consistent with the Fund's investment objective. The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of naked or uncovered options, which the Fund will not do), but capable of enhancing the Fund's total return. When writing a covered call option, a Fund, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security or currency above the exercise price, but conversely retains the risk of loss should the price of the security or currency decline. Unlike one who owns securities or currencies not subject to an option, the Fund has no control over when it may be required to sell the underlying securities or currencies, since it may be assigned an exercise notice at any time prior to the expiration of its obligation as a writer. If a call option which the Fund has written expires, the Fund will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security or currency during the option period. If the call option is exercised, the Fund will realize a gain or loss from the sale of the underlying security or currency. The Fund does not consider a security or currency covered by a call to be "pledged" as that term is used in the Fund's policy which limits the pledging or mortgaging of its assets. The premium received is the market value of an option. The premium the Fund will receive from writing a call option will reflect, among other things, the current market price of the underlying security or currency, the relationship of the exercise price to such market price, the historical price volatility of the underlying security or currency, and the length of the option period. Once the decision to write a call option has been made, T. Rowe Price, in determining whether a particular call option should be written on a particular security or currency, will consider the reasonableness of the anticipated premium and the likelihood that a liquid secondary market will exist for those options. The premium received by the Fund for writing covered call options will be recorded as a liability of the Fund. This liability will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Fund is computed (close of the New York Stock Exchange), or, in the absence of such sale, the latest asked price. The option will be terminated upon expiration of the option, the purchase of an identical option in a closing transaction, or delivery of the underlying security or currency upon the exercise of the option. Closing transactions will be effected in order to realize a profit on an outstanding call option, to prevent an underlying PAGE 38 security or currency from being called, or, to permit the sale of the underlying security or currency. Furthermore, effecting a closing transaction will permit the Fund to write another call option on the underlying security or currency with either a different exercise price or expiration date or both. If the Fund desires to sell a particular security or currency from its portfolio on which it has written a call option, or purchased a put option, it will seek to effect a closing transaction prior to, or concurrently with, the sale of the security or currency. There is, of course, no assurance that the Fund will be able to effect such closing transactions at favorable prices. If the Fund cannot enter into such a transaction, it may be required to hold a security or currency that it might otherwise have sold. When the Fund writes a covered call option, it runs the risk of not being able to participate in the appreciation of the underlying securities or currencies above the exercise price, as well as the risk of being required to hold on to securities or currencies that are depreciating in value. This could result in higher transaction costs. The Fund will pay transaction costs in connection with the writing of options to close out previously written options. Such transaction costs are normally higher than those applicable to purchases and sales of portfolio securities. Call options written by the Fund will normally have expiration dates of less than nine months from the date written. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities or currencies at the time the options are written. From time to time, the Fund may purchase an underlying security or currency for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering such security or currency from its portfolio. In such cases, additional costs may be incurred. The Fund will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from the writing of the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security or currency, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security or currency owned by the Fund. 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 PAGE 39 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 their related risks and rewards, is substantially identical to that of call options. The Fund would write put options only on a covered basis, which means that the Fund would maintain in a segregated account cash, U.S. government securities 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 or greater than the exercise price of the "covered" option at all times while the put option is outstanding. (The rules of a clearing corporation currently require that such assets be deposited in escrow to secure payment of the exercise price.) The Fund would generally write covered put options in circumstances where T. Rowe Price wishes to purchase the underlying security or currency for the Fund's portfolio at a price lower than the current market price of the security or currency. In such event the Fund would write a put option at an exercise price which, reduced by the premium received on the option, reflects the lower price it is willing to pay. Since the Fund would also receive interest on debt securities or currencies maintained to cover the exercise price of the option, this technique could be used to enhance current return during periods of market uncertainty. The risk in such a transaction would be that the market price of the underlying security or currency would decline below the exercise price less the premiums received. Such a decline could be substantial and result in a significant loss to the Fund. In addition, the Fund, because it does not own the specific securities or currencies which it may be required to purchase in exercise of the put, cannot benefit from appreciation, if any, with respect to such specific securities or currencies. PAGE 40 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. The Fund may purchase a put option on an underlying security or currency (a "protective put") owned by the Fund as a defensive technique in order to protect against an anticipated decline in the value of the security or currency. Such hedge protection is provided only during the life of the put option when the Fund, as the holder of the put option, is able to sell the underlying security or currency at the put exercise price regardless of any decline in the underlying security's market price or currency's exchange value. For example, a put option may be purchased in order to protect unrealized appreciation of a security or currency where T. Rowe Price deems it desirable to continue to hold the security or currency because of tax considerations. The premium paid for the put option and any transaction costs would reduce any capital gain otherwise available for distribution when the security or currency is eventually sold. The Fund may also purchase put options at a time when the Fund does not own the underlying security or currency. By purchasing put options on a security or currency it does not own, the Fund seeks to benefit from a decline in the market price of the underlying security or currency. If the put option is not sold when it has remaining value, and if the market price of the underlying security or currency remains equal to or greater than the exercise price during the life of the put option, the Fund will lose its entire investment in the put option. In order for the purchase of a put option to be profitable, the market price of the underlying security or currency must decline sufficiently PAGE 41 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 the Fund when purchasing a put option will be recorded as an asset of the Fund. This asset will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Fund is computed (close of New York Stock Exchange), or, in the absence of such sale, the latest bid price. This asset will be terminated upon expiration of the option, the selling (writing) of an identical option in a closing transaction, or the delivery of the underlying security or currency upon the exercise of the option. Purchasing Call Options The Fund may purchase American or European style call options. As the holder of a call option, the Fund has the right to purchase the underlying security or currency at the exercise price at any time during the option 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 the Fund for the purpose of acquiring the underlying securities or currencies for its portfolio. Utilized in this fashion, the purchase of call options enables the Fund to acquire the securities or currencies at the exercise price of the call option plus the premium paid. At times the net cost of acquiring securities or currencies in this manner may be less than the cost of acquiring the securities or currencies directly. This technique may also be useful to the Fund in purchasing a large block of securities or currencies that would be more difficult to acquire by direct market purchases. So long as it holds such a call option rather than the underlying security or currency itself, the Fund is partially protected from any unexpected decline in the market price of the underlying security or currency and in such event could allow the call PAGE 42 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 the Fund would look to a clearing corporation to exercise exchange-traded options, if the Fund were to purchase a dealer option, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. Failure by the dealer to do so would result in the loss of the premium paid by the Fund as well as loss of the expected benefit of the transaction. Exchange-traded options generally have a continuous liquid market while dealer options have none. Consequently, the Fund will generally be able to realize the value of a dealer option it has purchased only by exercising it or reselling it to the dealer who issued it. Similarly, when the Fund writes a dealer option, it generally will be able to close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Fund originally wrote the option. While the Fund will seek to enter into dealer options only with dealers who will agree to and which are expected to be capable of entering into closing transactions with the Fund, there can be no assurance that the Fund will be able to liquidate a dealer option at a favorable price at any time prior to expiration. Until the Fund, as a covered dealer call option writer, is able to effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) or currencies used as cover until the option expires or is exercised. In the event of insolvency of the contra party, the Fund may be unable to liquidate a dealer option. With respect to options written by the Fund, the inability to enter into a closing transaction may result in material losses to the Fund. For example, since the Fund must maintain a secured position with respect to any call option on a PAGE 43 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 illiquid securities. If the SEC changes its position on the liquidity of dealer options, the Fund will change its treatment of such instrument accordingly. High Yield Fund Spread Option Transactions The Fund may purchase from and sell to securities dealers covered spread options. Such covered spread options are not presently exchange listed or traded. The purchase of a spread option gives the Fund the right to put, or sell, a security that it owns at a fixed dollar spread or fixed yield spread in relationship to another security that the Fund does not own, but which is used as a benchmark. The risk to the Fund in purchasing covered spread options is the cost of the premium paid for the spread option and any transaction costs. In addition, there is no assurance that closing transactions will be available. The purchase of spread options will be used to protect the Fund against adverse changes in prevailing credit quality spreads, i.e., the yield spread between high quality and lower quality securities. Such protection is only provided during the life of the spread option. The security covering the spread option will be maintained in a segregated account by the Fund's custodian. The Fund does not consider a security covered by a spread option to be "pledged" as that term is used in the Fund's policy limiting the pledging or mortgaging of its assets. The Fund may also buy and sell uncovered spread options. Such options would be used for the same purposes and be subject to similar risks as covered spread options. However, in an uncovered spread option, the Fund would not own either of the securities involved in the spread. PAGE 44 Futures Contracts Transactions in Futures The Fund may enter into futures contracts, including stock index, interest rate and currency futures ("futures or futures contracts"). Stock index futures contracts may be used to provide a hedge for a portion of the Fund's portfolio, as a cash management tool, or as an efficient way for T. Rowe Price to implement either an increase or decrease in portfolio market exposure in response to changing market conditions. The Fund may purchase or sell futures contracts with respect to any stock index. Nevertheless, to hedge the Fund's portfolio successfully, the Fund must sell futures contacts with respect to indices or subindices whose movements will have a significant correlation with movements in the prices of the Fund's portfolio securities. Interest rate or currency futures contracts may be used as a hedge against changes in prevailing levels of interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or intended to be acquired by the Fund. In this regard, the Fund could sell interest rate or currency futures as an offset against the effect of expected increases in interest rates or currency exchange rates and purchase such futures as an offset against the effect of expected declines in interest rates or currency exchange rates. The Fund will enter into futures contracts which are traded on national or foreign futures exchanges, and are standardized as to maturity date and underlying financial instrument. Futures exchanges and trading in the United States are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission ("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. PAGE 45 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 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 PAGE 46 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. 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. PAGE 47 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 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 PAGE 48 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 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 PAGE 49 risks in connection with the use by the Fund of futures contracts as a hedging device. One risk arises because of the imperfect correlation between movements in the prices of the futures contracts and movements in the prices of the underlying instruments which are the subject of the hedge. T. Rowe Price will, however, attempt to reduce this risk by entering into futures contracts whose movements, in its judgment, will have a significant correlation with movements in the prices of the Fund's underlying instruments sought to be hedged. Successful use of futures contracts by the Fund for hedging purposes is also subject to T. Rowe Price's ability to correctly predict movements in the direction of the market. It is possible that, when the Fund has sold futures to hedge its portfolio against a decline in the market, the index, indices, or instruments underlying futures might advance and the value of the underlying instruments held in the Fund's portfolio might decline. If this were to occur, the Fund would lose money on the futures and also would experience a decline in value in its underlying instruments. However, while this might occur to a certain degree, T. Rowe Price believes that over time the value of the Fund's portfolio will tend to move in the same direction as the market indices used to hedge the portfolio. It is also possible that if the Fund were to hedge against the possibility of a decline in the market (adversely affecting the underlying instruments held in its portfolio) and prices instead increased, the Fund would lose part or all of the benefit of increased value of those underlying instruments that it has hedged, because it would have offsetting losses in its futures positions. In addition, in such situations, if the Fund had insufficient cash, it might have to sell underlying instruments to meet daily variation margin requirements. Such sales of underlying instruments might be, but would not necessarily be, at increased prices (which would reflect the rising market). The Fund might have to sell underlying instruments at a time when it would be disadvantageous to do so. In addition to the possibility that there might be an imperfect correlation, or no correlation at all, between price movements in the futures contracts and the portion of the portfolio being hedged, the price movements of futures contracts might not correlate perfectly with price movements in the underlying instruments due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors might close futures contracts through offsetting transactions, which could distort the normal relationship between the underlying instruments and futures markets. Second, the margin requirements in the futures market are less onerous than margin requirements in the securities markets, and as a result the futures market PAGE 50 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 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 PAGE 51 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. 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 PAGE 52 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. Intermediate and Long-Term Funds Limitations on Futures and Options for Intermediate and Long-Term Funds The Funds will not purchase a futures contract or option thereon if, with respect to positions in futures or options on futures which do not represent bona fide hedging, the aggregate initial margin and premiums on such positions would exceed 5% of the Fund's net asset value. In addition, neither of the Funds will enter into a futures transaction if it would be obligated to purchase or deliver under outstanding open futures contracts amounts which would exceed 15% of the Fund's total assets. A Fund will not write a covered call option if, as a result, the aggregate market value of all portfolio securities covering call options or subject to delivery under put options exceeds 15% of the market value of the Fund's total assets. A Fund will not write a covered put option if, as a result, the aggregate market value of all portfolio securities subject to such put options or covering call options exceeds 15% of the market value of the Fund's total assets. In order to comply with the laws of certain states, a Fund will not invest more than 5% of its total assets in premiums on put options. Should these state laws change or should a Fund obtain a waiver of their applications, the Fund may invest up to 15% of its total assets in premiums on put options. In order to comply with the laws of certain states, a Fund will not invest more than 5% of its total assets in premiums on call options. Should these state laws change or should a Fund obtain a waiver of their applications, the Fund may invest up to 15% of its total assets in premiums on call options. PAGE 53 In order to comply with the laws of certain states, a Fund will not purchase puts, calls, straddles, spreads and any combination thereof if by reason thereof the value of its aggregate investment in such classes of securities will exceed 5% of its total assets. Should these state laws change or should a Fund obtain a waiver of their application, the Fund may invest a higher percentage of its total assets in puts, calls, straddles, or spreads. The total amount of a Fund's total assets invested in futures and options under any combination of the policies described in paragraphs 1-6 above will not exceed 15% of the Fund's total assets. Foreign Currency Transactions A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are principally traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. The Fund may enter into forward contracts for a variety of purposes in connection with the management of the foreign securities portion of its portfolio. The Fund's use of such contracts would include, but not be limited to, the following: First, when the Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars, of the amount of foreign currency involved in the underlying security transactions, the Fund will be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date the security is purchased or sold and the date on which payment is made or received. Second, when T. Rowe Price believes that one currency may experience a substantial movement against another currency, including the U.S. dollar, it may enter into a forward contract to sell or buy the amount of the former foreign currency, approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. Alternatively, where appropriate, the Fund may hedge all or part of its foreign currency exposure through the use of a basket of currencies or a PAGE 54 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. 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 PAGE 55 forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the Fund's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Fund will suffer a loss to the extent of the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. The Fund's dealing in forward foreign currency exchange contracts will generally be limited to the transactions described above. However, the Fund reserves the right to enter into forward foreign currency contracts for different purposes and under different circumstances. Of course, the Fund is not required to enter into forward contracts with regard to its foreign currency-denominated securities and will not do so unless deemed appropriate by T. Rowe Price. It also should be realized that this method of hedging against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange at a future date. Additionally, although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time, they tend to limit any potential gain which might result from an increase in the value of that currency. Although the Fund values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. Federal Tax Treatment of Options, Futures Contracts and Forward Foreign Exchange Contracts 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. PAGE 56 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 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 PAGE 57 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 the Fund's shares present at a meeting of shareholders if the holders of more than 50% of the outstanding shares are present in person or by proxy or (2) more than 50% of the Fund's outstanding shares. Other restrictions in the form of operating policies are subject to change by the Fund's Board of Directors/Trustees without shareholder approval. Any investment restriction which involves a maximum percentage of securities or assets shall not be considered to be violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition of securities or assets of, or borrowings by, the Fund. Fundamental Policies As a matter of fundamental policy, the Fund may not: (1) Borrowing. Borrow money except that the Fund may (i) borrow for non-leveraging, temporary or emergency purposes and (ii) engage in reverse repurchase agreements and make other investments or engage in other transactions, which may involve a borrowing, in a manner consistent with the Fund's investment objective and program, provided that the combination of (i) and (ii) shall not exceed 33 1/3% of the value of the Fund's total assets (including the amount borrowed) less liabilities (other than borrowings) or such other percentage permitted by law. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law. The Fund may borrow from banks, other Price Funds or other persons to the extent permitted by applicable law. (2) Commodities. Purchase or sell physical commodities; except that the Fund (other than the Prime Reserve and Treasury Money Funds) may enter into futures contracts and options thereon; (3) (a) Industry Concentration (All Funds, except High Yield, New Income, Prime Reserve and Short-Term Bond Funds). Purchase the securities of any PAGE 58 issuer if, as a result, more than 25% of the value of the Fund's total assets would be invested in the securities of issuers having their principal business activities in the same industry; (b) Industry Concentration (High Yield Fund). Purchase the securities of any issuer if, as a result, more than 25% of the value of the Fund's total assets would be invested in the securities of issuers having their principal business activities in the same industry; provided, however, that the Fund will normally invest more than 25% of its total assets in the securities of the banking industry including, but not limited to, bank certificates of deposit and bankers' acceptances, when the Fund's position in issues maturing in one year or less equals 35% or more of the Fund's total assets; (c) Industry Concentration (New Income Fund). Purchase the securities of any issuer if, as a result, more than 25% of the value of the Fund's total assets would be invested in the securities of issuers having their principal business activities in the same industry; provided, however, that the Fund will invest more than 25% of its total assets, but not more than 50%, in any one of the gas utility, gas transmission utility, electric utility, telephone utility, and petroleum industries under certain circumstances, and further provided that this limitation does not apply to securities of the banking industry including, but not limited to, certificates of deposit and bankers' acceptances; (d) Industry Concentration (Prime Reserve Fund). Purchase the securities of any issuer if, as a result, more than 25% of the value of the Fund's total assets would be invested in the securities of issuers having their principal business activities in the same industry; provided, however, that this limitation does not apply to securities of the banking industry including, but not limited to, certificates of deposit and bankers' acceptances; and (e) Industry Concentration (Short-Term Bond Fund). Purchase the securities of any issuer if, as a result, more than 25% of the value of the Fund's total assets would be invested in the securities of issuers having their principal business PAGE 59 activities in the same industry; provided, however, that the Fund will normally invest more than 25% of its total assets in the securities of the banking industry including, but not limited to, bank certificates of deposit and bankers' acceptances when the Fund's position in issues maturing in one year or less equals 35% or more of the Fund's total assets; provided, further, that the Fund will invest more than 25% of its total assets, but not more than 50%, in any one of the gas utility, gas transmission utility, electric utility, telephone utility, and petroleum industries under certain circumstances; (4) Loans. Make loans, although the Fund may (i) lend portfolio securities and participate in an interfund lending program with other Price Funds provided that no such loan may be made if, as a result, the aggregate of such loans would exceed 33 1/3% of the value of the Fund's total assets; (ii) purchase money market securities and enter into repurchase agreements; and (iii) acquire publicly-distributed or privately-placed debt securities and purchase debt; (5) Percent Limit on Assets Invested in Any One Issuer. Purchase a security if, as a result, with respect to 75% of the value of its total assets, more than 5% of the value of the Fund's total assets would be invested in the securities of a single issuer, except securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities; (6) Percent Limit on Share Ownership of Any One Issuer. Purchase a security if, as a result, with respect to 75% of the value of the Fund's total assets, more than 10% of the outstanding voting securities of any 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 securities of companies engaged in the real estate business); PAGE 60 (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 T. Rowe 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 (1), the Prime Reserve and Treasury Money Funds have no current intention of engaging in any borrowing transactions. With respect to investment restriction (2), the Fund does not consider currency contracts or hybrid instruments to be commodities. For purposes of investment restriction (3), U.S., state or local governments, or related agencies or instrumentalities, are not considered an industry. Industries are determined by reference to the classifications of industries set forth in the Fund's Semi-annual and 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. PAGE 61 Operating Policies As a matter of operating policy, the Fund may not: (1) Borrowing. The Fund will not purchase additional securities when money borrowed exceeds 5% of its total assets. (2) Control of Portfolio Companies. Invest in companies for the purpose of exercising management or control; (3) (a) Equity Securities (All Funds, except High Yield and New Income Funds). Purchase any common stocks or other equity securities, or securities convertible into equity securities except as set forth in its operating policy on investment companies; (b) Equity Securities (High Yield Fund). Invest more than 20% of the Fund's total assets in equity securities (including up to 5% in warrants); (c) Equity Securities (New Income Fund). Invest more than 25% of its total assets in equity securities; (4) Futures Contracts. Purchase a futures contract or an option thereon if, with respect to positions in futures or options on futures which do not represent bona fide hedging, the aggregate initial margin and premiums on such positions would exceed 5% of the Fund's net asset value. (5) Illiquid Securities. Purchase illiquid securities if, as a result, more than 15% (10% for the Prime Reserve and Treasury Money Funds) of its net assets would be invested in such securities; (6) Investment Companies. Purchase securities of open-end or closed-end investment companies except in compliance with the Investment Company Act of 1940 and applicable state law. Duplicate fees may result from such purchases; (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; PAGE 62 (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 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. Purchase or retain the securities of any issuer if, to the knowledge of the Fund's management, those officers and directors of the Fund, and of its investment manager, who each own beneficially more than .5% of the outstanding securities of such issuer, together own beneficially more than 5% of such securities. (12) (a) Short Sales (All Funds except High Yield Fund). Effect short sales of securities; (b) Short Sales (High Yield Fund). Effect short sales of securities, other than as set forth in its prospectus and Statement of Additional Information; (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 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 PAGE 63 (14) Warrants. Invest in warrants if, as a result thereof, more than 2% of the value of the total 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 total 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. MANAGEMENT OF FUND The officers and directors/trustees of the Fund are listed below. Unless otherwise noted, the address of each is 100 East Pratt Street, Baltimore, Maryland 21202. Except as indicated, each has been an employee of T. Rowe Price for more than five years. In the list below, the Fund's directors/trustees who are considered "interested persons" of T. Rowe Price as defined under Section 2(a)(19) of the Investment Company Act of 1940 are noted with an asterisk (*). These directors/trustees are referred to as inside directors by virtue of their officership, directorship, and/or employment with T. Rowe Price. All Funds Independent Directors/Trustees ROBERT P. BLACK, Retired; formerly President, Federal Reserve Bank of Richmond; Address: 10 Dahlgren Road, Richmond, Virginia 23233 CALVIN W. BURNETT, PH.D., President, Coppin State College; Director, Maryland Chamber of Commerce and Provident Bank of Maryland; 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, President and Chief Operating Officer, The Rouse Company, real estate developers, Columbia, Maryland; Advisory Director, Kleinwort, Benson (North America) Corporation, a registered broker-dealer; Address: 10275 Little Patuxent Parkway, Columbia, Maryland 21044 F. PIERCE LINAWEAVER, 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: PAGE 64 The Legg Mason Tower, 111 South Calvert Street, Suite 2700, Baltimore, Maryland 21202 JOHN G. SCHREIBER, President, Schreiber Investments, a real estate investment company; Director and formerly (1/80-12/90) Executive Vice President, JMB Realty Corporation, a national real estate investment manager and developer; Address: 1115 East Illinois Road, Lake Forest, Illinois 60045 ANNE MARIE WHITTEMORE, Partner, law firm of McGuire, Woods, Battle & Boothe, Richmond, Virginia; formerly, Chairman (1991- 1993) and Director (1989-1993), Federal Reserve Bank of Richmond; Director, Owens & Minor, Inc., USF&G Corporation, Old Dominion University, and nominated to the Board of James River Corporation; Member, Richmond Bar Association and American Bar Association; Address: One James Center, 901 East Cary Street, Richmond, Virginia 23219-4030 Officers HENRY H. HOPKINS, Vice President--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; Vice President, Rowe Price-Fleming International, Inc. and T. Rowe Price Retirement Plan Services, Inc. LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price 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 ROGER L. FIERY, Assistant Vice President--Vice President, Rowe Price-Fleming International, Inc. EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T. Rowe Price Services, Inc. INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price Adjustable Rate Fund *GEORGE J. COLLINS, Chairman of the Board--President, Managing Director, and Chief Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming International, Inc., T. Rowe Price Trust Company and T. Rowe Price Retirement Plan Services, Inc., Chartered Investment Counselor *PETER VAN DYKE, President and Director--Managing Director, T. Rowe Price; Vice President of Rowe Price-Fleming International, Inc. and T. Rowe Price Trust Company *JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and Director, T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc. PAGE 65 HEATHER R. LANDON, Executive Vice President--Vice President, T. Rowe Price and T. Rowe Price Trust Company MICHAEL J. CONELIUS, Vice President--Assistant Vice President, T. Rowe Price VEENA A. KUTLER, Vice President--Vice President, T. Rowe Price and Rowe Price-Fleming International, Inc. JAMES M. MCDONALD, Vice President--Vice President, T. Rowe Price EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price and T. Rowe Price Trust Company; formerly, (1972-1989) charter member of the U.S. Senior Executive Services and Director, Analysis and Evaluation Division in the Office of Water Regulations and Standards of the U.S. Environmental Protection Agency CHARLES P. SMITH, Vice President--Managing Director, T. Rowe Price; Vice President, Rowe Price-Fleming International, Inc. GNMA Fund *GEORGE J. COLLINS, Chairman of the Board--President, Managing Director and Chief Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming International, Inc., T. Rowe Price Trust Company and T. Rowe Price Retirement Plan Services, Inc.; Chartered Investment Counselor *JAMES S. RIEPE, Vice President and Trustee--Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and Director, T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc Rorer, Inc. PETER VAN DYKE, President--Managing Director, T. Rowe Price; Vice President, Rowe Price-Fleming International, Inc. and T. Rowe Price Trust Company ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price and Rowe Price-Fleming International, Inc.; formerly (4/80-5/90) Vice President and Director, Private Finance, New York Life Insurance Company, New York, New York VEENA A. KUTLER, Vice President--Vice President, T. Rowe Price and Rowe Price-Fleming International, Inc. HEATHER R. LANDON, Vice President--Vice President, T. Rowe Price and T. Rowe Price Trust Company JAMES M. McDONALD, Vice President--Vice President, T. Rowe Price EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price and T. Rowe Price Trust Company; formerly (1972-1989) charter member of the U.S. Senior Executive Service and Director, Analysis and Evaluation Division in the Office of Water Regulations and Standards of the U.S. Environmental Protection Agency CHARLES P. SMITH, Vice President--Managing Director, T. Rowe Price; Vice President, Rowe Price-Fleming International, Inc. PAGE 66 High Yield Fund *GEORGE J. COLLINS, Chairman of the Board--President, Managing Director, and Chief Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming International, Inc., T. Rowe Price Trust Company and T. Rowe Price Retirement Plan Services, Inc., Chartered Investment Counselor *RICHARD S. SWINGLE, President and Director--Managing Director, T. Rowe Price *JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and Director, T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc. CATHERINE B. BRAY, Vice President--Vice President, T. Rowe Price; formerly (7/87-3/89) Fixed Income Analyst, Salomon Brothers, New York, New York ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price HUBERT M. STILES, JR., Vice President--Vice President, T. Rowe Price JAY W. VAN ERT, Vice President--Vice President, T. Rowe Price; formerly (7/86-5/89) High Yield Credit Analyst, United Savings Bank of Texas, Houston, Texas MARK J. VASELKIV, Vice President--Vice President, T. Rowe Price THEA N. WILLIAMS, Vice President--Assistant Vice President, T. Rowe Price MICHAEL J. CONELIUS, Assistant Vice President--Assistant Vice President, T. Rowe Price JAMES M. McDONALD, Assistant Vice President--Vice President, T. Rowe Price New Income Fund *GEORGE J. COLLINS, Chairman of the Board--President, Managing Director, and Chief Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming International, Inc., T. Rowe Price Trust Company and T. Rowe Price Retirement Plan Services, Inc., Chartered Investment Counselor *CARTER O. HOFFMAN, Vice President and Director--Managing Director, T. Rowe Price; Chartered Investment Counselor *JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and Director, T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc. *CHARLES P. SMITH, President and Director--Managing Director, T. Rowe Price; Vice President, Rowe Price-Fleming International, Inc. ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price and Rowe Price Fleming International, Inc.; formerly (4/80-5/90) PAGE 67 Vice President and Director, Private Finance, New York Life Insurance Company, New York, New York HEATHER R. LANDON, Vice President--Vice President, T. Rowe Price and T. Rowe Price Trust Company JAMES M. McDONALD, Vice President--Vice President, T. Rowe Price EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price and T. Rowe Price Trust Company; formerly (1972-1989) charter member of the U.S. Senior Executive Service and Director, Analysis and Evaluation Division in the Office of Water Regulations and Standards of the U.S. Environmental Protection Agency JOAN R. POTEE, Vice President--Vice President, T. Rowe Price ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price; Vice President, Rowe Price-Fleming International, Inc. and T. Rowe Price Trust Company Prime Reserve Fund *GEORGE J. COLLINS, Vice President and Director--President, Managing Director, and Chief Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming International, Inc., T. Rowe Price Trust Company and T. Rowe Price Retirement Plan Services, Inc., Chartered Investment Counselor *CARTER O. HOFFMAN, Chairman of the Board--Managing Director, T. Rowe Price; Chartered Investment Counselor EDWARD A. WIESE, President--Vice President, T. Rowe Price, Rowe Price-Fleming International, Inc. and T. Rowe Price Trust Company ROBERT P. CAMPBELL, Executive Vice President--Vice President, T. Rowe Price and Rowe Price-Fleming International Inc.; formerly (4/80-5/90) Vice President and Director, Private Finance, New York Life Insurance Company, New York, New York JAMES M. MCDONALD, Executive Vice President--Vice President, T. Rowe Price PATRICE L. BERCHTENBREITER, Vice President--Vice President, T. Rowe Price PAUL W. BOLTZ, Vice President--Vice President and Financial Economist of T. Rowe Price MICHAEL J. CONELIUS, Vice President--Assistant Vice President, T. Rowe Price JOAN R. POTEE, Vice President--Vice President, T. Rowe Price JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and Director, T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc. ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price PAGE 68 Short-Term Bond Fund *GEORGE J. COLLINS, Chairman of the Board--President, Managing Director, and Chief Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming International, Inc., T. Rowe Price Trust Company and T. Rowe Price Retirement Plan Services, Inc., Chartered Investment Counselor *JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and Director, T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc. VEENA A. KUTLER, President--Vice President, T. Rowe Price and Rowe Price-Fleming International, Inc. ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price and Rowe Price-Fleming International, Inc.; 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 JAMES M. MCDONALD, Vice President--Vice President, T. Rowe Price ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price CHARLES P. SMITH, Vice President--Managing Director, T. Rowe Price; Vice President, Rowe Price-Fleming International, Inc. EDWARD A. WIESE, Vice President--Vice President, T. Rowe Price, Rowe Price-Fleming International, Inc. and T. Rowe Price Trust Company Intermediate, Long-Term and Money Funds *GEORGE J. COLLINS, President and Director--President, Managing Director, and Chief Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming International, Inc., T. Rowe Price Trust Company and T. Rowe Price Retirement Plan Services, Inc., Chartered Investment Counselor *JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and Director, T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc. *CHARLES P. SMITH, Executive Vice President and Director-- Managing Director, T. Rowe Price; Vice President, Rowe Price- Fleming International, Inc. *PETER VAN DYKE, Executive Vice President and Director--Managing Director, T. Rowe Price; Vice President, Rowe Price-Fleming International, Inc. and T. Rowe Price Trust Company EDWARD A. WIESE, Executive Vice President--Vice President, T. Rowe Price, Rowe Price-Fleming International, Inc. and T. Rowe Price Trust Company PAUL W. BOLTZ, Vice President--Vice President and Financial Economist of T. Rowe Price PAGE 69 ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price and Rowe Price-Fleming International Inc.; formerly (4/80-5/90) Vice President and Director, Private Finance, New York Life Insurance Company, New York, New York VEENA A. KUTLER, Vice President--Vice President, T. Rowe Price and Rowe Price-Fleming International, Inc. HEATHER R. LANDON, Vice President--Vice President, T. Rowe Price and T. Rowe Price Trust Company JAMES M. McDONALD, Vice President--Vice President, T. Rowe Price JOAN R. POTEE, Vice President--Vice President, T. Rowe Price The Fund's Executive Committee, consisting of the Fund's interested directors/trustees, has been authorized by its respective Board of Directors/Trustees to exercise all powers of the Board to manage the Fund in the intervals between meetings of the Board, except the powers prohibited by statute from being delegated. PRINCIPAL HOLDERS OF SECURITIES As of the date of the prospectus, the officers and directors of the Fund, as a group, owned less than 1% of the outstanding shares of the Fund. As of February 28, 1994, Yachtcrew & Co., FBO Spectrum Income Account, State Street Bank and Trust Co., 1776 Heritage Drive-4W, North Quincy, MA 02171-2010 beneficially owned more than 5% of the outstanding shares of the GNMA, High Yield, New Income and Short-Term Bonds Funds, and T. Rowe Price Trust Co. Inc., Attn: Installation Team for Conversion Assets, New England Electric Plan, 25 Research Drive, Westborough, MA 01582 beneficially owned more than 5% of then outstanding shares of the Money Fund. INVESTMENT MANAGEMENT SERVICES Services Under the Management Agreement, T. Rowe Price provides the Fund with discretionary investment services. Specifically, T. Rowe Price is responsible for supervising and directing the investments of the Fund in accordance with the Fund's investment objectives, program, and restrictions as provided in its prospectus and this Statement of Additional Information. T. Rowe Price is also responsible for effecting all security transactions on behalf of the Fund, including the negotiation of commissions and the allocation of principal business and portfolio brokerage. In addition to these services, T. Rowe Price provides the Fund with certain corporate administrative services, including: PAGE 70 maintaining the Fund's corporate existence and corporate records; registering and qualifying Fund 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 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 a fee ("Fee") which consists of two components: a Group Management Fee ("Group Fee") and an Individual Fund Fee ("Fund Fee"). The Fee is paid monthly to T. Rowe Price on the first business day of the next succeeding calendar month and is calculated as described below. The monthly Group Fee ("Monthly Group Fee") is the sum of the daily Group Fee accruals ("Daily Group Fee Accruals") for each month. The Daily Group Fee Accrual for any particular day is computed by multiplying the Price Funds' group fee accrual as determined below ("Daily Price Funds' Group Fee Accrual") by the ratio of the Fund's net assets for that day to the sum of the aggregate net assets of the Price Funds for that day. The Daily Price Funds' Group Fee Accrual for any particular day is calculated by multiplying the fraction of one (1) over the number of calendar days in the year by the annualized Daily Price Funds' Group Fee Accrual for that day as determined in accordance with the following schedule: Price Funds' Annual Group Base Fee Rate for Each Level of Assets 0.480% First $1 billion 0.450% Next $1 billion 0.420% Next $1 billion 0.390% Next $1 billion 0.370% Next $1 billion 0.360% Next $2 billion 0.350% Next $2 billion 0.340% Next $5 billion 0.330% Next $10 billion 0.320% Next $10 billion 0.310% Thereafter PAGE 71 For the purpose of calculating the Group Fee, the Price Funds include all the mutual funds distributed by T. Rowe Price Investment Services, Inc., (excluding T. Rowe Price Spectrum Fund, Inc. and any institutional or private label mutual funds). For the purpose of calculating the Daily Price Funds' Group Fee Accrual for any particular day, the net assets of each Price Fund are determined in accordance with the Fund's prospectus as of the close of business on the previous business day on which the Fund was open for business. The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund Fee accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee Accrual for any particular day is computed by multiplying the fraction of one (1) over the number of calendar days in the year by the individual Fund Fee Rate and multiplying this product by the net assets of the Fund for that day, as determined in accordance with the Fund's prospectus as of the close of business on the previous business day on which the Fund was open for business. The individual fund fees for each Fund are listed in the chart below: Individual Fund Fees Adjustable Rate Fund 0.10% GNMA Fund 0.15% High Yield Fund 0.30% New Income Fund 0.15% Prime Reserve Fund 0.05% Short-Term Bond Fund 0.10% Intermediate Fund 0.05% Long-Term Fund 0.05% Money Fund 0.00% The following chart sets forth the total management fees, if any, paid to T. Rowe Price by each Fund, during the last three years: Fund 1994 1993 1992 Adjustable Rate $ 526,000 $ 627,000 * GNMA 4,626,000 4,102,000 $ 3,069,000 High Yield 10,554,000 8,014,000 5,701,000 New Income 7,750,000 7,113,000 6,348,000 Prime Reserve 13,617,000 15,620,000 18,486,000 Short-Term Bond 2,873,000 2,136,000 1,398,000 Intermediate 755,000 571,000 309,000 Long-Term 180,000 125,000 4,000 Money 2,084,000 165,000 2,140,000 * Due to the Fund's expense limitation in effect at that time, no management fee was paid by the Fund to T. Rowe Price. PAGE 72 Limitation on Fund Expenses The Management Agreement between the Fund and T. Rowe Price provides that the Fund will bear all expenses of its operations not specifically assumed by T. Rowe Price. However, in compliance with certain state regulations, T. Rowe Price will reimburse the Fund for certain expenses which in any year exceed the limits prescribed by any state in which the Fund's shares are qualified for sale. Presently, the most restrictive expense ratio limitation imposed by any state is 2.5% of the first $30 million of the Fund's average daily net assets, 2% of the next $70 million of the Fund's assets, and 1.5% of net assets in excess of $100 million. Reimbursement by the Fund to T. Rowe Price of any expenses paid or assumed under a state expense limitation may not be made more than two years after the end of the fiscal year in which the expenses were paid or assumed. The following chart sets forth expense ratio limitations and the periods for which they are effective. For each, T. Rowe Price has agreed to bear any Fund expenses which would cause the Fund's ratio of expenses to average net assets to exceed the indicated percentage limitations. The expenses borne by T. Rowe Price are subject to reimbursement by the Fund through the indicated reimbursement date, provided no reimbursement will be made if it would result in the Fund's expense ratio exceeding its applicable limitation. Expense Limitation Ratio Reimbursement Fund Period Limitation Date Adjustable Rate+ January 1, 1994- 0.70% May 31, 1998 May 31, 1996 Intermediate++ March 1, 1993- 0.80% February 28, 1997 February 28, 1995 Long-Term++ March 1, 1993- 0.80% February 28, 1997 February 28, 1995 + The Adjustable Rate Fund previously operated under a 0.40% limitation that expired December 31, 1993. The reimbursement period for this limitation extends through June 30, 1995. ++ The Intermediate and Long-Term Funds' operated under a 0.80% limitation that expired February 29, 1993. The reimbursement period for this limitation extends through February 28, 1995. Each of the above-referenced Fund's Management Agreement also provides that one or more additional expense limitation periods (of the same or different time periods) may be implemented after the expiration of the current expense limitation, and that with PAGE 73 respect to any such additional limitation period, the Fund may reimburse T. Rowe Price, provided the reimbursement does not result in the Fund's aggregate expenses exceeding the additional expense limitation. Pursuant to the Adjustable Rate Fund's current expense limitation, $938,000 of management fees were not accrued by the Fund for the year ended February 28, 1994. Pursuant to the Intermediate Fund's current expense limitation, $77,000 of unaccrued 1993 fees for the Fund, representing the entire unaccrued balance, were reimbursed to T. Rowe Price during the year ended February 28, 1994. Pursuant to the Long-Term Fund's current expense limitation, $61,000 of management fees were not accrued by the Fund for the year ended February 28, 1994. Additionally, $303,000 of unaccrued fees from the prior period for the Fund was subject to reimbursement through February 28, 1995. GNMA, High Yield, New Income, Prime Reserve and Short-Term Bond Funds T. Rowe Price Spectrum Fund, Inc. The Fund is a party to a Special Servicing Agreement ("Agreement") between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum Fund"), T. Rowe Price, T. Rowe Price Services, Inc. and various other T. Rowe Price funds which, along with the Fund, are funds in which Spectrum Fund invests (collectively all such funds "Underlying Price Funds"). The Agreement provides that, if the Board of Directors/Trustees of any Underlying Price Fund determines that such Underlying Fund's share of the aggregate expenses of Spectrum Fund is less than the estimated savings to the Underlying Price Fund from the operation of Spectrum Fund, the Underlying Price Fund will bear those expenses in proportion to the average daily value of its shares owned by Spectrum Fund, provided further that no Underlying Price Fund will bear such expenses in excess of the estimated savings to it. Such savings are expected to result primarily from the elimination of numerous separate shareholder accounts which are or would have been invested directly in the Underlying Price Funds and the resulting reduction in shareholder servicing costs. Although such cost savings are not certain, the estimated savings to the Underlying Price Funds generated by the operation of Spectrum Fund are expected to be sufficient to offset most, if not all, of the expenses incurred by Spectrum Fund. PAGE 74 All Funds 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 Fund's distributor. Investment Services is registered as a broker- dealer under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. The offering of the Fund's shares is continuous. Investment Services is located at the same address as the Fund and T. Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202. Investment Services serves as distributor to the Fund pursuant to an Underwriting Agreement ("Underwriting Agreement"), which provides that the Fund will pay all fees and expenses in connection with: registering and qualifying its shares under the various state "blue sky" laws; preparing, setting in type, printing, and mailing its prospectuses and reports to shareholders; and issuing its shares, including expenses of confirming purchase orders. The Underwriting Agreement provides that Investment Services will pay all fees and expenses in connection with: printing and distributing prospectuses and reports for use in offering and selling Fund shares; preparing, setting in type, printing, and mailing all sales literature and advertising; Investment Services' federal and state registrations as a broker-dealer; and offering and selling Fund shares, except for those fees and expenses specifically assumed by the Fund. Investment Services' expenses are paid by T. Rowe Price. Investment Services acts as the agent of the Fund in connection with the sale of its shares in 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 PAGE 75 Corporation. The Fund (other than the GNMA, Prime Reserve and U.S. Treasury Intermediate, Long-Term and Money Funds) has entered into a Custodian Agreement with The Chase Manhattan Bank, N.A., London, pursuant to which portfolio securities which are purchased outside the United States are maintained in the custody of various foreign branches of The Chase Manhattan Bank and such other custodians, including foreign banks and foreign securities depositories as are approved by the Fund's Board of Directors/Trustees in accordance with regulations under the Investment Company Act of 1940. The Bank's main office is at 225 Franklin Street, Boston, Massachusetts 02110. The address for The Chase Manhattan Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P 2HD, England. PORTFOLIO TRANSACTIONS Investment or Brokerage Discretion Decisions with respect to the purchase and sale of portfolio securities on behalf of the Fund are made by T. Rowe Price. T. Rowe Price is also responsible for implementing these decisions, including the negotiation of commissions and the allocation of portfolio brokerage and principal business. The Fund's purchases and sales of fixed-income portfolio securities are normally done on a principal basis and do not involve the payment of a commission although they may involve the designation of selling concessions. That part of the discussion below relating solely to brokerage commissions would not normally apply to the Fund (except to the extent it purchases equity securities (New Income and High Yield Funds only)). However, it is included because T. Rowe Price does manage a significant number of common stock portfolios which do engage in agency transactions and pay commissions and because some research and services resulting from the payment of such commissions may benefit the Fund. How Brokers and Dealers are Selected Equity Securities In purchasing and selling the 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, at competitive commission rates. However, under certain conditions, the Fund may pay higher brokerage commissions in return for brokerage and research services. As a general practice, over-the-counter orders are executed with market-makers. In selecting among market-makers, T. Rowe Price generally seeks to select those it believes to be actively and effectively trading the security being purchased or sold. In selecting broker-dealers to execute the Fund's PAGE 76 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. Fixed Income Securities Fixed income securities are generally purchased from the issuer or a primary market-maker acting as principal for the securities on a net basis, with no brokerage commission being paid by the client although the price usually includes an undisclosed compensation. Transactions placed through dealers serving as primary market-makers reflect the spread between the bid and asked prices. Securities may also be purchased from underwriters at prices which include underwriting fees. With respect to equity and fixed income securities, T. Rowe Price may effect principal transactions on behalf of the Fund with a broker or dealer who furnishes brokerage and/or research services, designate any such broker or dealer to receive selling concessions, discounts or other allowances, or otherwise deal with any such broker or dealer in connection with the acquisition of securities in underwritings. T. Rowe Price may receive research services in connection with brokerage transactions, including designations in fixed price offerings. How Evaluations are Made of the Overall Reasonableness of Brokerage Commissions Paid On a continuing basis, T. Rowe Price seeks to determine what levels of commission rates are reasonable in the marketplace for transactions executed on behalf of the Fund. In evaluating the reasonableness of commission rates, T. Rowe Price considers: (a) historical commission rates, 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. PAGE 77 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 responsibility issues. These services provide both domestic and international perspective. Research services are received primarily in the form of written reports, computer generated services, telephone contacts and personal meetings with security analysts. In addition, such services may be provided in the form of meetings arranged with corporate and industry spokespersons, economists, academicians and government representatives. In some cases, research services are generated by third parties but are provided to T. Rowe Price by or through broker-dealers. Research services received from brokers and dealers are supplemental to T. Rowe Price's own research effort and, when utilized, are subject to internal analysis before being incorporated by T. Rowe Price into its investment process. As a practical matter, it would not be possible for T. Rowe Price's Equity Research Division to generate all of the information presently provided by brokers and dealers. T. Rowe Price pays cash for certain research services received from external sources. T. Rowe Price also allocates brokerage for research services which are available for cash. While receipt of research services from brokerage firms has not reduced T. Rowe Price's normal research activities, the expenses of T. Rowe Price could be materially increased if it attempted to generate such additional information through its own staff. To the extent that research services of value are provided by brokers or dealers, T. Rowe Price may be relieved of expenses which it might otherwise bear. T. Rowe Price has a policy of not allocating brokerage business in return for products or services other than brokerage or research services. In accordance with the provisions of Section 28(e) of the Securities Exchange Act of 1934, T. Rowe Price may from time to time receive services and products which serve both research and non-research functions. In such event, T. Rowe Price makes a good faith determination of the anticipated research and non-research use of the product or service and allocates brokerage only with respect to the research component. PAGE 78 Commissions to Brokers who Furnish Research Services Certain brokers and dealers who provide quality brokerage and execution services also furnish research services to T. Rowe Price. With regard to the payment of brokerage commissions, T. Rowe Price has adopted a brokerage allocation policy embodying the concepts of Section 28(e) of the Securities Exchange Act of 1934, which permits an investment adviser to cause an account to pay commission rates in excess of those another broker or dealer would have charged for effecting the same transaction, if the adviser determines in good faith that the commission paid is reasonable in relation to the value of the brokerage and research services provided. The determination may be viewed in terms of either the particular transaction involved or the overall responsibilities of the adviser with respect to the accounts over which it exercises investment discretion. Accordingly, while T. Rowe Price cannot readily determine the extent to which commission rates or net prices charged by broker-dealers reflect the value of their research services, T. Rowe Price would expect to assess the reasonableness of commissions in light of the total brokerage and research services provided by each particular broker. T. Rowe Price may receive research, as defined in Section 28(e), in connection with selling concessions and designations in fixed price offerings in which the Funds participate. Internal Allocation Procedures T. Rowe Price has a policy of not precommitting a specific amount of business to any broker or dealer over any specific time period. Historically, the majority of brokerage placement has been determined by the needs of a specific transaction such as market-making, availability of a buyer or seller of a particular security, or specialized execution skills. However, T. Rowe Price does have an internal brokerage allocation procedure for that portion of its discretionary client brokerage business where special needs do not exist, or where the business may be allocated among several brokers or dealers which are able to meet the needs of the transaction. Each year, T. Rowe Price assesses the contribution of the brokerage and research services provided by brokers or dealers, and attempts to allocate a portion of its brokerage business in response to these assessments. Research analysts, counselors, various investment committees, and the Trading Department each seek to evaluate the brokerage and research services they receive from brokers or dealers and make judgments as to the level of business which would recognize such services. In addition, brokers or dealers sometimes suggest a level of business they would like to receive in return for the various brokerage and PAGE 79 research services they provide. Actual brokerage received by any firm may be less than the suggested allocations but can, and often does, exceed the suggestions, because the total business is allocated on the basis of all the considerations described above. In no case is a broker or dealer excluded from receiving business from T. Rowe Price because it has not been identified as providing research services. Miscellaneous T. Rowe Price's brokerage allocation policy is consistently applied to all its fully discretionary accounts, which represent a substantial majority of all assets under management. Research services furnished by brokers or dealers through which T. Rowe Price effects securities transactions may be used in servicing all accounts (including non-Fund accounts) managed by T. Rowe Price. Conversely, research services received from brokers or dealers which execute transactions for the Fund are not necessarily used by T. Rowe Price exclusively in connection with the management of the Fund. From time to time, orders for clients may be placed through a computerized transaction network. The Fund does not allocate business to any broker-dealer on the basis of its sales of the Fund's shares. However, this does not mean that broker-dealers who purchase Fund shares for their clients will not receive business from the Fund. Some of T. Rowe Price's other clients have investment objectives and programs similar to those of the Fund. T. Rowe Price may occasionally make recommendations to other clients which result in their purchasing or selling securities simultaneously with the Fund. As a result, the demand for securities being purchased or the supply of securities being sold may increase, and this could have an adverse effect on the price of those securities. It is T. Rowe Price's policy not to favor one client over another in making recommendations or in placing orders. T. Rowe Price frequently follows the practice of grouping orders of various clients for execution which generally results in lower commission rates being attained. In certain cases, where the aggregate order is executed in a series of transactions at various prices on a given day, each participating client's proportionate share of such order reflects the average price paid or received with respect to the total order. T. Rowe Price has established a general investment policy that it will ordinarily not make additional purchases of a common stock of a company for its clients (including the T. Rowe Price Funds) if, as a result of such purchases, 10% or more of the outstanding common stock of such company would be held by its clients in the aggregate. PAGE 80 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. Adjustable Rate, High Yield, New Income and Short-Term Bond Funds 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 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 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/Trustees 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 PAGE 81 affiliates of Robert Fleming Holding and JFG also may be used. Although it does not believe that the Fund's use of these brokers would be subject to Section 17(e) of the Investment Company Act of 1940, the Board of Directors/Trustees of the Fund has agreed that the procedures set forth in Rule 17e-1 under that Act will be followed when using such brokers. Other The Funds engaged in portfolio transactions involving broker- dealers in the following amounts for the fiscal years ended February 28, 1994, February 28, 1993 and February 29, 1992: Fund 1994 1993 1992 ______ ____ ____ ____ Adjustable Rate$ 793,565,000 $ 1,876,498,000 $ 427,475,000 GNMA 2,306,951,000 1,528,454,000 1,438,762,000 High Yield 18,554,222,000 16,168,606,000 6,702,967,000 New Income 20,265,475,000 15,193,999,000 6,648,064,000 Prime Reserve 29,024,172,000 36,478,989,000 29,975,769,000 Short-Term Bond 4,266,837,000 5,805,958,000 5,534,535,000 Intermediate 81,970,000 91,923,000 218,317,000 Long-Term 142,513,000 192,941,000 192,774,000 Money 3,449,951,000 2,804,196,000 23,290,378,000 The entire amount for each of these years represented principal transactions as to which the Adjustable Rate, GNMA, Prime Reserve, U.S. Treasury Intermediate, Long-Term and Money Funds have no knowledge of the profits or losses realized by the respective broker-dealers for the fiscal years ended February 28, 1994, February 28, 1993 and February 29, 1992. With respect to the High Yield, New Income and Short-Term Bond Funds, the following amounts consisted of principal transactions as to which the Funds have no knowledge of the profits or losses realized by the respective broker-dealers for the fiscal years ended February 28, 1994, February 28, 1993 and February 29, 1992: Fund 1994 1993 1992 ______ ____ ____ ____ High Yield $17,956,306,000 $15,737,460,000 $6,682,140,000 New Income 20,206,382,000 15,189,019,000 6,518,595,000 Short-Term Bond 0 0 5,034,535,000 The following amounts involved trades with brokers acting as agents or underwriters for the fiscal years ended February 28, 1994, February 28, 1993, and February 29, 1992: PAGE 82 Fund 1994 1993 1992 ______ ____ ____ ____ High Yield $597,916,000 $431,147,000 $ 20,827,000 New Income 59,093,000 4,980,000 129,469,000 Short-Term Bond 0 0 5,000,000 The amounts shown below involved trades with brokers acting as agents or underwriters, in which such brokers received total commissions, including discounts received in connection with underwritings for the fiscal years ended February 28, 1994, February 28, 1993 and February 29, 1992: Fund 1994 1993 1992 ______ ____ ____ ____ High Yield $16,730,000 $3,661,000 $1,201,000 New Income 169,000 20,000 402,000 Short-Term Bond 0 0 15,000 The percentage of total portfolio transactions, placed with firms which provided research, statistical, or other services to T. Rowe Price in connection with the management of the Funds, or in some cases, to the Funds for the fiscal years ended February 28, 1994, February 28, 1993 and February 29, 1992, are shown below: Fund 1994 1993 1992 ______ ____ ____ ____ Adjustable Rate 100% 94% 100% GNMA 91% 91% 99% High Yield 70% 70% 59% New Income 61% 61% 87% Prime Reserve 87% 81% 76% Short-Term Bond 61% 84% 79% Intermediate 85% 98% 100% Long-Term 98% 99% 100% Money 66% 75% 60% The portfolio turnover rates for the following Funds for the fiscal years ended February 28, 1994, February 28, 1993 and February 29, 1992 are as follows: PAGE 83 Fund 1994 1993 1992 ______ ____ ____ ____ Adjustable Rate 70.4% 110.8% 98.4% GNMA 92.5% 94.2% 66.0% High Yield 107.0% 104.4% 58.9% New Income 58.3% 85.8% 49.7% Short-Term Bond 90.8% 68.4% 380.7% Intermediate 20.2% 22.8% 91.4% Long-Term 59.4% 165.4% 162.4% Prime Reserve Fund The Fund, in pursuing its objectives, may engage in short-term trading to take advantage of market variations. The Fund will seek to protect principal, improve liquidity of its securities, or enhance yield by purchasing and selling securities based upon existing or anticipated market discrepancies. Money Fund The Fund, in pursuing its objectives, may engage in short-term trading to take advantage of market variations. The Fund will seek to protect principal, improve liquidity of its securities, or enhance yield by purchasing and selling securities based upon existing or anticipated market discrepancies. PRICING OF SECURITIES GNMA, High Yield, New Income, Short-Term Bond, U.S. Treasury Intermediate and Long-Term Funds 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 a bid-side valuation as furnished by dealers who make markets in such securities or by an independent pricing service, which considers yield or price of bonds of comparable quality, coupon, maturity, and type, as well as prices quoted by dealers who make markets in such securities. Domestic securities with remaining maturities less than one year are stated at fair value which is determined by using a matrix system that establishes a value for each security based on bid- side money market yields. There are a number of pricing services available, and the Board of Directors, on the basis of ongoing evaluation of these services, may use or may discontinue the use of any pricing service in whole or in part. PAGE 84 For the purposes of determining the 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. Prime Reserve and U.S. Treasury Money Funds Securities with more than 60 days remaining to maturity are stated at fair value which is determined by using a matrix system that establishes a value for each security based on money market yields. Securities originally purchased with remaining maturities of 60 days or less are valued at amortized cost. In addition, securities purchased with maturities in excess of 60 days, but which currently have maturities of 60 days or less, are valued at their amortized cost for the 60 days prior to maturity- - -such amortization being based on the fair value of the securities on the 61st day prior to maturity. All Funds Assets and liabilities for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value, as determined in good faith by or under the supervision of officers of the Funds, as authorized by the Board of Directors. Prime Reserve and Money Funds Maintenance of Net Asset Value Per Share It is the policy of the Fund to attempt to maintain a net asset value of $1.00 per share by rounding to the nearest one cent. This method of valuation is commonly referred to as "penny rounding" and is permitted by Rule 2a-7 under the Investment Company Act of 1940. Under Rule 2a-7: (a) the Board of Directors of the Fund must undertake to assure, to the extent reasonably practical taking into account current market conditions affecting the Fund's investment objectives, that the Fund's net asset value will not deviate from $1.00 per share; Prime Reserve Fund (b) the Fund must (i) maintain a dollar-weighted average portfolio maturity appropriate to its objective of maintaining a stable price per share, (ii) not purchase any instrument with a remaining maturity greater than 397 days (or in the case of U.S. government securities greater than PAGE 85 762 days), and (iii) maintain a dollar-weighted average portfolio maturity of 90 days or less; Money Fund (b) The Fund must (i) maintain a dollar-weighted average portfolio maturity appropriate to its objective of maintaining a stable price per share, (ii) not purchase any instrument with a remaining maturity greater than 762 days, and (iii) maintain a dollar-weighted average portfolio maturity of 90 days or less; Prime Reserve and Money Funds (c) the Fund must limit its purchase of portfolio instruments, including repurchase agreements, to those U.S. dollar-denominated instruments which the Fund's Board of Directors determines present minimal credit risks, and which are eligible securities as defined by Rule 2a-7; and (d) the Board of Directors must determine that (i) it is in the best interest of the Fund and its shareholders to maintain a stable price per share under the penny rounding method; and (ii) the Fund will continue to use the penny rounding method only so long as the Board of Directors believes that it fairly reflects the market based net asset value per share. Although the Fund believes that it will be able to maintain its net asset value at $1.00 per share under most conditions, there can be no absolute assurance that it will be able to do so on a continuous basis. If the Fund's net asset value per share declined, or was expected to decline, below $1.00 (rounded to the nearest one cent), the Board of Directors of the Fund might temporarily reduce or suspend dividend payments in an effort to maintain the net asset value at $1.00 per share. As a result of such reduction or suspension of dividends, an investor would receive less income during a given period than if such a reduction or suspension had not taken place. Such action could result in an investor receiving no dividend for the period during which he holds his shares and in his receiving, upon redemption, a price per share lower than that which he paid. On the other hand, if the Fund's net asset value per share were to increase, or were anticipated to increase above $1.00 (rounded to the nearest one cent), the Board of Directors of the Fund might supplement dividends in an effort to maintain the net asset value at $1.00 per share. PAGE 86 Prime Reserve Fund Prime Money Market Securities Defined. Prime money market securities are those which are described as First Tier Securities under Rule 2a-7 of the Investment Company Act of 1940. These include any security with a remaining maturity of 397 days or less that is rated (or that has been issued by an issuer that is rated with respect to a class of short-term debt obligations, or any security within that class that is comparable in priority and security with the security) by any two nationally recognized statistical rating organizations (NRSROs) (or if only one NRSRO has issued a rating, that NRSRO) in the highest rating category for short-term debt obligations (within which there may be sub- categories). First Tier Securities also include unrated securities comparable in quality to rated securities, as determined by T. Rowe Price under the supervision of the Fund's Board of Directors. All Funds NET ASSET VALUE PER SHARE The purchase and redemption price of the Fund's shares is equal to the Fund's net asset value per share or share price. The Fund determines its net asset value per share by subtracting the Fund's liabilities (including accrued expenses and dividends payable) from its total assets (the market value of the securities the Fund holds plus cash and other assets, including income accrued but not yet received) and dividing the result by the total number of shares outstanding. The net asset value per share of the Fund is normally calculated as of the close of trading on the New York Stock Exchange ("NYSE") every day the NYSE is open for trading. The NYSE is closed on the following days: New Year's Day, 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 the Fund may be suspended at times (a) during which the NYSE is closed, other than customary weekend and holiday closings, (b) during which trading on the NYSE is restricted, (c) during which an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or (d) during which a governmental body having jurisdiction over the Fund may by order permit such a suspension for the protection of the Fund's shareholders; provided that applicable rules and regulations of the Securities and Exchange Commission (or any succeeding governmental authority) shall PAGE 87 govern as to whether the conditions prescribed in (b), (c), or (d) exist. DIVIDENDS AND DISTRIBUTIONS Unless you elect otherwise, the Fund's annual capital gain distribution, if any, will be reinvested on the reinvestment date using the NAV per share of that date. The reinvestment date normally precedes the payment date by 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"). A portion of the dividends paid by the Fund may be eligible for the dividends-received deduction for corporate shareholders. For tax purposes, it does not make any difference whether dividends and capital gain distributions are paid in cash or in additional shares. The Fund must declare dividends 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 its tax year-end to avoid federal income tax. At the time of your purchase, the Fund's net asset value may reflect undistributed capital gains or net unrealized appreciation of securities held by the Fund. A subsequent distribution to you of such amounts, although constituting a return of your investment, would be taxable as a capital gain distribution. For federal income tax purposes, the Fund is permitted to carry forward its net realized capital losses, if any, for eight years and realize net capital gains up to the amount of such losses without being required to pay taxes on, or distribute such gains. On May 31, 1994, the books of each Fund indicated that each Fund's aggregate net assets included undistributed net income, net realized capital gains, and unrealized appreciation which are listed below. PAGE 88 Undistributed Net Realized Unrealized Fund Net Income Capital Gains Appreciation Adjustable Rate GNMA High Yield New Income Prime Reserve Short-Term Bond Intermediate Long-Term Money If, in any taxable year, the Fund should not qualify as a regulated investment company under the Code: (i) the Fund would be taxed at normal corporate rates on the entire amount of its taxable income, if any, without deduction for dividends or other distributions to shareholders; and (ii) the Fund's distributions to the extent made out of the Fund's current or accumulated earnings and profits would be taxable to shareholders as ordinary dividends (regardless of whether they would otherwise have been considered capital gain dividends). Taxation of Foreign Shareholders The Code provides that dividends from net income will be subject to U.S. tax. For shareholders who are not engaged in a business in the U.S., this tax would be imposed at the rate of 30% upon the gross amount of the dividends in the absence of a Tax Treaty providing for a reduced rate or exemption from U.S. taxation. Distributions of net long-term capital gains realized by the Fund are not subject to tax unless the foreign shareholder is a nonresident alien individual who was physically present in the U.S. during the tax year for more than 182 days. Foreign Currency Gains and Losses Foreign currency gains and losses, including the portion of gain or loss on the sale of debt securities attributable to foreign exchange rate fluctuations, are taxable as ordinary income. If the net effect of these transactions is a gain, the 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: PAGE 89 Adjustable Rate and GNMA Funds In conformity with regulations of the Securities and Exchange Commission, an income factor is calculated for each security in the portfolio based upon the security's coupon rate. The income factors are then adjusted for any gains or losses which have resulted from prepayments of principal during the period. The income factors are then totalled for all securities in the portfolio. Next, expenses of the Fund for the period net of expected reimbursements, are deducted from the income to arrive at net income, which is then converted to a per-share amount by dividing net income by the average number of shares outstanding during the period. The net income per share is divided by the net asset value on the last day of the period to produce a monthly yield which is then annualized. Quoted yield factors are for comparison purposes only, and are not intended to indicate future performance or forecast the dividend per share of the Fund. The yields of the Adjustable Rate and GNMA Funds calculated under the above-described method for the month ended May 31, 1994 were ____% and _____%, respectively. High Yield, New Income, Short-Term Bond, Intermediate and Long- Term Funds An income factor is calculated for each security in the portfolio based upon the security's market value at the beginning of the period and yield as determined in conformity with regulations of the 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 reimbursements are deducted from the income to arrive at net income, which is then converted to a per-share amount by dividing net income by the average number of shares outstanding during the period. The net income per share is divided by the net asset value on the last day of the period to produce a monthly yield which is then annualized. Quoted yield factors are for comparison purposes only, and are not intended to indicate future performance or forecast the dividend per share of the Fund. The yields of the High Yield, New Income, Short-Term Bond, Intermediate and Long-Term Funds calculated under the above- described method for the month ended May 31, 1994, was _____%, _____%, _____%, _____% and _____%, respectively. PAGE 90 Prime Reserve and Money Funds The Fund's current and historical yield for a period is calculated by dividing the net change in value of an account (including all dividends accrued and dividends reinvested in additional shares) by the account value at the beginning of the period to obtain the base period return. This base period return is divided by the number of days in the period then multiplied by 365 to arrive at the annualized yield for that period. The Fund's annualized compound yield for such period is compounded by dividing the base period return by the number of days in the period, and compounding that figure over 365 days. The seven-day yields ending May 31, 1993 for the Prime Reserve and Money Funds were _____% and ______%, respectively, and the Funds' compound yield for the same period were _____% and _____%, respectively. All Funds INVESTMENT PERFORMANCE Total Return Performance The Fund's calculation of total return performance includes the reinvestment of all capital gain distributions and income dividends for the period or periods indicated, without regard to tax consequences to a shareholder in the Fund. Total return is calculated as the percentage change between the beginning value of a static account in the Fund and the ending value of that account measured by the then current net asset value, including all shares acquired through reinvestment of income and capital gains dividends. The results shown are historical and should not be considered indicative of the future performance of the Fund. Each average annual compound rate of return is derived from the cumulative performance of the Fund over the time period specified. The annual compound rate of return for the Fund over any other period of time will vary from the average. PAGE 91 Cumulative Performance Percentage Change 1 Yr. 5 Yrs. 10 Yrs. Since Ended Ended Ended Inception- 2/28/94 2/28/94 2/28/94 2/28/94 Adjustable Rate U.S. Government Fund T. Rowe Price Adjustable Rate U.S. Government Fund, Inc. 3.11% 9.30% (9/30/91) Lipper Average of Adjustable Rate Mortgage Funds 3.17 10.27 Merrill Lynch 1-3 Year Govt. Index 3.48 16.22 Salomon Brothers 1-Year Treasury Index 2.61 11.17 Salomon Brothers 2-Year Treasury Index 3.46 16.51 GNMA Fund T. Rowe Price GNMA Fund 3.71 61.78% 96.72 (11/26/85) Salomon Brothers 30-Year GNMA Index 4.67 69.52 124.78 Lehman Brothers GNMA Bond Index 4.49 68.70 123.75 Lipper GNMA Funds Average 3.78 60.10 100.59 High Yield Fund High Yield Fund 16.59 58.38 176.57 (12/31/84) Merrill Lynch High Yield Index 14.16 84.90 225.33 Merrill Lynch Medium Quality Long Corporate Index 8.89 85.02 223.61 Lipper's Average of High Current Yield Funds 16.66 71.26 174.45 New Income Fund New Income Fund 5.36 61.39 162.15% 514.54 (8/31/73) Salomon Bros. Broad Investment Grade Index 5.58 69.34 202.62 N/A Salomon Bros. High Grade Corporate Bond Index 6.73 81.35 264.06 605.12 Lehman Bros. Govt./Corp. Bond Index 5.71 69.42 198.31 574.11 PAGE 92 Short-Term Bond Fund T. Rowe Price Short-Term Bond Fund 4.36 47.78 122.71 (3/2/84) T. Rowe Price Prime Reserve Fund 2.60 30.24 88.03 Donoghue Average of all Taxable Money Funds 2.70 30.32 86.25 Lehman Bros. 1-3 Year Govt./Corp. Bond Index 3.62 50.11 139.27 Lipper Short Investment Grade Debt Funds Average 3.95 49.71 136.46 U.S. Treasury Intermediate Fund Intermediate Fund 3.80 47.81 (9/29/89) Lehman Brothers Intermediate Treasury Index 4.23 48.86 U.S. Treasury Long-Term Fund Long-Term Fund 5.89 52.29 (9/29/89) Lehman Brothers Government/Corporate Bond Index 5.71 54.53 Lehman Brothers Long Treasury Index 8.32 64.05 Merrill Lynch 10-15 Year Treasury Index 6.54 61.96 Average Annual Compound Rates of Return 1 Yr. 5 Yrs. 10 Yrs. Since Ended Ended Ended Inception- 2/28/94 2/28/94 2/28/94 2/28/94 Adjustable Rate U.S. Government Fund T. Rowe Price Adjustable Rate U.S. Government Fund, Inc. 3.11% 3.75% (9/30/91) Lipper Average of Adjustable Rate Mortgage Funds 3.17 4.13 Merrill Lynch 1-3 Year Govt. Index 3.48 6.42 Salomon Brothers 1-Year Treasury Index 2.61 4.48 Salomon Brothers 2-Year Treasury Index 3.46 6.53 PAGE 93 GNMA Fund T. Rowe Price GNMA Fund 3.71 61.78% 96.72 (11/26/85) Salomon Brothers 30-Year GNMA Index 4.67 69.52 124.78 Lehman Brothers GNMA Bond Index 4.49 68.70 123.75 Lipper GNMA Funds Average 3.78 60.10 100.59 High Yield Fund High Yield Fund 16.59 9.63 11.74 (12/31/84) Merrill Lynch High Yield Index 14.16 13.08 13.74 Merrill Lynch Medium Quality Long Corporate Index 8.89 13.09 13.67 Lipper's Average of High Current Yield Funds 16.66 11.28 11.55 New Income Fund New Income Fund 5.36 10.05 10.12% 9.26 (8/31/73) Salomon Bros. Broad Investment Grade Index 5.58 11.11 11.71 N/A Salomon Bros. High Grade Corporate Bond Index 6.73 12.64 13.79 9.99 Lehman Bros. Govt./Corp. Bond Index 5.71 11.12 11.55 9.75 Short-Term Bond Fund T. Rowe Price Short-Term Bond Fund 4.36 8.12 8.34 (3/2/84) T. Rowe Price Prime Reserve Fund 2.60 5.42 6.52 Donoghue Average of all Taxable Money Funds 2.70 5.44 6.42 Lehman Bros. 1-3 Year Govt./Corp. Bond Index 3.62 8.46 9.12 Lipper Short Investment Grade Debt Funds Average 3.95 8.40 8.99 U.S. Treasury Intermediate Fund Intermediate Fund 3.80 9.25 (9/29/89) Lehman Brothers Intermediate Treasury Index 4.23 9.43 PAGE 94 U.S. Treasury Long-Term Fund Long-Term Fund 5.89 9.99 (9/29/89) Lehman Brothers Government/Corporate Bond Index 5.71 10.36 Lehman Brothers Long Treasury Index 8.32 11.86 Merrill Lynch 10-15 Year Treasury Index 6.54 11.54 Outside Sources of Information 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 six-month money market certificates. Performance may also be compared to (1) indices of broad groups of managed or 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 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 approximately 950 fixed income mutual funds offered in the United States. PAGE 95 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. The index used as a benchmark for the High Yield Fund is the High Yield Index. The two indices used as benchmarks for the Short-Term Bond Fund are the 91-Day Treasury Bill Index and the 1-2.99 Year Treasury Note 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. Salomon Brothers Inc., "High Yield Composite Index" is an index which provides performance and statistics for the high yield market place. Salomon Brothers Inc., "Market Performance" is 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. Shearson Lehman Brothers, Inc., "The Bond Market Report" is 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., is a market data distribution network 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, PAGE 96 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. All Funds, Except Prime Reserve Fund 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. 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 their own. PAGE 97 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 or exchange features. Of course, the value of a bond fund's shares redeemed through checkwriting may be worth more or less than their value at the time of their original purchase. o 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. All Funds 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 their diversity of choice, can be used for IRA investments. Generally, individuals may need to adjust their underlying IRA investments as their 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 PAGE 98 available. These currently include: the Asset Mix Worksheet which is designed to show shareholders how to reduce their 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 their children; the Retirement Planning Kit (also available in a PC version) includes a detailed workbook to determine how much money you may need for retirement and suggests how you might invest to achieve your objectives; 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 suggests 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. 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 below. Historical Returns for Different Investments Annualized returns for periods ended 12/31/93 50 years 20 years 10 years 5 years Small-Company Stocks 15.3% 18.8% 10.0% 13.3% Large-Company Stocks 12.3 12.8 14.9 14.5 Foreign Stocks N/A 14.4 17.9 2.3 Long-Term Corporate Bonds 5.6 10.2 14.0 13.0 Intermediate-Term U.S. Gov't. Bonds 5.7 9.8 11.4 11.3 Treasury Bills 4.6 7.5 6.4 5.6 U.S. Inflation 4.3 5.9 3.7 3.9 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 PAGE 99 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. Performance of Retirement Portfolios* Asset Mix Average Annualized Value Returns 20 Years of Ended 12/31/93 $10,000 Investment After Period ___________________________________________ ____________ Nominal Real Best Worst PortfolioGrowthIncome Safety Return Return** Year Year I. Low Risk 40% 40% 20% 11.3% 5.4% 24.9%-9.3%$ 79,775 II. Moderate Risk 60% 30% 10% 12.1% 6.2% 29.1%-15.6%$ 90,248 III. High Risk 80% 20% 0% 12.9% 7.0% 33.4%-21.9%$100,031 Source: T. Rowe Price Associates; data supplied by Lehman Brothers, Wilshire Associates, and Ibbotson Associates. * Based on actual performance for the 20 years ended 1993 of stocks (85% Wilshire 5000 and 15% Europe, Australia, Far East [EAFE] Index), bonds (Lehman Brothers Aggregate Bond Index from 1976-93 and Lehman Brothers Government/Corporate Bond Index from 1974-75), and 30-day Treasury bills from January 1974 through December 1993. 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 5.9% for the 20-year period ended 12/31/93. Insights From time to time, Insights, a T. Rowe Price publication of reports on specific investment topics and strategies, may be PAGE 100 included in the Fund's fulfillment kit. Such reports may include information concerning: calculating taxable gains and losses on mutual fund transactions, coping with stock market volatility, benefiting from dollar cost averaging, understanding international markets, investing in high-yield "junk" bonds, growth stock investing, conservative stock investing, value investing, investing in small companies, tax-free investing, fixed income investing, investing in mortgage-backed securities, as well as other topics and strategies. Other Publications From time to time, in newsletters and other publications issued by T. Rowe Price Investment Services, Inc., reference may be made to economic, financial and political developments in the U.S. and abroad and their effect on securities prices. Such discussions may take the form of commentary on these developments by T. Rowe Price mutual fund portfolio managers and their views and analysis on how such developments could affect investments in mutual funds. Redemptions in Kind In the unlikely event a shareholder were to receive an in kind redemption of portfolio securities of the Fund, brokerage fees could be incurred by the shareholder in a subsequent sale of such securities. Issuance of Fund Shares for Securities Transactions involving issuance of Fund shares for securities or assets other than cash will be limited to (1) bona fide reorganizations; (2) statutory mergers; or (3) other acquisitions of portfolio securities that: (a) meet the investment objective and policies of the Fund; (b) are acquired for investment and not for resale except in accordance with applicable law; (c) have a value that is readily ascertainable via listing on or trading in a recognized United States or international exchange or market; and (d) are not illiquid. All Funds, Except GNMA Fund CAPITAL STOCK The Fund's Charter authorizes the Board of Directors to classify and reclassify any and all shares which are then unissued, including unissued shares of capital stock into any number of classes or series, each class or series consisting of such number of shares and having such designations, such powers, preferences, rights, qualifications, limitations, and PAGE 101 restrictions, as shall be determined by the Board subject to the Investment Company Act and other applicable law. The shares of any such additional classes or series might therefore differ from the shares of the present class and series of capital stock and from each other as to preferences, conversions or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption, subject to applicable law, and might thus be superior or inferior to the capital stock or to other classes or series in various characteristics. The Board of Directors may increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Fund has authorized to issue without shareholder approval. Except to the extent that the Fund's Board of Directors might provide by resolution that holders of shares of a particular class are entitled to vote as a class on specified matters presented for a vote of the holders of all shares entitled to vote on such matters, there would be no right of class vote unless and to the extent that such a right might be construed to exist under Maryland law. The Charter contains no provision entitling the holders of the present class of capital stock to a vote as a class on any matter. Accordingly, the preferences, rights, and other characteristics attaching to any class of shares, including the present class of capital stock, might be altered or eliminated, or the class might be combined with another class or classes, by action approved by the vote of the holders of a majority of all the shares of all classes entitled to be voted on the proposal, without any additional right to vote as a class by the holders of the capital stock or of another affected class or classes. Shareholders are entitled to one vote for each full share held (and fractional votes for fractional shares held) and will vote in the election of or removal of directors (to the extent hereinafter provided) and on other matters submitted to the vote of shareholders. There will normally be no meetings of shareholders for the purpose of electing directors unless and until such time as less than a majority of the directors holding office have been elected by shareholders, at which time the directors then in office will call a shareholders' meeting for the election of directors. Except as set forth above, the directors shall continue to hold office and may appoint successor directors. Voting rights are not cumulative, so that the holders of more than 50% of the shares voting in the election of directors can, if they choose to do so, elect all the directors of the Fund, in which event the holders of the remaining shares will be unable to elect any person as a director. As set forth in the By-Laws of the Fund, a special meeting of shareholders of the Fund shall be called by the Secretary of the Fund on the written request of shareholders entitled to cast at least 10% of PAGE 102 all the votes of the Fund entitled to be cast at such meeting. Shareholders requesting such a meeting must pay to the Fund the reasonably estimated costs of preparing and mailing the notice of the meeting. The Fund, however, will otherwise assist the shareholders seeking to hold the special meeting in communicating to the other shareholders of the Fund to the extent required by Section 16(c) of the Investment Company Act of 1940. GNMA Fund DESCRIPTION OF THE FUND For tax and business reasons, the Fund was organized in 1985 as a Massachusetts Business Trust and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as a diversified, open-end investment company, commonly known as a "mutual fund." The Declaration of Trust permits the Board of Trustees to issue an unlimited number of full and fractional shares of a single class. The Declaration of Trust also provides that the Board of Trustees may issue additional series or classes of shares. Each share represents an equal proportionate beneficial interest in the Fund. In the event of the liquidation of the Fund, each share is entitled to a pro rata share of the net assets of the Fund. Shareholders are entitled to one vote for each full share held (and fractional votes for fractional shares held) and will vote in the election of or removal of trustees (to the extent hereinafter provided) and on other matters submitted to the vote of shareholders. There will normally be no meetings of shareholders for the purpose of electing trustees unless and until such time as less than a majority of the trustees holding office have been elected by shareholders, at which time the trustees then in office will call a shareholders' meeting for the election of trustees. Pursuant to Section 16(c) of the Investment Company Act of 1940, holders of record of not less than two-thirds of the outstanding shares of the Fund may remove a trustee by a vote cast in person or by proxy at a meeting called for that purpose. Except as set forth above, the trustees shall continue to hold office and may appoint successor trustees. Voting rights are not cumulative, so that the holders of more than 50% of the shares voting in the election of trustees can, if they choose to do so, elect all the trustees of the Trust, in which event the holders of the remaining shares will be unable to elect any person as a trustee. No amendments may be made to the Declaration of Trust without the affirmative vote of a majority of the outstanding shares of the Trust. PAGE 103 Shares have no preemptive or conversion rights; the right of redemption and the privilege of exchange are described in the prospectus. Shares are fully paid and nonassessable, except as set forth below. The Trust may be terminated (i) upon the sale of its assets to another diversified, open-end management investment company, if approved by the vote of the holders of two-thirds of the outstanding shares of the Trust, or (ii) upon liquidation and distribution of the assets of the Trust, if approved by the vote of the holders of a majority of the outstanding shares of the Trust. If not so terminated, the Trust will continue indefinitely. Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration of Trust disclaims shareholder liability for acts or obligations of the Fund and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Fund or a Trustee. The Declaration of Trust provides for indemnification from Fund property for all losses and expenses of any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund itself would be unable to meet its obligations, a possibility which T. Rowe Price believes is remote. Upon payment of any liability incurred by the Fund, the shareholders of the Fund paying such liability will be entitled to reimbursement from the general assets of the Fund. The Trustees intend to conduct the operations of the Fund in such a way so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of such Fund. 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, whose address is 919 Third Avenue, New York, New York 10022, is legal counsel to the Fund. PAGE 104 INDEPENDENT ACCOUNTANTS GNMA, High Yield, New Income, Prime Reserve, Short-Term Bond and Money Funds Price Waterhouse, 7 St. Paul Street, Suite 1700, Baltimore, Maryland 21202, are independent accountants to the Fund. Adjustable Rate, Intermediate and Long-Term Funds Coopers & Lybrand, 217 East Redwood Street, Baltimore, Maryland 21202, are independent accountants to the Fund. Financial Statements The financial statements of the Fund for the year ended February 28, 1994, and the report of independent accountants are included in the Fund's Annual Report for the period February 28, 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 February 28, 1994 are incorporated into this Statement of Additional Information by reference: NEW PRIME SHORT- GNMA INCOME RESERVE TERM BOND ____ ______ _______ _________ Report of Independent Accountants 12 15 11 17 Statement of Net Assets, February 28, 1994 6-7 6-10 5-8 6-11 Statement of Operations, year ended February 28, 1994 8 11 8 12 Statement of Changes in Net Assets, years ended February 28, 1994 and February 28, 1993 9 12 9 13 Notes to Financial Statements February 28, 1994 9-11 12-14 9-10 14-15 Financial Highlights 11 14 11 16 PAGE 105 MONEY INTERMEDIATE LONG-TERM _____ ____________ __________ Report of Independent Accountants 18 19 19 Statement of Net Assets, February 28, 1994 7-9 8-9 10-11 Statement of Operations, year ended February 28, 1994 11 11 11 Statement of Changes in Net Assets, years ended February 28, 1994 and February 28, 1993 12 12 12 Notes to Financial Statements February 28, 1994 13-14 13-14 13-14 Financial Highlights 15 16 17 ADJUSTABLE RATE HIGH YIELD _______________ __________ Report of Independent Accountants 13 19 Portfolio of Investments, February 28, 1994 5-7 6-13 Statement of Assets and Liabilities, February 28, 1994 7 14 Statement of Operations, year ended February 28, 1994 8 15 Statement of Changes in Net Assets, years ended February 28, 1994 and February 28, 1993 9 16 Notes to Financial Statements February 28, 1994 10-11 16-18 Financial Highlights 12 18 RATINGS OF COMMERCIAL PAPER Adjustable Rate, High Yield, Prime Reserve and Short-Term Bond Funds Moody's Investors Service, Inc.: The rating of Prime-1 is the highest commercial paper rating assigned by Moody's. Among the factors considered by Moody's in assigning ratings are the following: valuation of the management of the issuer; economic evaluation of the issuer's industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; evaluation of the issuer's products in relation to competition and customer acceptance; liquidity; amount and quality of long-term debt; trend of earnings over a period of 10 PAGE 106 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. Prime Reserve Fund 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 Adjustable Rate, High Yield, New Income Funds Moody's Investors Services, Inc. (Moody's) Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Aa-Bonds rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally 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 present but certain protective elements may be PAGE 107 lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba-Bonds rated Ba are judged to have speculative elements: their futures cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterize bonds in this class. B-Bonds rated B generally lack the characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa-Bonds rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca-Bonds rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked short-comings. Standard & Poor's Corporation (S&P) 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, C, 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. BB indicates the lowest degree of speculation and CC the highest PAGE 108 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. Adjustable Rate, High Yield Funds 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 or often factors, while guarantee or assumption by parties other than the original debtor may influence their rating. AA-Of safety virtually beyond question and readily salable. Their merits are not greatly unlike those of "AAA" class but a bond so rated may be junior though of strong lien, or the margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured, but influenced as to rating by the lesser financial power of the enterprise and more local type of market. PAGE 7 PART C OTHER INFORMATION Item 24 - Financial Statements and Exhibits (a) Financial Statements. Condensed Financial Information (Financial Highlights table) is included in Part A of the Registration Statement. Statement of Net Assets, Statement of Operations, and Statement of Changes in Net Assets are included in the Annual Report to Shareholders, the pertinent portions of which are incorporated by reference in Part B of the Registration Statement. (b) Exhibits. (1)(a) Articles of Incorporation of Registrant, dated July 1, 1983 (1)(b) Articles of Amendment, dated April 28, 1976, May 1, 1981 and July 1, 1983 (1)(c) Articles Supplementary, dated November 7, 1991 (2) By-Laws of Registrant, as amended January 18, 1984 (3) Inapplicable (4) Specimen Stock Certificate (filed with Amendment No. 3) (5) Investment Management Agreement between Registrant and T. Rowe Price Associates, Inc., dated July 1, 1987 (6) Underwriting Agreement between Registrant and T. Rowe Price Marketing, Inc., dated September 25, 1985 (7) Inapplicable (8)(a) Custodian Agreement between T. Rowe Price Funds and State Street Bank and Trust Company, dated September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991, November 6, 1991, April 23, 1992, September 2, 1992, November 3, 1992, December 16, 1992, December 21, 1992, January 28, 1993, April 22, 1993, September 16, 1993, November 3, 1993, and March 1, 1994 (8)(b) Global Custody Agreement between The Chase Manhattan Bank, N.A., and T. Rowe Price Funds, dated January 3, 1994 (9)(a) Transfer Agency and Service Agreement between T. Rowe Price Services, Inc. and T. Rowe Price Funds, dated January 1, 1994, as amended March 1, 1994 (9)(b) Agreement between T. Rowe Price Associates, Inc. and T. Rowe Price Funds for Fund Accounting Services, dated January 1, 1994, as amended March 1, 1994 PAGE 8 (9)(c) Agreement between T. Rowe Price Retirement Plan Services, Inc. and the Taxable Funds, dated January 1, 1994 (10) Inapplicable (11) Consent of Independent Accountants (12) Inapplicable (13) Inapplicable (14) Inapplicable (15) Inapplicable (16) TOTAL RETURN PERFORMANCE CALCULATION Item 25. Persons Controlled by or Under Common Control With Registrant. None Item 26. Number of Holders of Securities. As of February 28, 1994, there were 47,000 shareholders in the Fund. Item 27. Indemnification. The Registrant maintains comprehensive Errors and Omissions and Officers and Directors insurance policies written by the Evanston Insurance Company, The Chubb Group, and ICI Mutual. These policies provide coverage for the named insureds, which include T. Rowe Price Associates, Inc. ("Manager"), Rowe Price-Fleming International, Inc. ("Price-Fleming"), T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price Trust Company, T. Rowe Price Stable Asset Management, Inc., RPF International Bond Fund and thirty-five other investment companies, namely, T. Rowe Price Growth Stock Fund, Inc., T. Rowe Price New Horizons Fund, Inc., T. Rowe Price New Era Fund, Inc., T. Rowe Price Prime Reserve Fund, Inc., T. Rowe Price Tax-Free Income Fund, Inc., T. Rowe Price Tax-Exempt Money Fund, Inc., T. Rowe Price International Funds, Inc., T. Rowe Price U.S. Treasury Funds, Inc., T. Rowe Price Growth & Income Fund, Inc., T. Rowe Price Tax-Free Short-Intermediate Fund, Inc., T. Rowe Price Short-Term Bond Fund, Inc., T. Rowe Price High Yield Fund, Inc., T. Rowe Price Tax-Free High Yield Fund, Inc., T. Rowe Price New America Growth Fund, T. Rowe Price Equity Income Fund, T. Rowe Price GNMA Fund, T. Rowe Price Capital Appreciation Fund, T. Rowe Price State Tax-Free Income Trust, T. Rowe Price California Tax-Free Income Trust, T. Rowe Price Science & Technology Fund, Inc., T. Rowe Price Small-Cap Value Fund, Inc., Institutional International Funds, Inc., T. Rowe Price Index Trust, Inc., T. Rowe Price Spectrum Fund, Inc., T. Rowe Price Balanced Fund, Inc., T. Rowe Price Adjustable Rate U.S. Government Fund, Inc., T. Rowe Price Mid-Cap Growth Fund, Inc., T. Rowe Price OTC Fund, Inc., T. Rowe Price Tax- Free Insured Intermediate Bond Fund, Inc., T. Rowe Price Dividend Growth Fund, Inc., T. Rowe Price Blue Chip Growth Fund, Inc., T. Rowe Price Summit Funds, Inc., T. Rowe Price Summit Municipal Funds, Inc., T. Rowe Price Equity Series, Inc., and T. Rowe Price International Series, Inc. The Registrant and the thirty-five investment companies listed above, with the exception of T. Rowe Price Equity Series, Inc., T. Rowe Price International Series, Inc. and Institutional International Funds, Inc., will be collectively referred to as the Price Funds. The investment manager for the Price Funds, including T. Rowe Price Equity Series, Inc., is the Manager. Price-Fleming is the PAGE 9 investment manager to T. Rowe Price International Funds, Inc., T. Rowe Price International Series, Inc. and Institutional International Funds, Inc., and is 50% owned by TRP Finance, Inc., a wholly-owned subsidiary of the Manager, 25% owned by Copthall Overseas Limited, a wholly-owned subsidiary of Robert Fleming Holdings Limited, and 25% owned by Jardine Fleming Holdings Limited. In addition to the corporate insureds, the policies also cover the officers, directors, and employees of each of the named insureds. The premium is allocated among the named corporate insureds in accordance with the provisions of Rule 17d-1(d)(7) under the Investment Company Act of 1940. Article X, Section 10.01 of the Registrant's By-Laws provides as follows: Section 10.01. Indemnification and Payment of Expenses in Advance. The Corporation shall indemnify any individual ("Indemnitee") who is a present or former director, officer, employee, or agent of the Corporation, or who is or has been serving at the request of the Corporation, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, who, by reason of his position was, is, or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter collectively referred to as a "Proceeding") against any judgments, penalties, fines, settlements, and reasonable expenses (including attorneys' fees) incurred by such Indemnitee in connection with any Proceeding, to the fullest extent that such indemnification may be lawful under applicable Maryland law, as from time to time amended. The Corporation shall pay any reasonable expenses so incurred by such Indemnitee in defending a Proceeding in advance of the final disposition thereof to the fullest extent that such advance payment may be lawful under applicable Maryland law, as from time to time amended. Subject to any applicable limitations and requirements set forth in the Corporation's Articles of Incorporation and in these By-Laws, any payment of indemnification or advance of expenses shall be made in accordance with the procedures set forth in applicable Maryland law, as from time to time amended. Notwithstanding the foregoing, nothing herein shall protect or purport to protect any Indemnitee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office ("Disabling Conduct"). Anything in this Article X to the contrary notwithstanding, no indemnification shall be made by the Corporation to any Indemnitee unless: (a) there is a final decision on the merits by a court or other body before whom the Proceeding was brought that the Indemnitee was not liable by reason of Disabling Conduct; or (b) in the absence of such a decision, there is a reasonable determination, based upon a review of the facts, that the Indemnitee was not liable by reason of Disabling Conduct, which determination shall be made by: (i) the vote of a majority of a quorum of directors who are neither "interested persons" of the Corporation as defined in Section 2(a)(19) of the Investment Company Act of 1940, nor parties to the Proceeding; or PAGE 10 (ii) an independent legal counsel in a written opinion. Anything in this Article X to the contrary notwithstanding, any advance of expenses by the Corporation to any Indemnitee shall be made only upon the undertaking by such Indemnitee to repay the advance unless it is ultimately determined that such Indemnitee is entitled to indemnification as above provided, and only if one of the following conditions is met: (a) the Indemnitee provides a security for his undertaking; or (b) the Corporation shall be insured against losses arising by reason of any lawful advances; or (c) there is a determination, based on a review of readily available facts, that there is reason to believe that the Indemnitee will ultimately be found entitled to indemnification, which determination shall be made by: (i) a majority of a quorum of directors who are neither "interested persons" of the Corporation as defined in Section 2(a)(19) of the Investment Company Act of 1940, nor parties to the Proceeding; or (ii) an independent legal counsel in a written opinion. Section 10.02 of the Registrant's By-Laws provides as follows: Section 10.02. Insurance of Officers, Directors, Employees and Agents. To the fullest extent permitted by applicable Maryland law and by Section 17(h) of the Investment Company Act of 1940, as from time to time amended, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in or arising out of his position, whether or not the Corporation would have the power to indemnify him against such liability. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 28. Business and Other Connections of Investment Manager. Rowe Price-Fleming International, Inc. ("Price-Fleming"), a Maryland corporation, is a corporate joint venture 50% owned by TRP Finance, Inc., a PAGE 11 wholly-owned subsidiary of the Manager, and was organized in 1979 to provide investment counsel service with respect to foreign securities for institutional investors in the United States. Price-Fleming, in addition to managing private counsel client accounts, also sponsors registered investment companies which invest in foreign securities, serves as general partner of RPFI International Partners, Limited Partnership, and provides investment advice to the T. Rowe Price Trust Company, trustee of the International Common Trust Fund. T. Rowe Price Investment Services, Inc. ("Investment Services"), a wholly- owned subsidiary of the Manager, is a Maryland corporation organized in 1980 for the purpose of acting as the principal underwriter and distributor for the Price Funds. 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. In 1984, Investment Services expanded its activities to include a discount brokerage service. TRP Distribution, Inc., a wholly-owned subsidiary of Investment Services, is a Maryland corporation organized in 1991. It was organized for and engages in the sale of certain investment related products prepared by Investment Services. T. Rowe Price Associates Foundation, Inc., was organized in 1981 for the purpose of making charitable contributions to religious, charitable, scientific, literary and educational organizations. The Foundation (which is not a subsidiary of the Manager) is funded solely by contributions from the Manager and income from investments. T. Rowe Price Services, Inc. ("Price Services"), a wholly-owned subsidiary of the Manager, is a Maryland corporation organized in 1982 and is registered as a transfer agent under the Securities Exchange Act of 1934. Price Services provides transfer agent, dividend disbursing, and certain other services, including shareholder services, to the Price Funds. T. Rowe Price Retirement Plan Services, Inc. ("RPS"), a wholly-owned subsidiary of the Manager, was incorporated in Maryland in 1991 and is registered as a transfer agent under the Securities Exchange Act of 1934. RPS provides administrative, recordkeeping, and subaccounting services to administrators of employee benefit plans. T. Rowe Price Trust Company ("Trust Company"), a wholly-owned subsidiary of the Manager, is a Maryland chartered limited purpose trust company, organized in 1983 for the purpose of providing fiduciary services. The Trust Company serves as trustee/custodian for employee benefit plans, common trust funds and a few trusts. T. Rowe Price Threshold Fund II, L.P., a Delaware limited partnership, was organized in 1986 by the Manager, and invests in private financings of small companies with high growth potential; the Manager is the General Partner of the partnership. RPFI International Partners, Limited Partnership, is a Delaware limited partnership organized in 1985 for the purpose of investing in a diversified group of small and medium-sized rapidly growing non-U.S. companies. Price-Fleming is the general partner of this partnership, and certain clients of Price-Fleming are its limited partners. T. Rowe Price Real Estate Group, Inc. ("Real Estate Group"), is a Maryland corporation and a wholly-owned subsidiary of the Manager established in 1986 to provide real estate services. Subsidiaries of Real Estate Group are: T. PAGE 12 Rowe Price Realty Income Fund I Management, Inc., a Maryland corporation (General Partner of T. Rowe Price Realty Income Fund I, A No-Load Limited Partnership), T. Rowe Price Realty Income Fund II Management, Inc., a Maryland corporation (General Partner of T. Rowe Price Realty Income Fund II, America's Sales-Commission-Free Real Estate Limited Partnership), T. Rowe Price Realty Income Fund III Management, Inc., a Maryland corporation (General Partner of T. Rowe Price Realty Income Fund III, America's Sales-Commission-Free Real Estate Limited Partnership, a Delaware limited partnership), and T. Rowe Price Realty Income Fund IV Management, Inc., a Maryland corporation (General Partner of T. Rowe Price Realty Income Fund IV, America's Sales-Commission-Free Real Estate Limited Partnership). Real Estate Group serves as investment manager to T. Rowe Price Renaissance Fund, Ltd., A Sales-Commission-Free Real Estate Investment, established in 1989 as a Maryland corporation which qualifies as a REIT. T. Rowe Price Stable Asset Management, Inc. ("Stable Asset Management") is a Maryland corporation organized in 1988 as a wholly-owned subsidiary of the Manager. Stable Asset Management, which is registered as an investment adviser under the Investment Advisers Act of 1940, specializes in the management of investment portfolios which seek stable and consistent investment returns through the use of guaranteed investment contracts, bank investment contracts, structured or synthetic investment contracts, and short-term fixed-income securities. T. Rowe Price Recovery Fund Associates, Inc., a Maryland corporation, is a wholly-owned subsidiary of the Manager organized in 1988 for the purpose of serving as the General Partner of T. Rowe Price Recovery Fund, L.P., a Delaware limited partnership which invests in financially distressed companies. T. Rowe Price (Canada), Inc. is a Maryland corporation organized in 1988 as a wholly-owned subsidiary of the Manager. This entity is registered as an investment adviser under the Investment Advisers Act of 1940, and may apply for registration as an investment manager under the Securities Act of Ontario in order to be eligible to provide certain services to the RPF International Bond Fund, a trust (whose shares are sold in Canada) which Price-Fleming serves as investment adviser. Since 1983, the Manager has organized several distinct Maryland limited partnerships, which are informally called the Pratt Street Ventures partnerships, for the purpose of acquiring interests in growth-oriented businesses. Tower Venture, Inc., a wholly-owned subsidiary of the Manager, is a Maryland corporation organized in 1989 for the purpose of serving as a general partner of 100 East Pratt St., L.P., a Maryland limited partnership whose limited partners also include the Manager. The purpose of the partnership is to further develop and improve the property at 100 East Pratt Street, the site of the Manager's headquarters, through the construction of additional office, retail and parking space. TRP Suburban, Inc. is a Maryland corporation organized in 1990 as a wholly-owned subsidiary of the Manager. TRP Suburban has entered into agreements with McDonogh School and CMANE-McDonogh-Rowe Limited Partnership to construct an office building in Owings Mills, Maryland, which houses the Manager's transfer agent, plan administrative services, retirement plan services and operations support functions. TRP Finance, Inc. and TRP Finance MRT, Inc., wholly-owned subsidiaries of the Manager, are Delaware corporations organized in 1990 to manage certain PAGE 13 passive corporate investments and other intangible assets. TRP Finance MRT, Inc. was dissolved on October 4, 1993. T. Rowe Price Strategic Partners Fund, L.P. is a Delaware limited partnership organized in 1990 for the purpose of investing in small public and private companies seeking capital for expansion or undergoing a restructuring of ownership. The general partner of the Fund is T. Rowe Price Strategic Partners, L.P., a Delaware limited partnership whose general partner is T. Rowe Price Strategic Partners Associates, Inc., ("Strategic Associates"), a Maryland corporation which is a wholly-owned subsidiary of the Manager. Strategic Associates also serves as the general partner of T. Rowe Price Strategic Partners II, L.P., a Delaware limited partnership established in 1992, which in turn serves as general partner of T. Rowe price Strategic Partners Fund II, L.P., a Delaware limited partnership organized in 1992. Listed below are the directors of the Manager who have other substantial businesses, professions, vocations, or employment aside from that of Director of the Manager: JAMES E. HALBKAT, JR., Director of the Manager. Mr. Halbkat is President of U.S. Monitor Corporation, a provider of public response systems. Mr. Halbkat's address is: P.O. Box 23109, Hilton Head Island, South Carolina 29925. JOHN W. ROSENBLUM, Director of the Manager. Mr. Rosenblum is the Tayloe Murphy Professor at the University of Virginia, and a director of: Chesapeake Corporation, a manufacturer of paper products, Cadmus Communications Corp., a provider of printing and communication services; Comdial Corporation, a manufacturer of telephone systems for businesses; and Cone Mills Corporation, a textiles producer. Mr. Rosenblum's address is: P.O. Box 6550, Charlottesville, Virginia 22906. ROBERT L. STRICKLAND, Director of the Manager. Mr. Strickland is Chairman of Lowe's Companies, Inc., a retailer of specialty home supplies. Mr. Strickland's address is 604 Two Piedmont Plaza Building, Winston-Salem, North Carolina 27104. PHILIP C. WALSH, Director of the Manager. Mr. Walsh is a Consultant to Cyprus Amax Minerals Company, Englewood, Colorado, and a director of Piedmont Mining Company, Inc., Charlotte, North Carolina. Mr. Walsh's address is: Blue Mill Road, Morristown, New Jersey 07960. With the exception of Messrs. Halbkat, Rosenblum, Strickland, and Walsh, all of the directors of the Manager are employees of the Manager. George J. Collins, who is Chief Executive Officer, President, and a Managing Director of the Manager, is a Director of Price-Fleming. George A. Roche, who is Chief Financial Officer and a Managing Director of the Manager, is a Vice President and a Director of Price-Fleming. M. David Testa, who is a Managing Director of the Manager, is Chairman of the Board of Price-Fleming. Henry H. Hopkins, Charles P. Smith, and Peter Van Dyke, who are Managing Directors of the Manager, are Vice Presidents of Price-Fleming. Robert P. Campbell, Roger L. Fiery, III, Robert C. Howe, Veena A. Kutler, George A. Murnaghan, William F. Wendler, II, and Edward A. Wiese, who are Vice Presidents of the Manager, are Vice Presidents of Price-Fleming. PAGE 14 Alvin M. Younger, Jr., who is a Managing Director and the Secretary and Treasurer of the Manager, is Secretary and Treasurer of Price-Fleming. Nolan L. North, who is a Vice President and Assistant Treasurer of the Manager, is Assistant Treasurer of Price-Fleming. Leah P. Holmes, who is an Assistant Vice President of the Manager, is a Vice President of Price-Fleming. Barbara A. Van Horn, who is Assistant Secretary of the Manager, is Assistant Secretary of Price-Fleming. Certain directors and officers of the Manager are also officers and/or directors of one or more of the Price Funds and/or one or more of the affiliated entities listed herein. See also "Management of Fund," in Registrant's Statement of Additional Information. Item 29. Principal Underwriters. (a) The principal underwriter for the Registrant is Investment Services. Investment Services acts as the principal underwriter for the other thirty-five Price Funds. Investment Services is a wholly-owned subsidiary of the Manager, 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. Investment Services was formed for the limited purpose of distributing the shares of the Price Funds and will not engage in the general securities business. Since the Price Funds are sold on a no-load basis, Investment Services does not receive any commission or other compensation for acting as principal underwriter. (b) The address of each of the directors and officers of Investment Services listed below is 100 East Pratt Street, Baltimore, Maryland 21202. Positions and Name and Principal Positions and Offices Offices with Business Address With Underwriter Registrant __________________ _____________________ _____________ James Sellers Riepe President and Director Vice President and Director Henry Holt Hopkins Vice President and Vice President Director Mark E. Rayford Director None Charles E. Vieth Vice President and None Director Patricia M. Archer Vice President None Edward C. Bernard Vice President None Joseph C. Bonasorte Vice President None Meredith C. Callanan Vice President None Laura H. Chasney Vice President None Victoria C. Collins Vice President None Christopher W. Dyer Vice President None Forrest R. Foss Vice President None Patricia O'Neil Goodyear Vice President None James W. Graves Vice President None Andrea G. Griffin Vice President None Thomas Grizzard Vice President None PAGE 15 David J. Healy Vice President None Joseph P. Healy Vice President None Walter J. Helmlinger Vice President None Eric G. Knauss Vice President None Douglas G. Kremer Vice President None Sharon Renae Krieger Vice President None Keith Wayne Lewis Vice President None David L. Lyons Vice President None Sarah McCafferty Vice President None Maurice Albert Minerbi Vice President None Nancy M. Morris Vice President None George A. Murnaghan Vice President None Steven Ellis Norwitz Vice President None Kathleen M. O'Brien Vice President None Charles S. Peterson Vice President None Pamela D. Preston Vice President None Lucy Beth Robins Vice President None John Richard Rockwell Vice President None Monica R. Tucker Vice President None William F. Wendler, II Vice President None Terri L. Westren Vice President None Jane F. White Vice President None Thomas R. Woolley Vice President None Alvin M. Younger, Jr. Secretary and Treasurer None Mark S. Finn Controller None Richard J. Barna Assistant Vice President None Catherine L. Berkenkemper Assistant Vice President None Ronae M. Brock Assistant Vice President None Brenda E. Buhler Assistant Vice President None Patricia Sue Butcher Assistant Vice President None John A. Galateria Assistant Vice President None Janelyn A. Healey Assistant Vice President None Keith J. Langrehr Assistant Vice President None C. Lillian Matthews Assistant Vice President None Janice D. McCrory Assistant Vice President None Sandra J. McHenry Assistant Vice President None JeanneMarie B. Patella Assistant Vice President None Kristin E. Seeberger Assistant Vice President None Arthur J. Silber Assistant Vice President None Linda C. Wright Assistant Vice President None Nolan L. North Assistant Vice President None Barbara A. VanHorn Assistant Secretary None (c) Not applicable. Investment Services will not receive any compensation with respect to its activities as underwriter for the Price Funds since the Price Funds are sold on a no-load basis. Item 30. Location of Accounts and Records. All accounts, books, and other documents required to be maintained by T. Rowe Price New Income Fund, Inc. under Section 31(a) of the Investment Company Act of 1940 and the rules thereunder will be maintained by T. Rowe Price New Income Fund, Inc. at its offices at 100 East Pratt Street, Baltimore, Maryland 21202. Transfer, dividend disbursing, and shareholder service activities are performed by T. Rowe Price Services, Inc., at 100 East Pratt Street, Baltimore, Maryland 21202. Custodian activities for T. Rowe Price New Income Fund, Inc. are performed at State Street Bank and Trust Company's Service Center (State Street South), 1776 Heritage Drive, Quincy, Massachusetts 02171. PAGE 16 Item 31. Management Services. Registrant is not a party to any management-related service contract, other than as set forth in the Prospectus. Item 32. Undertakings a. The Fund agrees to furnish, upon request and without charge, a copy of its latest Annual Report to each person to whom a prospectus is delivered. PAGE 17 Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Baltimore, State of Maryland, this 25th day of April, 1994. T. ROWE PRICE NEW INCOME FUND, INC. /s/Charles P. Smith By: Charles P. Smith President and Director Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated: SIGNATURE TITLE DATE _________ _____ ____ /s/George J. Collins Chairman of the Board April 25, 1994 George J. Collins (Chief Executive Officer) /s/Carmen F. Deyesu Treasurer April 25, 1994 Carmen F. Deyesu (Chief Financial Officer) /s/Robert P. Black Director April 25, 1994 Robert P. Black /s/Calvin W. Burnett Director April 25, 1994 Calvin W. Burnett /s/Anthony W. Deering Director April 25, 1994 Anthony W. Deering /s/Carter O. Hoffman Vice President and Director April 25, 1994 Carter O. Hoffman /s/F. Pierce Linaweaver Director April 25, 1994 F. Pierce Linaweaver /s/James S. Riepe Vice President and Director April 25, 1994 James S. Riepe /s/John Sagan Director April 25, 1994 John Sagan /s/John G. Schreiber Director April 25, 1994 John G. Schreiber EX-99.B1A-CHARTER 2 PAGE 1 ARTICLES OF INCORPORATION of ROWE PRICE NEW INCOME FUND, INC. FIRST: The undersigned, H. Spencer Everett, Jr., whose post office address is One Charles Center, Baltimore, Maryland 21201, being at least eighteen years of age, does hereby form a corporation under the General Laws of the State of Maryland. SECOND: Name. The name of the Corporation is Rowe Price New Income Fund, Inc. THIRD: Corporate Purposes. The purposes for which the Corporation is formed are as follows (1) To operate as and carry on the business of an investment company, and exercise all the powers necessary and appropriate to the conduct of such operations. (2) To invest and reinvest its funds in and hold for investment the securities (including but not limited to bonds, debentures, time notes and all other evidences of indebtedness and shares, stock, subscription rights, profit-sharing interests or participations and all other contracts for or evidences of equity interests) of any corporation, company, trust, association, firm or other business organization however established, and of any country, state, municipality or other political sub-division, or of any other governmental or quasi-governmental agency or instrumentality. (3) To acquire (by purchase, subscription or otherwise), to trade in and deal in, to sell or otherwise dispose of, to lend, and to pledge any such securities. (4) To exercise all rights, powers and privileges of ownership or interest in all securities held by the Corporation, including the right to vote there on and otherwise act with respect thereto and to do all acts for the preservation, protection, improvement and enhancement in value of all such securities. (5) To aid by further investment any corporation, company, trust, association, firm or other business organization, any obligation of or interest in which is held by the Corporation or in the affairs of which the Corporation has any direct or indirect interest, and to do anything designed to protect, preserve, improve or enhance the value of such obligation or interest. (6) To promote or aid the incorporation of any organization or enterprise under the laws of any country, state, municipality or other political subdivision, and to cause the same to be dissolved, wound up, liquidated, merged or consolidated. (7) In general to carry on any other business in connection with or incidental to any of the foregoing objects and purposes, to have and exercise all the powers conferred upon corporations by the laws of the State of Maryland as in force from time to time, to do everything necessary, suitable PAGE 2 or proper for the accomplishment of any purpose or the attainment of any object or the furtherance of any power hereinbefore set forth, either alone or in association with others, and to take any action incidental or appurtenant to or growing out of or connected with the aforesaid business or purposes, objects or powers. The Corporation shall have the power to conduct and carry on its business, or any part thereof, and to have one or more offices, and to exercise any or all of its corporate powers and rights, in the State of Maryland, in any other states, territories, districts, colonies and dependencies of the United States, and in any or all foreign countries. The foregoing clauses shall be construed both as objects and powers, and the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the general powers of the Corporation. FOURTH: Address and Resident Agent. The post office address of the principal office of the Corporation in the State of Maryland is One Charles Center Baltimore, Maryland 21201 The name and post office address of the resident agent of the Corporation in the State of Maryland is Carter O. Hoffman One Charles Center Baltimore, Maryland 21201 FIFTH: Capital Stock. The total number of shares of stock which the Corporation has authority to issue is Twenty-Five Million (25,000,000) shares of a single class of the par value of One Dollar ($1) per share, such shares having an aggregate par value of Twenty-Five Million Dollars ($25,000,000). SIXTH: Directors. The number of directors of the Corporation shall be seven, or such larger number as may from time to time be fixed by the By-Laws of the Corporation or pursuant to authorization contained in such By-Laws. The names of the directors who shall act as such until the first annual meeting of stockholders and until their successors are duly chosen and qualify are as follows: Carter O. Hoffman Howard P. Colhoun Donald E. Bowman W. Ernest Issel Lawrence P. Naylor, III J. H. Pearlstone, Jr. Charles W. Shaeffer SEVENTH: Regulation of the Powers of the Corporation and Its Directors and Shareholders. PAGE 3 SECTION I ISSUE OF THE CORPORATION'S SHARES 1.01 General. The Board of Directors may from time to time issue and sell or cause to be issued and sold any of the Corporation's authorized shares, including any additional shares hereafter authorized and any shares redeemed or repurchased by the Corporation, except that only shares previously contracted to be sold may be issued during any period when the determination of net asset value is suspended pursuant to the provisions of Section III hereof. All such authorized shares, when issued in accordance with the terms of this Section I, shall be fully paid and nonassessable. No holder of any shares of the Corporation shall be entitled, by reason of holding or owning such shares, to any prior, preemptive or other right to subscribe to, purchase or otherwise acquire any additional shares of the Corporation subsequently issued for cash or other consideration or by way of a dividend or otherwise. 1.02 Price. No shares of the Corporation shall be issued or sold by the Corporation, except as a stock dividend distributed to shareholders, for less than an amount which would result in proceeds to the Corporation, before taxes payable by the Corporation in connection with such transaction, of at least the net asset value per share determined as set forth in Section III here of as of such time as the Board of Directors shall have by resolution theretofore prescribed but not earlier than the close of business on the business day (which term, as used herein, shall mean a day on which the New York Stock Exchange is open all or part of the day for unrestricted trading) next preceding the date of receipt of an unconditional purchase order for such shares. In the absence of a resolution of the Board of Directors applicable to the transaction, such net asset value shall be that next determined after receipt of such purchase order. For this purpose, the time of receipt of such an unconditional order shall be the time it is first received by the principal underwriter or by the custodian or depositary of the Corporation's assets or by another agent of the Corporation designated for the purpose. 1.03 On Merger or Consolidation. In connection with the acquisition of all or substantially all the assets or stock of another investment company or investment trust, the Board of Directors may issue or cause to be issued shares of the Corporation and accept in payment therefor, in lieu of cash, such assets at their market value, or such stock at the market value of the assets held by such investment company or investment trust, either with or without adjustment for contingent costs or liabilities, provided that the funds of the Corporation are permitted by law to be invested in such assets or stock. 1.04 Fractional Shares. The Board of Directors may issue and sell fractions of shares having pro rata all the rights of full shares, including, without limitation, the right to vote and to receive dividends. SECTION II REDEMPTION AND REPURCHASE OF THE CORPORATION'S SHARES 2.01 Redemption of Shares. The Corporation shall redeem its shares, subject to the conditions and at the price determined as hereinafter set forth, upon proper application of the record holder thereof at such office or agency as may be designated from time to time for that purpose by the Board of Directors. Any such application must be accompanied by the certificate or certificates, if any, evidencing such shares, duly endorsed or accompanied by a proper instrument of transfer. The Board of Directors shall have power to PAGE 4 determine from time to time the form and the other accompanying documents which shall be necessary to constitute a proper application for redemption. 2.02 Price. Subject to any redemption charge which may be imposed pursuant to Section 2.06 hereof, such shares shall be redeemed at their net asset value determined as set forth in Section III hereof as of such time as the Board of Directors shall have theretofore prescribed by resolution, which time shall not be later than the close of business on the next business day succeeding, and not earlier than the close of business on the next business day preceding, the date on which proper application is made for redemption. In the absence of such resolution, the redemption price of shares deposited shall be the net asset value of such shares (less any applicable redemption charge) next determined as set forth in Section III hereof after receipt of such application. 2.03 Payment. Payment for such shares shall be made to the shareholder of record within 7 days after the date upon which proper application is received, subject to the provisions of Section 2.04 hereof. Such payment shall be made in cash or other assets of the Corporation or both, as the Board of Directors shall prescribe. For the purposes of such payment for shares redeemed, the value of assets delivered shall be determined as set forth in Section III here of as of the same time as of which the per share net asset value of such shares is determined. 2.04 Effect of Suspension of Determination of Net Asset Value. If, pursuant to Section 3.03 hereof, the Board of Directors shall declare a suspension of the determination of net asset value, the rights of shareholders (including those who shall have applied for redemption pursuant to Section 2.01 hereof but who shall not yet have received payment) to have shares redeemed and paid for by the Corporation shall be suspended until the termination of such suspension is declared. Any record holder whose redemption right is so suspended may, during the period of such suspension, by appropriate written notice of revocation to the office or agency where application was made, revoke his application and withdraw any share certificates which accompanied such application. The redemption price of shares for which redemption applications have not been revoked shall be the net asset value of such shares next determined as set forth in Section III after the termination of such suspension, and payment shall be made within 7 days after the date upon which the application was made plus the period after such application during which the determination of net asset value was suspended. 2.05 Repurchase by Agreement. The Corporation may repurchase shares of the Corporation directly, or through its principal underwriter or other agent designated for the purpose, by agreement with the owner thereof at a price not exceeding the net asset value per share determined as of the time when the purchase or contract of purchase is made or the net asset value as of any time which may be later determined pursuant to Section III hereof, provided payment is not made for the shares prior to the time as of which such net asset value is determined. 2.06 Redemption Charge. Upon resolution of the Board of Directors of the Corporation, shares presented to the Corporation for redemption under circumstances described in such resolution will be subject to a redemption charge not in excess of 1% of the net asset value of such shares applicable to such redemption. Such charge shall be deducted from the redemption price otherwise payable for such shares and shall be retained as an asset of the Corporation. PAGE 5 SECTION III NET ASSET VALUE OF SHARES 3.01 By Whom Determined. The Board of Directors shall have the power and duty to determine from time to time the net asset value per share of the outstanding shares of the Corporation. It may delegate such power and duty to one or more of the directors and officers of the Corporation, to the custodian or depositary of the Corporation's assets, or to another agent of the Corporation appointed for such purpose. Any determination made pursuant to this Section by the Board of Directors or its delegate shall be binding on all parties concerned. 3.02 When Determined. The net asset value shall be determined at such times as the Board of Directors shall prescribe by resolution, provided that such net asset value shall be determined at least once each week as of the close of business on a business day. In the absence of a resolution of the Board of Directors, the net asset value shall be determined as of the close of trading on the New York Stock Exchange on each business day. 3.03 Suspension of Determination of Net Asset Value. The Board of Directors may declare a suspension of the determination of net asset value for the whole or any part of any period (a) during which the New York Stock Exchange is closed other than customary week-end and holiday closings, (b) during which trading on the New York Stock Exchange is restricted, (c) during which an emergency exists as a result of which disposal by the Corporation of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Corporation fairly to determine the value of its net assets or (d) which a governmental body having jurisdiction over the Corporation may by order permit for the protection of the security holders of the Corporation. Such suspension shall take effect at such time as the Board of Directors shall specify, which shall not be later than the close of business on the business day next following the declaration, and thereafter there shall be no determination of net asset value until the Board of Directors shall declare the suspension at an end, except that the suspension shall terminate in any event on the first day on which (1) the condition giving rise to the suspension shall have ceased to exist and (2) no other condition exists under which suspension is authorized under this Section 3.03. Each declaration by the Board of Directors pursuant to this Section 3.03 shall be consistent with such official rules and regulations, if any, relating to the subject matter thereof as shall have been promulgated by the Securities and Exchange Commission or any other governmental body having jurisdiction over the Corporation and as shall be in effect at the time. To the extent not inconsistent with such official rules and regulations, the determination of the Board of Directors shall be conclusive. 3.04 Computation of Per Share Net Asset Value. a. Net Asset Value Per Share. The net asset value of each share as of any particular time shall be the quotient obtained by dividing the value of the net assets of the Corporation by the total number of shares outstanding. b. Value of Corporation's Net Assets. The value of the Corporation's net assets as of any particular time shall be the value of the Corporation's assets less its liabilities, determined and computed as follows: (1) Corporation's Assets. The Corporation's assets shall be deemed to include: (A) all cash on hand or on deposit, including any interest accrued thereon, (B) all bills and demand notes and accounts PAGE 6 receivable, (C) all securities owned or contracted for by the Corporation, (D) all stock and cash dividends and cash distributions payable to but not yet received by the Corporation (when the valuation of the underlying security is being determined ex-dividend), (E) all interest accrued on any interest-bearing securities owned by the Corporation (except accrued interest included in the valuation of the underlying security) and (F) all other property of every kind and nature, including prepaid expenses. (2) Valuation of Assets. The value of such assets is to be determined as follows: (i) Cash and Prepaid Expenses. The value of any cash on hand and of any prepaid expenses shall be deemed to be their full amount. (ii) Other Current Assets. The value of any cash on deposit, bills, demand notes, accounts receivable, and cash dividends and interest declared or accrued as aforesaid and not yet received shall be deemed to be the full amount thereof, unless the Board of Directors shall determine that any such item is not worth its full amount. In such case the value of the item shall be deemed to be its reasonable value, as determined by the Board of Directors. (iii) Securities Listed or Dealt in on New York Stock Exchange. The value of any security listed or dealt in upon the New York Stock Exchange and not subject to restrictions against sale by the Corporation on such Exchange shall be determined as of the close of trading by taking the last sale price on the date as of which net asset value is being determined, all as reported by any means in common use. Lacking any sales, the value shall be deemed to be such, not higher than the closing asked price and not lower than the closing bid price there for on such date, as the Board of Directors or its delegate may from time to time determine. When an appraisal is made as part of a determination other than as of the close of trading, the latest available quotations (i.e., last sale on that day or latest bid and asked if no sale on that day) shall be used. The Board of Directors may by resolution permit quotations on an exchange other than the New York Stock Exchange or over-the-counter rather than stock exchange quotations to be used when they appear to the Board of Directors or its delegate to reflect more closely the fair value of any particular security in the portfolio and may authorize adjustments to be made in applying any market quotation in order to reflect the size of the Corporation's holding of the particular security, the relation to such size of the volume of trading on which such market quotation is based and other similar factors. (iv) Securities Listed on Other Exchanges. The value of any security listed or dealt in on one or more securities exchanges, but not on the New York Stock Exchange, and not subject to restrictions against sale by the Corporation on such exchanges, shall be determined as nearly as possible in the manner described in the preceding subparagraph, with reference to the quotations on the exchange that, in the opinion of the Board of Directors or its delegate, best reflects the fair value of the security. (v) Unlisted Securities and Other Property. The value of any other property, the valuation of which is not provided for PAGE 7 above, shall be its fair market value as determined in such manner as the Board of Directors shall from time to time prescribe by resolution. (3) The Corporation's Liabilities. The Corporation's liabilities shall not be deemed to include outstanding shares and surplus. They shall be deemed to include: (A) all bills and accounts payable, (B) all administrative expenses accrued, (C) all contractual obligations for the payment of money or property, including the amount of any declared but unpaid dividends upon the Corporation's shares, (D) all reserves authorized or approved by the Board of Directors for taxes or contingencies and (E) all other liabilities of whatsoever kind and nature except any liabilities represented by the Corporation's outstanding shares and surplus. 3.05 Interim Determinations. Any determination of net asset value other than as of the close of trading on the New York Stock Exchange may be made either by appraisal or by calculation or estimate. Any such calculation of estimate shall be based on changes in the market value of representative or selected securities or on changes in recognized market averages since the last closing appraisal and made in a manner which in the opinion of the Board of Directors will fairly reflect the changes in the net asset value. 3.06 Miscellaneous. For the purposes of this Section III: (a) Shares of the Corporation sold shall be deemed to be outstanding as of the time, not before an unconditional purchase order there for has been received by the Corporation (directly or through one of its agents) or by one of its underwriters and the sale price in currency has been determined, when the sale is reported to the Corporation or to its agent for determining net asset value, and the net sale price thereof to the Corporation (less commission, if any, and less any stamp or other tax payable by the Corporation in connection with the issue and sale thereof) shall be thereupon deemed to be an asset of the Corporation. (b) Shares of the Corporation for which an application for redemption has been made or which are subject to repurchase by the Corporation shall be deemed to be outstanding up to and including the time as of which the redemption or repurchase price is determined. After such time, they shall be deemed to be no longer outstanding and the price until paid shall be deemed to be a liability of the Corporation. (c) Funds on deposit and contractual obligations payable to the Corporation in foreign currency and liabilities and contractual obligations payable by the Corporation in foreign currency shall be taken at the current cable rate of exchange as nearly as practicable at the time as of which the net asset value is computed. SECTION IV COMPLIANCE WITH INVESTMENT COMPANY ACT OF 1940 Notwithstanding any of the foregoing provisions of this Article SEVENTH, the Board of Directors may prescribe, in its absolute discretion, such other bases and times for determining the per share net asset value of the Corporation's shares as it shall deem necessary or desirable to enable the Corporation to comply with any provision of the Investment Company Act of 1940, or any rule or regulation thereunder, including any rule or regulation PAGE 8 adopted pursuant to Section 22 of the Investment Company Act of 1940 by the Securities and Exchange Commission or any securities association registered under the Securities Act of 1934, all as in effect now or as hereafter amended or added. SECTION V MISCELLANEOUS 5.01 Compensation of Directors. The Board of Directors shall have power from time to time to authorize payment of compensation to the directors for services to the Corporation, including fees for attendance at meetings of the Board of Directors and of committees. 5.02 Inspection of Corporation's Books. The Board of Directors shall have power from time to time to determine whether and to what extent, and at what times and places and under what conditions and regulations the accounts and books of the Corporation (other than the stock ledger) or any of them shall be open to the inspection of shareholders; and no shareholder shall have any right of inspecting any account, book or document of the Corporation except as at the time conferred by statute, unless authorized by a resolution of the shareholders or the Board of Directors. 5.03 Majority Vote of Shareholders. Notwithstanding any provision of the laws of the State of Maryland requiring a greater proportion than a majority of the votes of all classes or of any class of stock entitled to be cast, to take or authorize any action, such action may, subject to other applicable provisions of law, these Articles of Incorporation and the By-Laws, be taken or authorized upon the concurrence of a majority of the aggregate number of the votes entitled to be cast thereon. 5.04 Name: The Corporation acknowledges that it is adopting its corporate name through permission of T. Rowe Price Associates, Inc., a Maryland corporation, and agrees that T. Rowe Price Associates, Inc. reserves to itself and any successor to its business the right to grant the nonexclusive right to use the name "Rowe Price" or any similar name to any other corporation or entity, including but not limited to any investment company of which T. Rowe Price Associates, Inc. or any subsidiary or affiliate thereof or any successor to the business of any thereof shall be the investment adviser. 5.05 Reservation of Right to Amend. The Corporation reserves the right to make any amendment of its charter, now or hereafter authorized by law, including any amendment which alters the contract rights, as expressly set forth in its charter, of any outstanding stock, and all rights herein conferred upon stockholders are granted subject to such reservation. IN WITNESS WHEREOF, I have signed these Articles of Incorporation and acknowledge the same to be my act on this 14th day of August, 1973. /s/H. Spencer Everett, Jr. H. Spencer Everett, Jr. PAGE 9 STATE OF MARYLAND ) : to wit: CITY OF BALTIMORE ) I hereby certify that on this 14th day of August, 1973, before me, the subscriber, a Notary Public of the State of Maryland in and for the City of Baltimore, personally appeared H. Spencer Everett, Jr. and acknowledged the foregoing Articles of Incorporation to be his act. Witness my hand and notarial seal this 14th day of August, 1973. /s/Carolynn J. Utara Carolynn J. Utara Notary Public Baltimore, Md. EX-99.B1B-CHARTER/A 3 PAGE 1 ROWE PRICE NEW INCOME FUND, INC. ARTICLES OF AMENDMENT Rowe Price New Income Fund, Inc., a Maryland corporation, having its principal office in the City of Baltimore, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Charter of the Corporation is hereby amended by striking out Article FIFTH therefrom and inserting in lieu thereof a new Article FIFTH to read in full as follows: "FIFTH: The total number of shares of stock which the Corporation shall have authority to issue is One Hundred Million (100,000,000) shares, all of one class, of the par value of One Dollar ($1.00) each, and of the aggregate par value of One Hundred Million Dollars ($100,000,000). Any fractional share of such stock shall be entitled to its proportionate part of the rights of a whole share to receive dividends to participate in the assets of the Corporation in the event of liquidation, and to vote. SECOND: The Board of Directors of the Corporation, on January 28, 1976, duly adopted a resolution in which was set forth the foregoing amendment to the Charter of the Corporation, declaring that the said amendment as proposed was advisable and directing that it be submitted for action thereon by the stockholders of the Corporation at the annual meeting of stockholders to be held on April 20, 1976. THIRD: Notice setting forth a summary of the change to be effected by said amendment of the Charter, and stating that a purpose of said meeting of stockholders would be to take action thereon, was given, as required by law, to all stockholders entitled to vote thereon. FOURTH: The amendment of the Charter as hereinabove set forth was approved by the stockholders of the Corporation at said meeting by the affirmative vote of 8,381,090.150 shares of the 13,652,949.220 shares of common stock issued and outstanding, or 61.39% of the votes entitled to be PAGE 2 cast thereon, which vote was sufficient to approve such amendment pursuant to the provisions of the Charter of the Corporation which requires the approval of a majority of the votes entitled to be cast on any such amendment, notwithstanding any provision of the law requiring a greater proportion. FIFTH: The amendment of the Charter as hereinabove set forth has been duly advised by the Board of Directors and approved by the stockholders of the Corporation. SIXTH: (a) The total number of shares of stock which the Corporation was heretofore authorized by its Charter to issue was Twenty-Five Million (25,000,000) shares, all of one class, of the par value of One Dollar ($1.00) each. (b) The total number of shares of stock which the Corporation is to be hereafter authorized to issue is One Hundred Million (100,000,000) shares, all of one class, of the par value of One Dollar ($1.00) each. (c) The stock of the Corporation is not divided into classes. IN WITNESS WHEREOF, ROWE PRICE NEW INCOME FUND, INC. has caused these presents to be signed in its name and on its behalf by its President, and its corporate seal to be hereunto affixed and attested by its Secretary, on April 28, 1976. ROWE PRICE NEW INCOME FUND, INC. /s/Carter O. Hoffman Carter O. Hoffman, President - -ATTEST: /s/Lenora V. Hornung Lenora V. Hornung, Secretary PAGE 3 STATE OF MARYLAND ) ) SS.: CITY OF BALTIMORE ) I HEREBY CERTIFY that on April 28, 1976, before me the subscriber, a Notary Public of the State of Maryland, in and for the City of Baltimore, personally appeared CARTER O. HOFFMAN, President of ROWE PRICE NEW INCOME FUND, INC., a Maryland corporation and in the name and on behalf of said Corporation acknowledged the foregoing Articles of Amendment to be the corporate act of said Corporation; and at the same time made oath in due form of law that the matters and facts set forth in said Articles of Amendment with respect to the approval of said amendment are true to the best of his knowledge, information and belief. WITNESS my hand and notarial seal, the day and year last above written. /s/Carolynn Kendall Carolynn Kendall Notary Public My commission expires July l, 1978. PAGE 4 ROWE PRICE NEW INCOME FUND, INC. ARTICLES OF AMENDMENT Rowe Price New Income Fund, Inc., a Maryland corporation having its principal office in the City of Baltimore, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Charter of the Corporation is hereby amended by deleting therefrom Article SECOND and inserting in lieu thereof a new Article SECOND to read in full as follows: "SECOND: The name of the Corporation is: T. ROWE PRICE NEW INCOME FUND, INC." SECOND: The Board of Directors of the Corporation, on January 22, 1981, duly adopted resolutions in which were set forth the foregoing amendment to Article SECOND of the Charter of the Corporation, declaring that the said amendment as proposed was advisable and directing that it be submitted for action thereon by the shareholders of the Corporation at the annual meeting of shareholders to be held on April 27, 1981. THIRD: Notice setting forth a summary of the changes to be effected by said amendments of the Charter, and stating that a purpose of said meeting of shareholders would be to take action thereon, was given, as required by law, to all shareholders entitled to vote thereon. FOURTH: The amendment to Article SECOND of the Charter as hereinabove set forth was approved by the shareholders of the Corporation at said meeting on April 27, 1981, by the affirmative vote of 22,591,306.874 shares of the 44,282,396.387 shares of common stock issued and outstanding, or 51.02% of the votes entitled to be cast thereon, which vote was sufficient to approve such amendment pursuant to the provisions of the Charter of the Corporation which requires the approval of a majority of the votes entitled to be cast on any such amendment, notwithstanding any provision of the law requiring a greater proportion. PAGE 5 FIFTH: The amendment of the Charter as hereinabove set forth has been duly advised by the Board of Directors and approved by the shareholders of the Corporation. IN WITNESS WHEREOF, ROWE PRICE NEW INCOME FUND, INC. has caused these presents to be signed in its name and on its behalf by its Vice President, and its corporate seal to be hereunto affixed and attested by its Secretary, on May l, 1981. ROWE PRICE NEW INCOME FUND, INC. /s/Howard P. Colhoun Howard P. Colhoun, Vice President ATTEST: /s/Lenora V. Hornung Lenora V. Hornung, Secretary STATE OF MARYLAND ) ) SS.: CITY OF BALTIMORE ) I HEREBY CERTIFY that on May 1, 1981, before me the subscriber, a Notary Public of the State of Maryland, in and for the City of Baltimore, personally appeared Howard P. Colhoun, Vice President of ROWE PRICE NEW INCOME FUND, INC., a Maryland corporation, and in the name and on behalf of said Corporation acknowledged the foregoing Articles of Amendment to be the corporate act of said Corporation; and at the same time made oath in due form of law that the matters and facts set forth in said Articles of Amendment with respect to the approval of the said amendments are true to the best of his knowledge, information and belief. WITNESS my hand and notarial seal, the day and year last above written. /s/Catherine L. Boch Catherine L. Boch Notary Public My commission expires: July 1, 1982 PAGE 6 T. ROWE PRICE NEW INCOME FUND, INC. ARTICLES OF AMENDMENT T. Rowe Price New Income Fund, Inc., a Maryland corporation, having its principal office in the City of Baltimore, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Charter of the Corporation is hereby amended by deleting therefrom Article FIFTH and inserting in lieu thereof a new Article FIFTH to read in full as follows: "FIFTH: 1. The total number of shares of stock which the Corporation shall have authority to issue is Two Hundred Million (200,000,000) shares, all of one class, of the par value of One Dollar ($1.00) each, and of the aggregate par value of Two Hundred Million Dollars ($200,000,000). Any fractional share of such stock shall be entitled to its proportionate part of the rights of a whole share to receive dividends, to participate in the assets of the Corporation in the event of liquidation and to vote." SECOND: The Board of Directors of the Corporation, on January 19, 1983, duly adopted a resolution which set forth the foregoing amendment to the Charter of the Corporation, declaring that said amendment as proposed was advisable and directing that it be submitted for action thereon by the shareholders of the Corporation at the annual meeting of shareholders to be held on June 8, 1983. THIRD: Notice setting forth a summary of the changes to be effected by said amendment to the Charter, and stating that a purpose of said meeting of shareholders would be to take action thereon, was given, as required by law, to all shareholders entitled to vote thereon. FOURTH: The amendment to Article FIFTH of the Charter as hereinabove set forth was approved by the shareholders of the Corporation at said meeting on June 8, 1983, by the affirmative vote of 52,512,832.668 shares of the 80,035,802.592 shares of common stock issued and outstanding, or 65.64% of the votes entitled to be cast thereon, which vote was sufficient to approve such amendment pursuant to the provisions of the Charter of the Corporation which PAGE 7 require the approval of a majority of the votes entitled to be cast on any such amendment, notwithstanding any provision of the law requiring a greater proportion. FIFTH: The amendment of the Charter as hereinabove set forth has been duly advised by the Board of Directors and approved by the shareholders of the Corporation. SIXTH: (a) The total number of shares of stock which the Corporation was heretofore authorized by its Charter to issue was One Hundred Million (100,000,000) shares, all of one class, of the par value of One Dollar ($1.00) each. (b) The total number of shares of stock which the Corporation is to be hereafter authorized to issue is Two Hundred Million (200,000,000) shares, all of one class, of the par value of One Dollar ($1.00) each, having an aggregate par value of Two Hundred Million Dollars ($200,000,000). (c) The stock of the Corporation is not divided into classes. IN WITNESS WHEREOF, T. ROWE PRICE NEW INCOME FUND, INC. has caused these presents to be signed in its name and on its behalf by its Vice President, and its corporate seal to be hereunto affixed and attested by its Secretary, on July 1, 1983. T. ROWE PRICE NEW INCOME FUND, INC. /s/James S. Riepe James S. Riepe, Vice President ATTEST: /s/Lenora V. Hornung Lenora V. Hornung, Secretary PAGE 8 STATE OF MARYLAND ) ) SS.: CITY OF BALTIMORE ) I HEREBY CERTIFY that on July 1, 1983, before me the subscriber, a Notary Public of the State of Maryland, in and for the City of Baltimore, personally appeared James S. Riepe, Vice President of T. ROWE PRICE NEW INCOME FUND, INC., a Maryland corporation, and in the name and on behalf of said Corporation acknowledged the foregoing Articles of Amendment to be the corporate act of said Corporation; and at the same time made oath in due form of law that the matters and facts set forth in said Articles of Amendment with respect to the approval of the said amendment are true to the best of his knowledge, information and belief. WITNESS my hand and notarial seal, the day and year last above written. /s/Ingrid Vordemberge Ingrid Vordemberge Notary Public My commission expires: July 1, 1986 EX-99.B1C-CHARTER/S 4 PAGE 1 T. ROWE PRICE NEW INCOME FUND, INC. ARTICLES SUPPLEMENTARY INCREASING AUTHORIZED STOCK AS AUTHORIZED BY SECTION 2-105(c) OF THE MARYLAND GENERAL CORPORATION LAW* T. Rowe Price New Income Fund, Inc., a Maryland corporation, having its principal office in Baltimore City, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: In accordance with Section 2-105(c) of the Maryland General Corporation Law, the Board of Directors has increased the authorized capital stock of the Corporation to 300 million shares of common stock (par value $1.00 per share). SECOND: The Corporation is registered as an open-end investment company under the Investment Company Act of 1940. THIRD: (a) As of immediately before the increase, the total number of shares of stock of all classes which the Corporation has authority to issue is 200 million shares of common stock (par value $1.00 per share). (b) As increased the total number of shares of stock of all classes which the Corporation has authority to issue is 300 million shares of common stock (par value $1.00 per share). (c) The aggregate par value of all shares having a par value is $200 million before the increase and $300 million as increased. IN WITNESS WHEREOF, T. Rowe Price New Income Fund, Inc. has caused these presents to be signed in its name and on its behalf by its Vice President and witnessed by its Secretary on November 7, 1991. WITNESS: T. ROWE PRICE NEW INCOME FUND, INC. /s/Lenora V. Hornung /s/Henry H. Hopkins _____________________________ By: _______________________________ Lenora V. Hornung, Secretary Henry H. Hopkins, Vice President PAGE 2 THE UNDERSIGNED, Vice President of T. Rowe Price New Income Fund, Inc., who executed on behalf of the Corporation Articles Supplementary of which this Certificate is make a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles Supplementary to be the corporate act of said Corporation and hereby certifies that the matters and facts set forth herein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. /s/Henry H. Hopkins ___________________________________ Henry H. Hopkins, Vice President EX-99.B2-BYLAWS 5 PAGE 1 BY-LAWS OF T. ROWE PRICE NEW INCOME FUND, INC. AS AMENDED: NOVEMBER 28, 1973 JANUARY 24, 1979 MAY 1, 1981 JANUARY 21, 1982 JANUARY 1, 1983 JANUARY 21, 1988 APRIL 20, 1990 JULY 1, 1991 JULY 20, 1993 JANUARY 18, 1994 PAGE 2 TABLE OF CONTENTS Page ARTICLE I. NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL . . . . . . . . . . . . . . . . . . . . . 1 1.01. Name. . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02. Principal Offices . . . . . . . . . . . . . . . . . . 1 1.03. Seal. . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II. STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . 1 2.01. Annual Meetings . . . . . . . . . . . . . . . . . . . 1 2.02. Special Meetings. . . . . . . . . . . . . . . . . . . 2 2.03. Place of Meetings . . . . . . . . . . . . . . . . . . 2 2.04. Notice of Meetings. . . . . . . . . . . . . . . . . . 2 2.05. Voting - in General . . . . . . . . . . . . . . . . . 2 2.06. Stockholders Entitled to Vote . . . . . . . . . . . . 3 2.07. Voting - Proxies. . . . . . . . . . . . . . . . . . . 3 2.08. Quorum. . . . . . . . . . . . . . . . . . . . . . . . 3 2.09. Absence of Quorum . . . . . . . . . . . . . . . . . . 3 2.10. Stock Ledger and List of Stockholders . . . . . . . . 3 ARTICLE III. BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . 4 3.01. Number and Term of Office . . . . . . . . . . . . . . 4 3.02. Qualification of Directors. . . . . . . . . . . . . . 4 3.03. Election of Directors . . . . . . . . . . . . . . . . 4 3.04. Removal of Directors. . . . . . . . . . . . . . . . . 4 3.05. Vacancies and Newly Created Directorships . . . . . . 4 3.06. General Powers. . . . . . . . . . . . . . . . . . . . 5 3.07. Power to Issue and Sell Stock . . . . . . . . . . . . 5 3.08. Power to Declare Dividends. . . . . . . . . . . . . . 5 3.09. Annual and Regular Meetings . . . . . . . . . . . . . 6 3.10. Special Meetings. . . . . . . . . . . . . . . . . . . 6 3.11. Notice. . . . . . . . . . . . . . . . . . . . . . . . 6 3.12. Waiver of Notice. . . . . . . . . . . . . . . . . . . 6 3.13. Quorum and Voting . . . . . . . . . . . . . . . . . . 6 3.14. Conference Telephone. . . . . . . . . . . . . . . . . 6 3.15. Compensation. . . . . . . . . . . . . . . . . . . . . 6 3.16. Action without a Meeting. . . . . . . . . . . . . . . 6 3.17. Director Emeritus . . . . . . . . . . . . . . . . . . 7 ARTICLE IV. EXECUTIVE COMMITTEE AND OTHER COMMITTEES. . . . . . . 7 4.01. How Constituted . . . . . . . . . . . . . . . . . . . 7 4.02. Powers of the Executive Committee . . . . . . . . . . 7 4.03. Other Committees of the Board of Directors. . . . . . 7 4.04. Proceedings, Quorum and Manner of Acting. . . . . . . 7 4.05. Other Committees. . . . . . . . . . . . . . . . . . . 7 PAGE 3 ARTICLE V. OFFICERS. . . . . . . . . . . . . . . . . . . . . . . 8 5.01. General . . . . . . . . . . . . . . . . . . . . . . . 8 5.02. Election, Term of Office and Qualifications . . . . . 8 5.03. Resignation . . . . . . . . . . . . . . . . . . . . . 8 5.04. Removal . . . . . . . . . . . . . . . . . . . . . . . 8 5.05. Vacancies and Newly Created Offices . . . . . . . . . 8 5.06. Chairman of the Board . . . . . . . . . . . . . . . . 8 5.07. President . . . . . . . . . . . . . . . . . . . . . . 9 5.08. Vice President. . . . . . . . . . . . . . . . . . . . 9 5.09. Treasurer and Assistant Treasurers. . . . . . . . . . 9 5.10. Secretary and Assistant Secretaries . . . . . . . . . 9 5.11. Subordinate Officers. . . . . . . . . . . . . . . . . 10 5.12. Remuneration. . . . . . . . . . . . . . . . . . . . . 10 ARTICLE VI. CUSTODY OF SECURITIES AND CASH. . . . . . . . . . . . 10 6.01. Employment of a Custodian . . . . . . . . . . . . . . 10 6.02. Central Certificate Service . . . . . . . . . . . . . 10 6.03. Cash Assets . . . . . . . . . . . . . . . . . . . . . 10 6.04. Free Cash Accounts. . . . . . . . . . . . . . . . . . 11 6.05. Action Upon Termination of Custodian Agreement. . . . 11 ARTICLE VII. EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES. . . . 11 7.01. Execution of Instruments. . . . . . . . . . . . . . . 11 7.02. Voting of Securities. . . . . . . . . . . . . . . . . 11 ARTICLE VIII. CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . 12 8.01. Ownership of Shares . . . . . . . . . . . . . . . . . 12 8.02. Transfer of Capital Stock . . . . . . . . . . . . . . 12 8.03. Transfer Agents and Registrars. . . . . . . . . . . . 12 8.04. Transfer Regulations. . . . . . . . . . . . . . . . . 13 8.05. Fixing of Record Date . . . . . . . . . . . . . . . . 13 8.06. Lost, Stolen or Destroyed Certificates. . . . . . . . 13 ARTICLE IX. FISCAL YEAR, ACCOUNTANT . . . . . . . . . . . . . . . 13 9.01. Fiscal Year . . . . . . . . . . . . . . . . . . . . . 13 9.02. Accountants . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE X. INDEMNIFICATION AND INSURANCE . . . . . . . . . . . . 14 10.01. Indemnification and Payment of Expenses in Advance. . 14 10.02. Insurance of Officers, Directors, Employees and Agents . . . . . . . . . . . . . . . . . . . . 15 ARTICLE XI. AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . 16 11.01. General . . . . . . . . . . . . . . . . . . . . . . . 16 11.02. By Stockholders Only. . . . . . . . . . . . . . . . . 16 PAGE 4 ARTICLE XII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . 16 12.01 Use of the Term "Annual Meeting". . . . . . . . . . . 16 PAGE 5 T. ROWE PRICE NEW INCOME FUND, INC. (A Maryland Corporation) BY-LAWS ARTICLE I NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL Section 1.01. Name: The name of the Corporation is T. ROWE PRICE NEW INCOME FUND, INC. (Section 1.01. Name as amended May 1, 1981.) Section 1.02. Principal Offices: The principal office of the Corporation in the State of Maryland shall be located in the City of Baltimore. The Corporation may, in addition, establish and maintain such other offices and places of business, within or without the State of Maryland, as the Board of Directors may from time to time determine. (MGCL, Sections 8, 9(a)(4))* Section 1.03. Seal: The corporate seal of the Corporation shall be circular in form and shall bear the name of the Corporation, the year of its incorporation, and the words "Corporate Seal, Maryland". The form of the seal shall be subject to alteration by the Board of Directors and the seal may be used by causing it or a facsimile to be impressed or affixed or printed or otherwise reproduced. Any officer or Director of the Corporation shall have authority to affix the corporate seal of the Corporation to any document requiring the same. (MGCL, Section 9(a)(3)). ARTICLE II STOCKHOLDERS Section 2.01. Annual Meetings: The Corporation shall not be required to hold an annual meeting of its shareholders in any year unless the Investment Company Act of 1940 requires an election of directors by shareholders. In the event that the Corporation shall be so required to hold an annual meeting, such meeting shall be held at a date and time set by the Board of Directors, which date shall be no later than 120 days after the occurrence of the event requiring the meeting. Any shareholders' meeting held in accordance with the preceding sentence shall for all purposes constitute the annual meeting of shareholders for the fiscal year of the Corporation in which the meeting is held. At any such meeting, the shareholders shall elect directors to hold the offices of any directors who have held office for more than one year or who have been elected by the Board of Directors to fill vacancies which result from any cause. Except as the Articles of Incorporation or statute provides otherwise, Directors may transact any business within the powers of the Corporation as may properly come before the meeting. Any business of the Corporation may be transacted at the annual ____________________ *Bracketed citations are to the General Corporation Law of the State of Maryland ("MGCL") or to the United States Investment Company Act of 1940, as amended (the "Investment Company Act"), or to Rules of the United States Securities and Exchange Commission thereunder ("SEC Rules"). The citations are inserted for reference only and do not constitute a part of the By-Laws. PAGE 6 meeting without being specially designated in the notice, except such business as is specifically required by statute to be stated in the notice. [MGCL, Section 2-501] (Section 2.01. Annual Meetings, as amended April 20, 1990) Section 2.02. Special Meetings: Special meetings of the shareholders may be called at any time by the Chairman of the Board, the President, any Vice President, or by the Board of Directors. Special meetings of the shareholders shall be called by the Secretary on the written request of shareholders entitled to cast at least ten (10) percent of all the votes entitled to be cast at such meeting, provided that (a) such request shall state the purpose or purposes of the meeting and the matters proposed to be acted on, and (b) the shareholders requesting the meeting shall have paid to the Corporation the reasonably estimated cost of preparing and mailing the notice thereof, which the Secretary shall determine and specify to such shareholders. Unless requested by shareholders entitled to cast a majority of all the votes entitled to be cast at the meeting, a special meeting need not be called to consider any matter which is substantially the same as a matter voted upon at any special meeting of the shareholders held during the preceding twelve (12) months. [ MGCL, Section 38(c) ] (Section 2.02. Special Meetings, as amended July 20, 1993) Section 2.03. Place of Meetings: All stockholders' meetings shall be held at such place within the United States as may be fixed from time to time by the Board of Directors. [ MGCL, Section 38(a) ] Section 2.04. Notice of Meetings: Not less than 10 days nor more than 90 days before the date of every stockholders' meeting, the Secretary or an Assistant Secretary of the Corporation shall give to each stockholder entitled to vote at such meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting the purpose or purposes for which the meeting is called, either by mail or by presenting it to him personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the Corporation, with postage thereon prepaid. No notice of a stockholders' meeting need be given to any stockholder who shall sign a written waiver of such notice whether before or after the holding of such meeting, which shall be filed with the records of such meeting, or to any stockholder who shall attend such meeting in person or by proxy. Unless the adjournment is for more than 30 days or a new record date is fixed, notice of adjournment of a stockholders' meeting to another time or place need not be given if such time and place are announced at such meeting. [ MGCL, Sections 39, 46 ] Section 2.05. Voting - In General: At every stockholders' meeting each stockholder shall be entitled to one vote for each share of stock of the Corporation validly issued and outstanding and held by such stockholder, except that no shares held by the Corporation shall be entitled to a vote. Fractional shares shall be entitled to fractional votes. Except as otherwise specifically provided in the Articles of Incorporation or these By-Laws or as required by provisions of the United States Investment Company Act, as amended from time to time, all matters shall be decided by a vote of the majority of the votes cast. The vote upon any question shall be by ballot whenever requested by any person entitled to vote, but, unless such a request is made, voting may be conducted in any way approved by the meeting. [ MGCL, Sections 42(a), 43 ] PAGE 7 Section 2.06. Stockholders Entitled to Vote: If, pursuant to Section 8.05 hereof, a record date has been fixed for the determination of stockholders entitled to notice of or to vote at any stockholders' meeting, each stockholder of the Corporation shall be entitled to vote, in person or by proxy, each share or fraction of a share of stock standing in his name on the books of the Corporation on such record date and outstanding at the time of the meeting. If no record date has been fixed for the determination of stockholders, the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which notice of the meeting is mailed or the day 30 days before the meeting, whichever is the closer date to the meeting, or, if notice is waived by all stockholders, at the close of business on the tenth day next preceding the day on which the meeting is held. [ MGCL, Section 40 ] Section 2.07. Voting - Proxies: The right to vote by proxy shall exist only if the instrument authorizing such proxy to act shall have been executed in writing by the stockholder himself or by his attorney thereunto duly authorized in writing. No proxy shall be valid after eleven months from its date unless it provides for a longer period. [ MGCL, Section 43(b)(2) ] Section 2.08. Quorum: The presence at any stockholders' meeting, in person or by proxy, of stockholders entitled to cast a majority of the votes thereat shall be necessary and sufficient to constitute a quorum for the transaction of business. [ MGCL, Section 41 ] Section 2.09. Absence of Quorum: In the absence of a quorum, the holders of a majority of shares entitled to vote at the meeting and present thereat in person or by proxy, or, if no stockholder entitled to vote is present thereat in person or by proxy, any officer present thereat entitled to preside or act as Secretary of such meeting, may adjourn the meeting sine die or from time to time. Any business that might have been transacted at the meeting originally called may be transacted at any such adjourned meeting at which a quorum is present. Section 2.10. Stock Ledger and List of Stockholders: It shall be the duty of the Secretary or Assistant Secretary of the Corporation to cause an original or duplicate stock ledger to be maintained at the office of the Corporation's transfer agent, containing the names and addresses of all stockholders and the number of shares of each class held by each stockholder. Such stock ledger may be in written form or any other form capable of being converted into written form within a reasonable time for visual inspection. Any one or more persons, each of whom has been a stockholder of record of the Corporaation for more than six months next preceding such request, who owns in the aggregate 5% or more of the outstanding capital stock of the Corporation, may submit (unless the Corporation at the time of the request maintains a duplicate stock ledger at its principal office in Maryland) a written request to any officer of the Corporation or its resident agent in Maryland for a list of the stockholders of the Corporation. Within 20 days after such a request, there shall be prepared and filed at the Corporation's principal office in Maryland a list containing the names and addresses of all stockholders of the Corporation and the number of shares of each class held by each stockholder, certified as correct by any officer of the Corporation, by its stock transfer agent, or by its registrar. [ MGCL, Sections 50, 51 ] PAGE 8 ARTICLE III BOARD OF DIRECTORS Section 3.01. Number and Term of Office: The Board of Directors shall consist of seven Directors, which number may be increased or decreased by a resolution of a majority of the entire Board of Directors, provided that the number of Directors shall not be less than three nor more than 15. Each Director (whenever elected) shall hold office until the next annual meeting of stockholders or until his successor is elected and qualifies or until his earlier death, resignation or removal. [ MGCL, Section 53 ] Section 3.02. Qualification of Directors: No member of the Board of Directors need be a stockholder of the Corporation but at least one member of the Board of Directors shall be a person who is not an interested person (as such term is defined in the Investment Company Act of 1940, as amended) of the investment adviser of the Corporation nor an officer or employee of the Corporation. [ Investment Company Act, Section 10(d) ] Section 3.03. Election of Directors: Until the first annual meeting of shareholders or until successors are duly elected and qualified, the Board of Directors shall consist of the persons named as such in the Articles of Incorporation. Thereafter except as otherwise provided in Sections 3.04 and 3.05 hereof, at each annual meeting, the shareholders shall elect Directors to hold office until the next annual meeting and/or until their successors are elected and qualify. In the event that Directors are not elected at an annual shareholders' meeting, then Directors may be elected at a special shareholders' meeting. Directors shall be elected by vote of the holders of a majority of the shares present in person or by proxy and entitled to vote thereon. [ MGCL, Section 2-404 ] (Section 3.03. Election of Directors, as amended January 21, 1988) Section 3.04. Removal of Directors: At any meeting of stockholders, duly called and at which a quorum is present, the stockholders may, by the affirmative vote of the holders of a majority of the votes entitled to be cast thereon, remove any Director or Directors from office, either with or without cause, and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of removed Directors. [ MGCL, Section 52 ] Section 3.05. Vacancies and Newly Created Directorships: If any vacancies shall occur in the Board of Directors by reason of resignation, removal or otherwise, or if the authorized number of Directors shall be increased, the Directors then in office shall continue to act, and such vacancies (if not previously filled by the stockholders) may be filled by a majority of the Directors then in office, whether or not a quorum, provided that, immediately after filling such vacancy, at least two-thirds of the Directors then holding office shall have been elected to such office by the stockholders of the Corporation. In the event that at any time, other than the time preceding the first meeting of stockholders, less than a majority of the Directors of the Corporation holding office at that time were so elected by the stockholders, a meeting of the stockholders shall be held promptly and in any event within 60 days for the purpose of electing Directors to fill any existing vacancies in the Board of Directors unless the Securities and Exchange Commission shall by order extend such period. Except as provided in Section 3.04 hereof, a Director elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next annual meeting of stockholders or until his successor is elected and qualifies. [ MGCL, Section 54, Investment Company Act, Section 16(a) ] PAGE 9 Section 3.06. General Powers: (a) The property, affairs and business of the Corporation shall be managed by the Board of Directors, which may exercise all the powers of the Corporation except such as are by law, by the Articles of Incorporation or by these By-Laws conferred upon or reserved to the stockholders of the Corporation. [ MGCL, Section 52(a) ] (b) All acts done by any meeting of the Directors or by any person acting as a Director, so long as his successor shall not have been duly elected or appointed, shall, notwithstanding that it be afterwards discovered that there was some defect in the election of the Directors or such person acting as a Director or that they or any of them were disqualified, be as valid as if the Directors or such person, as the case may be, had been duly elected and were or was qualified to be Directors or a Director of the Corporation. Section 3.07. Power to Issue and Sell Stock: The Board of Directors may from time to time authorize by resolution the issuance and sale of any of the Corporation's authorized shares to such persons as the Board of Directors shall deem advisable and such resolution shall fix the consideration or minimum consideration for which such shares are to be issued, or a formula or method pursuant to which such consideration is to be fixed and determined, and shall include a fair description of any consideration other than money and a statement of the actual value of such consideration as then determined in the opinion of the Board of Directors or a statement that in the opinion of the Board of Directors such consideration is or will be not less than a stated sum. [ MGCL, Section 20(c) ] Section 3.08. Power to Declare Dividends: (a) The Board of Directors, from time to time as they may deem advisable, may declare and the Corporation pay dividends, in cash, property or shares of the Corporation available for dividends, to the stockholders according to their respective rights and interests. [ MGCL, Section 37 ] (b) The Board of Directors shall cause to be accompanied by a written statement any dividend payment wholly or partly from any source other than the Corporation's accumulated undistributed net income (determined in accordance with good accounting practice and the rules and regulations of the Securities and Exchange Commission then in effect) not including profits or losses realized upon the sale of securities or other properties. Such statement shall adequately disclose the source or sources of such payment and the basis of calculation and shall be otherwise in such form as the Securities and Exchange Commission may prescribe. [ Investment Company Act, Section 19; SEC Rule 19a-1; MGCL, Section 37 ] (c) Notwithstanding the above provisions of this Section 3.08, the Board of Directors may at any time declare and distribute pro rata among the stockholders a stock dividend out of the Corporation's authorized but unissued shares of stock, including any shares previously purchased by the Corporation, provided that such dividend shall not be distributed in shares of any class with respect to any shares of a different class. The shares so distributed shall be issued at the par value thereof, and there shall be transferred to stated capital, at the time such dividend is paid, an amount of surplus equal to the aggregate par value of the shares issued as a dividend and there may be transferred from earned surplus to capital surplus such additional amount as the Board of Directors may determine. [ MGCL, Section 37 ] PAGE 10 Section 3.09. Annual and Regular Meetings: The annual meeting of the Board of Directors for choosing officers and transacting other proper business shall be held immediately after the annual shareholders' meeting at such place as may be specified in the notice of such meeting of the Board of Directors, or, in the absence of such annual shareholders' meeting, at such time and place as the Board of Directors may provide. The Board of Directors from time to time may provide by resolution for the holding of regular meetings and fix their time and place (within or outside the State of Maryland). [ MGCL, Section 2-409(a)] (Section 3.09. Annual and Regular Meetings, as amended January 21, 1988) Section 3.l0. Special Meetings: Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the President (or, in the absence or disability of the President, by any Vice President), the Treasurer, or two or more Directors, at the time and place (within or outside the State of Maryland) specified in the respective notices or waivers of notice of such meetings. Section 3.11. Notice: Notice of annual, regular, and special meetings, stating the time and place, shall be mailed to each Director at his residence or regular place of business or caused to be delivered to him personally or to be transmitted to him by telegraph, cable or wireless at least two days before the day on which the meeting is to be held. Such notice need not include a statement of the business to be transacted at, or the purpose of, the meeting. [ MGCL, Section 56(b) ] Section 3.12. Waiver of Notice: No notice of any meeting need be given to any Director who attends such meeting in person or to any Director who waives notice of such meeting in writing (which waiver shall be filed with the records of such meeting), whether before or after the holding of the meeting. (MGCL, Section 46) Section 3.13. Quorum and Voting: At all meetings of the Board of Directors the presence of one-third of the total number of Directors authorized, but not less than two Directors, shall constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the Directors present may adjourn the meeting, from time to time, until a quorum shall be present. The action of a majority of the Directors present at a meeting at which a quorum is present shall be the action of the Board of Directors unless the concurrence of a greater proportion is required for such action by law, by the Articles of Incorporation or by these By-Laws. (MGCL, Section 56) Section 3.14. Conference Telephone: Members of the Board of Directors or of any committee designated by the Board may participate in a meeting of the Board or of such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at such meeting. (MGCL, Section 56(e)) Section 3.15. Compensation: Each Director may receive such remuneration for his services as shall be fixed from time to time by resolution of the Board of Directors. Section 3.16. Action Without a Meeting: Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or of such committee and such written PAGE 11 consent is filed with the minutes of proceedings of the Board or committee. (MGCL, Section 58) Section 3.17. Director Emeritus: Upon the retirement of a Director of the Corporation, the Board of Directors may designate such retired Director as a Director Emeritus. The position of Director Emeritus shall be honorary only and shall not confer upon such Director Emeritus any responsibility, or voting authority, whatsoever with respect to the Corporation. A Director Emeritus may, but shall not be required to attend the meetings of the Board of Directors and receive materials normally provided Directors relating to the Corporation. The Board of Directors may establish such compensation as it may deem appropriate under the circumstances to be paid by the Fund to a Director Emeritus. (Section 3.17. Director Emeritus, as amended January 24, 1979) ARTICLE IV EXECUTIVE COMMITTEE AND OTHER COMMITTEES Section 4.01. How Constituted: By resolution adopted by the Board of Directors the Board may appoint from among its members one or more committees, including an Executive Committee, each consisting of at least two Directors. Each member of a committee shall hold office during the pleasure of the Board. The President shall be a member of the Executive Committee. [ MGCL, Section 59 ] Section 4.02. Powers of the Executive Committee: Unless otherwise provided by resolution of the Board of Directors, the Executive Committee, in the intervals between meetings of the Board of Directors, shall have and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation except the power to declare a dividend, to issue stock, or to recommend to stockholders any action requiring stockholders' approval. [MGCL, Section 59] Section 4.03. Other Committees of the Board of Directors: To the extent provided by resolution of the Board, other committees shall have and may exercise any of the powers that may lawfully be granted to the Executive Committee. [ MGCL, Section 59 ] Section 4.04. Proceedings, Quorum and Manner of Acting: In the absence of appropriate resolution of the Board of Directors, each committee may adopt such rules and regulations governing its proceedings, quorum and manner of acting as it shall deem proper and desirable, provided that the quorum shall not be less than two Directors. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a member of the Board of Directors to act in the place of such absent member. [ MGCL, Section 59 ] Section 4.05. Other Committees: The Board of Directors may appoint other committees, each consisting of one or more persons who need not be Directors. Each such committee shall have such powers and perform such duties as may be assigned to it from time to time by the Board of Directors, but shall not exercise any power which may lawfully be exercised only by the Board of Directors or a committee thereof. PAGE 12 ARTICLE V OFFICERS Section 5.01. General: The officers of the Corporation shall be a President, one or more Vice Presidents, a Secretary, and a Treasurer, and may include one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.11 hereof. The Board of Directors may elect, but shall not be required to elect, a Chairman of the Board. [ MGCL, Section 60(a) ] Section 5.02. Election, Term of Office and Qualifications: The officers of the Corporation (except those appointed pursuant to Section 5.11 hereof) shall be elected by the Board of Directors at its first meeting and thereafter at each annual meeting of the Board. If any officer or officers are not elected at any such meeting, such officer or officers may be elected at any subsequent regular or special meeting of the Board. Except as provided in Sections 5.03, 5.04 and 5.05 hereof, each officer elected by the Board of Directors shall hold office until the next annual meeting of the Board of Directors and until his successor shall have been chosen and qualified. Any person may hold two or more offices of the Corporation, except that neither the Chairman of the Board nor the President may hold the office of Vice President, but no person shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, the Articles of Incorporation or these By-Laws to be executed, acknowledged or verified by two or more officers. The Chairman of the Board and the President shall be selected from among the Directors of the Corporation and may hold such offices only so long as they continue to be Directors. No other officer need be a Director. [ MGCL, Sections 2-413, 2-415 ] (Section 5.02. Election, Term of Office and Qualifications, as amended January 21, 1988) Section 5.03. Resignation: Any officer may resign his office at any time by delivering a written resignation to the Board of Directors, the President, the Secretary, or any Assistant Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 5.04. Removal: Any officer may be removed from office by the Board of Directors whenever in the Board's judgment the best interests of the Corporation will be served thereby. Section 5.05 Vacancies and Newly Created Offices: If any vacancy shall occur in any office by reason of death, resignation, removal, disqualification or other cause, or if any new office shall be created, such vacancies or newly created offices may be filled by the Board of Directors at any meeting or, in the case of any office created pursuant to Section 5.11 hereof, by any officer upon whom such power shall have been conferred by the Board of Directors. [ MGCL, Section 60 ] Section 5.06. Chairman of the Board: The Chairman of the Board, if there be such an officer, shall preside at all stockholders' meetings, and at all meetings of the Board of Directors. He may sign (unless the President or a Vice President shall have signed) certificates representing stock of the Corporation authorized for issuance by the Board of Directors and shall have such other powers and perform such other duties as may be assigned to him from time to time by the Board of Directors. [ MGCL, Section 60 ] Section 5.07. President: The President shall be the chief executive and operating officer of the Corporation and, at the request of or in the absence or disability of the Chairman of the Board or if no Chairman of the PAGE 13 Board has been chosen, he shall preside at all stockholders' meetings and at all meetings of the Board of Directors and shall in general exercise the powers and perform the duties of the Chairman of the Board. He shall be ex officio a member of all standing committees of the Board of Directors. Subject to the supervision of the Board of Directors, he shall have general charge of the business, affairs, property and operation of the Corporation and its officers, employees, and agents. He may sign (unless the Chairman or a Vice President shall have signed) certificates representing stock of the Corporation authorized for issuance by the Board of Directors. Except as the Board of Directors may otherwise order, he may sign in the name and on behalf of the Corporation all deeds, bonds, contracts or agreements. He shall exercise such other powers and perform such other duties as from time to time may be assigned to him by the Board of Directors. [ MGCL, Section 60 ] Section 5.08. Vice President: The Board of Directors shall, from time to time, designate and elect one or more Vice Presidents who shall have such powers and perform such duties as from time to time may be assigned to them by the Board of Directors or the President. At the request or in the absence or disability of the President, then the Vice President (or, if there are two or more Vice Presidents, then the senior of the Vice Presidents present and able to act) may perform all the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President may sign (unless the Chairman, the President or another Vice President shall have signed) certificates representing stock of the Corporation authorized for issuance by the Board of Directors. [ MGCL, Section 60 ] Section 5.09. Treasurer and Assistant Treasurers: The Treasurer shall be the principal financial and accounting officer of the Corporation and shall have general charge of the finances and books of account of the Corporation. Except as otherwise provided by the Board of Directors, he shall have general supervision of the funds and property of the Corporation and of the performance by the custodian of its duties with respect thereto. He may countersign (unless an Assistant Treasurer or Secretary or Assistant Secretary shall have countersigned) certificates representing stock of the Corporation authorized for issuance by the Board of Directors. He shall render to the Board of Directors, whenever directed by the Board, an account of the financial condition of the Corporation and of all his transactions as Treasurer; and as soon as possible after the close of each fiscal year he shall make and submit to the Board of Directors a like report for such fiscal year. He shall cause to be prepared annually a full and correct statement of the affairs of the Corporation, including a balance sheet and a financial statement of operations for the preceding fiscal year, which shall be submitted at the annual meeting of stockholders and filed within 20 days thereafter at the principal office of the Corporation in the State of Maryland. He shall perform all the acts incidental to the office of Treasurer, subject to the control of the Board of Directors. Any Assistant Treasurer may perform such duties of the Treasurer as the Treasurer or the Board of Directors may assign, and, in the absence of the Treasurer, he may perform all the duties of the Treasurer. [ MGCL, Section 49(b) ] Section 5.10. Secretary and Assistant Secretaries: The Secretary shall attend to the giving and serving of all notices of the Corporation and shall record all proceedings of the meetings of the stockholders and Directors in one or more books to be kept for that purpose. He shall keep in safe custody the seal of the Corporation and shall have charge of the records of the Corporation, including the stock books and such other books and papers as the Board of Directors may direct and such books, reports, certificates and other documents required by law to be kept, all of which shall at all reasonable times be open to inspection by any Director. He shall countersign PAGE 14 (unless the Treasurer, an Assistant Treasurer or an Assistant Secretary shall have countersigned) certificates representing stock of the Corporation authorized for issuance by the Board of Directors. He shall perform such other duties as appertain to his office or as may be required by the Board of Directors. Any Assistant Secretary may perform such duties of the Secretary as the Secretary or the Board of Directors may assign, and, in the absence of the Secretary, he may perform all the duties of the Secretary. [ MGCL, Section 60 ] Section 5.11. Subordinate Officers: The Board of Directors from time to time may appoint such other officers or agents as it may deem advisable, each of whom shall have such title, hold office for such period, have such authority and perform such duties as the Board of Directors may determine. The Board of Directors from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. [ MGCL, Section 60(a) ] Section 5.12. Remuneration: The salaries or other compensation of the officers of the Corporation shall be fixed from time to time by resolution of the Board of Directors, except that the Board of Directors may by resolution delegate to any person or group of persons the power to fix the salaries or other compensation of any subordinate officers or agents appointed in accordance with the provisions of Section 5.11 hereof. ARTICLE VI CUSTODY OF SECURITIES AND CASH Section 6.01. Employment of a Custodian: The Corporation shall place and maintain its securities and similar investments in the custody of a bank or banks, each having an aggregate capital, surplus and undivided profits of not less than $10,000,000. Each such custodian bank shall be appointed and its remuneration fixed by the Board of Directors. [ Investment Company Act, Section 17(f) ] Section 6.02. Central Certificate Service: Subject to such rules, regulations and orders as the Securities and Exchange Commission may adopt as necessary or appropriate for the protection of investors, the Corporation's custodian may deposit all or any part of the securities owned by the Corporation in a system for the central handling of securities established by a national securities exchange or national securities association registered with the Commission under the Securities Exchange Act of 1934, or such other person as may be permitted by the Commission, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities. [ Investment Company Act, Section 17(f) ] Section 6.03. Cash Assets: The cash proceeds from the sale of securities and similar investments and other cash assets of the Corporation shall be kept in the custody of a bank or banks appointed pursuant to Section 6.01 hereof, or in accordance with such rules and regulations or orders as the Securities and Exchange Commission may from time to time prescribe for the protection of investors, except that the Corporation may maintain a checking account in a bank or banks, each having an aggregate capital, surplus and undivided profits of not less than $10,000,000, provided that the balance of such account or the aggregate balances of such accounts shall at no time exceed the amount of the fidelity bond, maintained pursuant to the requirements of the Investment Company Act of 1940 and rules and regulations PAGE 15 thereunder, covering the officers or employees authorized to draw on such account or accounts. [ Investment Company Act, Section 17(f) ] Section 6.04. Free Cash Accounts: The Corporation may, upon resolution of its Board of Directors, maintain a petty cash account free of the foregoing requirements of this Article VI in an amount not to exceed $500, provided that such account is operated under the imprest system and is maintained subject to adequate controls approved by the Board of Directors over disbursements and reimbursements including, but not limited to, fidelity bond coverage for persons having access to such funds. [ Investment Company Act, Rule 17f-3 ] Section 6.05. Action Upon Termination of Custodian Agreement: Upon resignation of a custodian of the Corporation or inability of a custodian to continue to serve, the Board of Directors shall promptly appoint a successor custodian, but in the event that no successor custodian can be found who has the required qualifications and is willing to serve, the Board of Directors shall call as promptly as possible a special meeting of the stockholders to determine whether the Corporation shall function without a custodian or shall be liquidated. If so directed by vote of the holders of a majority of the outstanding shares of stock of the Corporation, the custodian shall deliver and pay over all property of the Corporation held by it as specified in such vote. ARTICLE VII EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES Section 7.01. Execution of Instruments: All deeds, documents, transfers, contracts, agreements, requisitions or orders, promissory notes, assignments, endorsements, checks and drafts for the payment of money by the Corporation, and other instruments requiring execution by the Corporation shall be signed by the Chairman, the President, a Vice President, or the Treasurer, or as the Board of Directors may otherwise, from time to time, authorize. Any such authorization may be general or confined to specific instances. Section 7.02. Voting of Securities: Unless otherwise ordered by the Board of Directors, the Chairman, the President, or any Vice President shall have full power and authority on behalf of the Corporation to attend and to act and to vote, or in the name of the Corporation to execute proxies to vote, at any meeting of stockholders of any company in which the Corporation may hold stock. At any such meeting such officer shall possess and may exercise (in person or by proxy) any and all rights, powers and privileges incident to the ownership of such stock. The Board of Directors may by resolution from time to time confer like powers upon any other person or persons. [ MGCL, Section 44(a) ] ARTICLE VIII CAPITAL STOCK Section 8.01. Ownership of Shares: (a) Certificates certifying the ownership of shares of the Corporation will not be issued for shares purchased or otherwise acquired after July 1, 1991. The ownership of shares, full or fractional, shall be recorded on the books of the Corporation or its agent. The record books of PAGE 16 the Corporation as kept by the Corporation or its agent, as the case may be, shall be conclusive as to the number of shares held from time to time by each such shareholder. The Corporation reserves the right to require the surrender of outstanding certificates if the Board of Directors so determines. [ MGCL, Section 2-210(c) ] (b) Every certificate exchanged, surrendered for redemption or otherwise returned to the Corporation shall be marked "Cancelled" with the date of cancellation. (Section 8.01. Ownership of Shares, as amended July 1, 1991) Section 8.02. Transfer of Capital Stock: (a) Shares of stock of the Corporation shall be transferable only upon the books of the Corporation kept for such purpose and, if one or more certificates representing such shares have been issued, upon surrender to the Corporation or its transfer agent or agents of such certificate or certificates duly endorsed or accompanied by appropriate evidence of assignment, transfer, succession or authority to transfer. (b) The Corporation shall be entitled to treat the holder of record of any share of stock as the absolute owner thereof for all purposes, and accordingly shall not be bound to recognize any legal, equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by the statutes of the State of Maryland. Section 8.03. Transfer Agents and Registrars: The Board of Directors may, from time to time, appoint or remove transfer agents and registrars of transfers of shares of stock of the Corporation, and it may appoint the same person as both transfer agent and registrar. (Section 8.03. Transfer Agents and Registrars, as amended July 1, 1991) Section 8.04. Transfer Regulations: The shares of stock of the Corporation may be freely transferred, and the Board of Directors may, from time to time, adopt lawful rules and regulations with reference to the method of transfer of the shares of stock of the Corporation. Section 8.05. Fixing of Record Date: The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock, or for any other proper purpose, provided that such record date shall be a date not more than 60 days nor, in the case of a meeting of stockholders, less than 10 days prior to the date on which the particular action, requiring such determination of stockholders, is to be taken. In such case, only such stockholders as shall be stockholders of record on the record date so fixed shall be entitled to such notice of, and to vote at, such meeting or adjournment, or to give such consent, or to receive payment of such dividend or other distribution, or to receive such allotment of rights, or to exercise such rights, or to take other action, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any such record date. [ MGCL, Section 40 ] PAGE 17 Section 8.06. Lost, Stolen or Destroyed Certificates: If a certificate for stock of the Corporation is alleged to have been lost, stolen or destroyed, no new certificate will be issued. Instead, ownership of the shares formerly represented by the lost, stolen or destroyed certificate shall be recorded on the books of the Corporation or its agent, in accordance with the provisions of Section 8.01 of these By-Laws. Before recording ownership of such shares, the Board of Directors, or any officer authorized by the Board, may, in its discretion, require the owner of the lost, stolen, or any destroyed certificate (or his legal representative) to give the Corporation a bond or other indemnity, in such form and in such amount as the Board or any such officer may direct and with such surety or sureties as may be satisfactory to the Board of any such officer, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate. [ MGCL, Section 2-213 ] (Section 8.06. Lost, Stolen or Destroyed Certificates, as amended July 1, 1991 ARTICLE IX FISCAL YEAR, ACCOUNTANT Section 9.01. Fiscal Year: The fiscal year of the Corporation shall be the twelve (12) calendar months beginning on the 1st day of June in each year and ending on the last day of the following May, or such other period of twelve (12) calendar months as the Board of Directors may by resolution prescribe. (Section 9.01. Fiscal Year: as amended November 28, 1973, January 1, 1983, and January 18, 1994.) Section 9.02. Accountants: (a) The Corporation shall employ an independent public accountant or firm of independent public accountants as its accountant to examine the accounts of the Corporation and to sign and certify financial statements filed by the Corporation. The accountant's certificates and reports shall be addressed both to the Board of Directors and to the stockholders. (b) A majority of the members of the Board of Directors who are not interested persons (as such term is defined in the Investment Company Act of 1940, as amended) of the Corporation shall select the accountant, by vote cast in person, at any meeting held before the first annual stockholders' meeting, and thereafter shall select the accountant annually, by vote cast in person, at a meeting held within 30 days before or after the beginning of the fiscal year of the Corporation or 30 days before the annual stockholders' meeting in that year. Such selection shall be submitted for ratification or rejection at the next succeeding annual stockholders' meeting. If such meeting shall reject such selection, the accountant shall be selected by majority vote of the Corporation's outstanding voting securities, either at the meeting at which the rejection occurred or at a subsequent meeting of stockholders called for the purpose. (c) Any vacancy occurring between annual meetings, due to the death or resignation of the accountant, may be filled by the vote of a majority of those members of the Board of Directors who are not interested persons (as so defined) of the Corporation, cast in person at a meeting called for the purpose of voting on such action. PAGE 18 (d) The employment of the accountant shall be conditioned upon the right of the Corporation by vote of a majority of the outstanding voting securities at any meeting called for the purpose to terminate such employment forthwith without any penalty. [ Investment Company Act, Section 32(a) ] ARTICLE X INDEMNIFICATION AND INSURANCE Section 10.01. Indemnification and Payment of Expenses in Advance: The Corporation shall indemnify any individual ("Indemnitee") who is a present or former director, officer, employee, or agent of the Corporation, or who is or has been serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, who, by reason of his position was, is, or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter collectively referred to as a "Proceeding") against any judgments, penalties, fines, settlements, and reasonable expenses (including attorneys' fees) incurred by such Indemnitee in connection with any Proceeding, to the fullest extent that such indemnification may be lawful under applicable Maryland law, as from time to time amended. The Corporation shall pay any reasonable expenses so incurred by such Indemnitee in defending a Proceeding in advance of the final disposition thereof to the fullest extent that such advance payment may be lawful under applicable Maryland law, as from time to time amended. Subject to any applicable limitations and requirements set forth in the Corporation's Articles of Incorporation and in these By-Laws, any payment of indemnification or advance of expenses shall be made in accordance with the procedures set forth in applicable Maryland law, as from time to time amended. Notwithstanding the foregoing, nothing herein shall protect or purport to protect any Indemnitee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office ("Disabling Conduct"). Anything in this Article X to the contrary notwithstanding, no indemnification shall be made by the Corporation to any Indemnitee unless: (a) there is a final decision on the merits by a court or other body before whom the Proceeding was brought that the Indemnitee was not liable by reason of Disabling Conduct; or (b) in the absence of such a decision, there is a reasonable determination, based upon a review of the facts, that the Indemnitee was not liable by reason of Disabling Conduct, which determination shall be made by: (i) the vote of a majority of a quorum of directors who are neither "interested persons" of the Corporation, as defined in Section 2(a)(19) of the Investment Company Act of 1940, nor parties to the Proceeding; or (ii) an independent legal counsel in a written opinion. Anything in this Article X to the contrary notwithstanding, any advance of expenses by the Corporation to any Indemnitee shall be made only PAGE 19 upon the undertaking by such Indemnitee to repay the advance unless it is ultimately determined that such Indemnitee is entitled to indemnification as above provided, and only if one of the following conditions is met: (a) the Indemnitee provides a security for his undertaking; or (b) the Corporation shall be insured against losses arising by reason of any lawful advances; or (c) there is a determination, based on a review of readily available facts, that there is reason to believe that the Indemnitee will ultimately be found entitled to indemnification, which determination shall be made by: (i) a majority of a quorum of directors who are neither "interested persons" of the Corporation as defined in Section 2(a)(19) of the Investment Company Act of 1940, nor parties to the Proceeding; or (ii) an independent legal counsel in a written opinion. Section 10.02. Insurance of Officers, Directors, Employees and Agents. To the fullest extent permitted by applicable Maryland law and by Section 17(h) of the Investment Company Act of 1940, as from time to time amended, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in or arising out of his position, whether or not the Corporation would have the power to indemnify him against such liability. [ MGCL, Section 2-418(k) ] (ARTICLE X as amended January 21, 1982) ARTICLE XI AMENDMENTS Section 11.01. General: Except as provided in Section 11.02 hereof, all By-Laws of the Corporation, whether adopted by the Board of Directors or the stockholders, shall be subject to amendment, alteration, or repeal, and new By-Laws may be made, by the affirmative vote of a majority of either: (a) the holders of record of the outstanding shares of stock of the Corporation entitled to vote, at any annual or special meeting the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration, repeal, or new By-Law; or (b) the Directors present at any regular or special meeting at which a quorum is present if the notice or waiver of notice thereof or material sent to the Directors in connection therewith on or prior to the last date for the giving of such notice under these By-Laws shall have specified or summarized the proposed amendment, alteration, repeal, or new By-Law. Section 11.02. By Stockholders Only: PAGE 20 (a) No amendment of any section of these By-Laws shall be made except by the stockholders of the Corporation if the stockholders shall have provided in the By-Laws that such section may not be amended, altered, or repealed except by the stockholders. (b) From and after the issue of any shares of the Capital Stock of the Corporation, no amendment of this Article XI shall be made except by the stockholders of the Corporation. ARTICLE XII MISCELLANEOUS Section 12.01. Use of the Term "Annual Meeting": The use of the term "annual meeting" in these By-Laws shall not be construed as implying a requirement that a shareholder meeting be held annually. (ARTICLE XII. MISCELLANEOUS, added January 21, 1988) EX-99.B5-MGTAGMT 6 PAGE 1 INVESTMENT MANAGEMENT AGREEMENT Between T. ROWE PRICE NEW INCOME FUND, INC. and T. ROWE PRICE ASSOCIATES, INC. INVESTMENT MANAGEMENT AGREEMENT, made as of the 1st day of July, 1987, by and between T. ROWE PRICE NEW INCOME FUND, INC., a corporation organized and existing under the laws of the State of Maryland (hereinafter called the "Fund"), and T. ROWE PRICE ASSOCIATES, INC., a corporation organized and existing under the laws of the State of Maryland (hereinafter called the "Manager"). W I T N E S S E T H: WHEREAS, the Fund is engaged in business as an open-end management investment company and is registered as such under the federal Investment Company Act of l940, as amended (the "Act"); and WHEREAS, the Manager is engaged principally in the business of rendering investment supervisory services and is registered as an investment adviser under the federal Investment Advisers Act of l940, as amended; and WHEREAS, the Fund desires the Manager to render investment supervisory services to the Fund in the manner and on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. Duties and Responsibilities of Manager. A. Investment Advisory Services. The Manager shall act as investment manager and shall supervise and direct the investments of the Fund in accordance with the Fund's investment objective, program and restrictions as provided in its prospectus, as amended from time to time, and such other limitations as the Fund may impose by notice in writing to the Manager. The Manager shall obtain and evaluate such information relating to the economy, industries, businesses, securities markets and securities as it may deem necessary or useful in the discharge of its obligations hereunder and shall formulate and implement a continuing program for the management of the assets and resources of the Fund in a manner consistent with its investment objective. In furtherance of this duty, the Manager, as agent and attorney-in-fact with respect to the Fund, is authorized, in its discretion and without prior consultation with the Fund, to: (i) buy, sell, exchange, convert, lend, and otherwise trade in any stocks, bonds, and other securities or assets; and (ii) place orders and negotiate the commissions (if any) for the execution of transactions in securities with or through PAGE 2 such brokers, dealers, underwriters or issuers as the Manager may select. B. Financial, Accounting, and Administrative Services. The Manager shall maintain the corporate existence and corporate records of the Fund; maintain the registrations and qualifications of Fund shares under federal and state law; monitor the financial, accounting, and administrative functions of the Fund; maintain liaison with the various agents employed by the Fund (including the Fund's transfer agent, custodian, independent accountants and legal counsel) and assist in the coordination of their activities on behalf of the Fund. C. Reports to Fund. The Manager shall furnish to or place at the disposal of the Fund such information, reports, evaluations, analyses and opinions as the Fund may, at any time or from time to time, reasonably request or as the Manager may deem helpful to the Fund. D. Reports and Other Communications to Fund Shareholders. The Manager shall assist the Fund in developing all general shareholder communications, including regular shareholder reports. E. Fund Personnel. The Manager agrees to permit individuals who are officers or employees of the Manager to serve (if duly elected or appointed) as officers, directors, members of any committee of directors, members of any advisory board, or members of any other committee of the Fund, without remuneration from or other cost to the Fund. F. Personnel, Office Space, and Facilities of Manager. The Manager at its own expense shall furnish or provide and pay the cost of such office space, office equipment, office personnel, and office services as the Manager requires in the performance of its investment advisory and other obligations under this Agreement. 2. Allocation of Expenses. A. Expenses Paid by Manager. (1) Salaries and Fees of Officers. The Manager shall pay all salaries, expenses, and fees of the officers and directors of the Fund who are affiliated with the Manager. (2) Assumption of Fund Expenses by Manager. The payment or assumption by the Manager of any expense of the Fund that the Manager is not required by this Agreement to pay or assume shall not obligate the Manager to pay or assume the same or any similar expense of the Fund on any subsequent occasion. B. Expenses Paid by Fund. The Fund shall bear all expenses of its organization, operations, and business not specifically assumed or agreed to be paid by the Manager as provided in this Agreement. In particular, but without limiting the generality of the foregoing, the Fund shall pay: (1) Custody and Accounting Services. All expenses of the transfer, receipt, safekeeping, servicing and accounting for the Fund's cash, securities, and other property, including all charges of depositories, custodians, and other agents, if any; (2) Shareholder Servicing. All expenses of maintaining and servicing shareholder accounts, including all charges of the PAGE 3 Fund's transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents, if any; (3) Shareholder Communications. All expenses of preparing, setting in type, printing, and distributing reports and other communications to shareholders; (4) Shareholder Meetings. All expenses incidental to holding meetings of Fund shareholders, including the printing of notices and proxy material, and proxy solicitation therefor; (5) Prospectuses. All expenses of preparing, setting in type, and printing of annual or more frequent revisions of the Fund's prospectus and of mailing them to shareholders; (6) Pricing. All expenses of computing the Fund's net asset value per share, including the cost of any equipment or services used for obtaining price quotations; (7) Communication Equipment. All charges for equipment or services used for communication between the Manager or the Fund and the custodian, transfer agent or any other agent selected by the Fund; (8) Legal and Accounting Fees and Expenses. All charges for services and expenses of the Fund's legal counsel and independent auditors; (9) Directors' Fees and Expenses. All compensation of directors, other than those affiliated with the Manager, and all expenses incurred in connection with their service; (10) Federal Registration Fees. All fees and expenses of registering and maintaining the registration of the Fund under the Act and the registration of the Fund's shares under the Securities Act of 1933, as amended (the "'33 Act"), including all fees and expenses incurred in connection with the preparation, setting in type, printing, and filing of any registration statement and prospectus under the '33 Act or the Act, and any amendments or supplements that may be made from time to time; (11) State Registration Fees. All fees and expenses of qualifying and maintaining qualification of the Fund and of the Fund's shares for sale under securities laws of various states or jurisdictions, and of registration and qualification of the Fund under all other laws applicable to the Fund or its business activities (including registering the Fund as a broker-dealer, or any officer of the Fund or any person as agent or salesman of the Fund in any state); (12) Issue and Redemption of Fund Shares. All expenses incurred in connection with the issue, redemption, and transfer of Fund shares, including the expense of confirming all share transactions, and of preparing and transmitting the Fund's stock certificates; (13) Bonding and Insurance. All expenses of bond, liability, and other insurance coverage required by law or deemed advisable by the Fund's board of directors; PAGE 4 (14) Brokerage Commissions. All brokers' commissions and other charges incident to the purchase, sale, or lending of the Fund's portfolio securities; (15) Taxes. All taxes or governmental fees payable by or with respect of the Fund to federal, state, or other governmental agencies, domestic or foreign, including stamp or other transfer taxes; (16) Trade Association Fees. All fees, dues, and other expenses incurred in connection with the Fund's membership in any trade association or other investment organization; and (17) Nonrecurring and Extraordinary Expenses. Such nonrecurring expenses as 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 legal obligation to provide indemnification to its officers, directors, and agents. 3. Management Fee. The Fund shall pay the Manager a fee ("Fee") which will consist of two components: a Group Management Fee ("Group Fee"), and an Individual Fund Fee ("Fund Fee"). The Fee shall be paid monthly to the Manager on the first business day of the next succeeding calendar month and shall be calculated as follows: A. Group Fee. The monthly Group Fee ("Monthly Group Fee") shall be the sum of the daily Group Fee accruals ("Daily Group Fee Accruals") for each month. The Daily Group Fee Accrual for any particular day will be computed by multiplying the Price Funds' group fee accrual as determined below ("Daily Price Funds' Group Fee Accrual") by the ratio of the Fund's net assets for that day to the sum of the aggregate net assets of the Price Funds for that day. The Daily Price Funds' Group Fee Accrual for any particular day shall be calculated by multiplying the fraction of one (1) over the number of calendar days in the year by the annualized Daily Price Funds' Group Fee Accrual for that day as determined in accordance with the following schedule: Price Funds Annual Group Base Fee Rate for Each Level of Assets ______________________________________ 0.480% First $1 billion 0.450% Next $1 billion 0.420% Next $1 billion 0.390% Next $1 billion 0.370% Next $1 billion 0.360% Next $2 billion 0.350% Next $2 billion 0.340% Next $5 billion 0.330% Next $10 billion 0.320% Thereafter The Price Funds shall include all the mutual funds distributed by T. Rowe Price Investment Services, Inc. (except for the T. Rowe Price Institutional Trust and any private label mutual funds). For the purpose of calculating the Daily Price Funds' Group Fee Accrual for any particular day, the net assets of each Price Fund shall be determined in accordance with the Fund's prospectus as of the close of business on the previous business day on which the Fund was open for business. PAGE 5 B. Fund Fee. The monthly Fund Fee ("Monthly Fund Fee") shall be the sum of the daily Fund Fee accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee Accrual for any particular day will be computed by multiplying the fraction of one (1) over the number of calendar days in the year by the Fund Fee Rate of 0.15% and multiplying this product by the net assets of the Fund for that day, as determined in accordance with the Fund's prospectus as of the close of business on the previous business day on which the Fund was open for business. C. Expense Limitation. To the extent that the aggregate expenses of every character incurred by the Fund in any fiscal year, including but not limited to Fees of the Manager computed as hereinabove set forth, but excluding interest, taxes, brokerage, and other expenditures which are capitalized in accordance with generally accepted accounting principles and extraordinary expenses, shall exceed the limit ("State Expense Limit") prescribed by any state in which the Fund's shares are qualified for sale, such excess amount shall be the liability of the Manager to pay in the manner specified below. To determine the Manager's liability for the Fund's expenses, the expenses of the Fund shall be annualized monthly as of the last day of the month. If the annualized expenses for any month exceed the State Expense Limit, the payment of the Fee for such month (if there be any) shall be reduced by such excess ("Excess Amount") and in the event the Excess Amount exceeds the amount due as the Fee, the Manager shall remit to the Fund the difference between the Excess Amount and the amount due as the Fee; provided, however, that an adjustment shall be made on or before the last day of the first month of the next succeeding fiscal year if the aggregate expenses for the fiscal year do not exceed the State Expense Limit. D. Proration of Fee. If this Agreement becomes effective or terminates before the end of any month, the Fee for the period from the effective date to the end of such month or from the beginning of such month to the date of termination, as the case may be, shall be prorated according to the proportion which such period bears to the full month in which such effectiveness or termination occurs. 4. Brokerage. Subject to the approval of the board of directors of the Fund, the Manager, in carrying out its duties under Paragraph 1.A., may cause the Fund to pay a broker-dealer which furnishes brokerage or research services [as such services are defined under Section 28(e) of the Securities Exchange Act of l934, as amended (the "'34 Act")], a higher commission than that which might be charged by another broker-dealer which does not furnish brokerage or research services or which furnishes brokerage or research services deemed to be of lesser value, if such commission is deemed reasonable in relation to the brokerage and research services provided by the broker- dealer, viewed in terms of either that particular transaction or the overall responsibilities of the Manager with respect to the accounts as to which it exercises investment discretion (as such term is defined under Section 3(a)(35) of the '34 Act). 5. Manager's Use of the Services of Others. The Manager may (at its cost except as contemplated by Paragraph 4 of this Agreement) employ, retain or otherwise avail itself of the services or facilities of other persons or organizations for the purpose of providing the Manager or the Fund with such statistical and other factual information, such advice regarding economic factors and trends, such advice as to occasional transactions in specific securities or such other information, advice or assistance as the Manager may deem necessary, appropriate or convenient for the discharge of its obligations hereunder or otherwise helpful to the Fund, or in the discharge of Manager's overall responsibilities with respect to the other accounts which it serves as investment manager. PAGE 6 6. Ownership of Records. All records required to be maintained and preserved by the Fund pursuant to the provisions of rules or regulations of the Securities and Exchange Commission under Section 31(a) of the Act and maintained and preserved by the Manager on behalf of the Fund are the property of the Fund and will be surrendered by the Manager promptly on request by the Fund. 7. Reports to Manager. The Fund shall furnish or otherwise make available to the Manager such prospectuses, financial statements, proxy statements, reports, and other information relating to the business and affairs of the Fund as the Manager may, at any time or from time to time, reasonably require in order to discharge its obligations under this Agreement. 8. Services to Other Clients. Nothing herein contained shall limit the freedom of the Manager or any affiliated person of the Manager to render investment supervisory and corporate administrative services to other investment companies, to act as investment manager or investment counselor to other persons, firms or corporations, or to engage in other business activities; but so long as this Agreement or any extension, renewal or amendment hereof shall remain in effect or until the Manager shall otherwise consent, the Manager shall be the only investment manager to the Fund. 9. Limitation of Liability of Manager. Neither the Manager nor any of its officers, directors, or employees, nor any person performing executive, administrative, trading, or other functions for the Fund (at the direction or request of the Manager) or the Manager in connection with the Manager's discharge of its obligations undertaken or reasonably assumed with respect to this Agreement, shall be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which this Agreement relates, except for loss resulting from willful misfeasance, bad faith, or gross negligence in the performance of its or his duties on behalf of the Fund or from reckless disregard by the Manager or any such person of the duties of the Manager under this Agreement. 10. Use of Manager's Name. The Fund may use the name "T. Rowe Price New Income Fund, Inc." or any other name derived from the name "T. Rowe Price" only for so long as this Agreement or any extension, renewal or amendment hereof remains in effect, including any similar agreement with any organization which shall have succeeded to the business of the Manager as investment manager. At such time as this Agreement or any extension, renewal or amendment hereof, or such other similar agreement shall no longer be in effect, the Fund will (by corporate action, if necessary) cease to use any name derived from the name "T. Rowe Price," any name similar thereto or any other name indicating that it is advised by or otherwise connected with the Manager, or with any organization which shall have succeeded to the Manager's business as investment manager. 11. Term of Agreement. The term of this Agreement shall begin on the date first above written, and unless sooner terminated as hereinafter provided, this Agreement shall remain in effect through April 30, l988. Thereafter, this Agreement shall continue in effect from year to year, subject to the termination provisions and all other terms and conditions hereof, so long as: (a) such continuation shall be specifically approved at least annually by the board of directors of the Fund or by vote of a majority of the outstanding voting securities of the Fund and, concurrently with such approval by the board of directors or prior to such approval by the holders of the outstanding voting securities of the Fund, as the case may be, by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the directors of the Fund who are not parties to this Agreement or interested persons of any such party; and (b) the Manager shall PAGE 7 not have notified the Fund, in writing, at least 60 days prior to April 30, 1988 or prior to April 30th of any year thereafter, that it does not desire such continuation. The Manager shall furnish to the Fund, promptly upon its request, such information as may reasonably be necessary to evaluate the terms of this Agreement or any extension, renewal or amendment hereof. 12. Amendment and Assignment of Agreement. This Agreement may not be amended or assigned without the affirmative vote of a majority of the outstanding voting securities of the Fund, and this Agreement shall automatically and immediately terminate in the event of its assignment. 13. Termination of Agreement. This Agreement may be terminated by either party hereto, without the payment of any penalty, upon 60 days' prior notice in writing to the other party; provided, that in the case of termination by the Fund such action shall have been authorized by resolution of a majority of the directors of the Fund who are not parties to this Agreement or interested persons of any such party, or by vote of a majority of the outstanding voting securities of the Fund. 14. Miscellaneous. A. Captions. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. B. Interpretation. Nothing herein contained shall be deemed to require the Fund to take any action contrary to its Articles of Incorporation or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the board of directors of the Fund of its responsibility for and control of the conduct of the affairs of the Fund. C. Definitions. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the Act shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States courts or, in the absence of any controlling decision of any such court, by rules, regulations or orders of the Securities and Exchange Commission validly issued pursuant to the Act. Specifically, the terms "vote of a majority of the outstanding voting securities," "interested person," "assignment," and "affiliated person," as used in Paragraphs 2, 8, 11, 12, and 13 hereof, shall have the meanings assigned to them by Section 2(a) of the Act. In addition, where the effect of a requirement of the Act reflected in any provision of this Agreement is relaxed by a rule, regulation or order of the Securities and Exchange Commission, whether of special or of general application, such provision shall be deemed to incorporate the effect of such rule, regulation or order. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto affixed, as of the day and year first above written. Attest: T. ROWE PRICE NEW INCOME FUND, INC. /s/Lenora V. Hornung /s/George J. Collins ______________________________ By:_______________________________ Secretary PAGE 8 Attest: T. ROWE PRICE ASSOCIATES, INC. /s/Mary Louise Williams /s/James S. Riepe ______________________________ By:_______________________________ Secretary EX-99.B6-UNDERWRT 7 PAGE 1 UNDERWRITING AGREEMENT BETWEEN T. ROWE PRICE NEW INCOME FUND, INC. AND T. ROWE PRICE MARKETING, INC. THIS UNDERWRITING AGREEMENT, made as of 1st day of May, 1981, by and between T. ROWE PRICE NEW INCOME FUND, INC., a corporation organized and existing under the laws of the State of Maryland (hereinafter called the "Fund"), and T. ROWE PRICE MARKETING, INC., a corporation organized and existing under the laws of the State of Maryland (hereinafter called the "Distributor"). WITNESSETH: WHEREAS, the Fund is engaged in business as an open-end management investment company and is registered as such under the federal Investment Company Act of 1940, as amended ("ICA-40"); and WHEREAS, the Distributor proposes to engage principally in the business of distributing shares of the investment companies sponsored and managed by either T. Rowe Price Associates, Inc. ("Price Associates") or Rowe Price- Fleming International, Inc. ("Price-Fleming") and is registered as a broker- dealer under the Securities and Exchange Act of 1934, as amended, ("SEA-34") and is a member of the National Association of Securities Dealers, Inc. ("NASD"); and WHEREAS, the Fund desires the Distributor to act as the distributor in the public offering of its shares; NOW, THEREFORE, in consideration of the premises and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. Delivery of Fund Documents. The Fund has furnished Distributor with copies, properly certified or authenticated, of each of the following: (a) Articles of Incorporation, dated August 14, 1973, as amended to date. (b) By-Laws of the Fund as in effect on the date hereof. (c) Resolutions of the Board of Directors of the Fund selecting Distributor as principal underwriter and approving this form of agreement. The Fund shall furnish the Distributor from time to time with copies, properly certified or authenticated, of all the amendments of, or supplements to, the foregoing, if any. The Fund shall furnish Distributor promptly with properly certified or authenticated copies of any registration statements filed by it with the Securities and Exchange Commission under the Securities Act of 1933, as amended, ("SA-33") or ICA-40, together with any financial statements and exhibits included therein, and all amendments or supplements thereto hereafter filed. PAGE 2 2. Sale of Shares. Subject to the provisions of Paragraphs 3, 4 and 6 hereof, and to such minimum purchase requirements as may from time to time be currently indicated in the Fund's Prospectus, the Distributor is authorized to sell, as agent on behalf of the Fund, shares of the Fund's capital stock ("Shares") authorized for issuance and registered under SA-33. Distributor may also sell Shares under offers of exchange between and among the investment companies for which Price Associates and/or Price-Fleming act as investment advisers ("Price Funds"). Distributor may also purchase as principal such Shares for resale to the public. Such sale will be made by Distributor on behalf of the Fund by accepting unconditional orders to purchase the Shares placed with Distributor by investors and such purchases will be made by Distributor only after acceptance by Distributor of such orders. The sales price to the public of such Shares shall be the public offering price as defined in Paragraph 5 hereof. 3. Sale of Shares by Fund. The rights granted to the Distributor shall be non-exclusive in that the Fund reserves the right to sell its Shares to investors pursuant to applications received and accepted by the Fund or its transfer agent. Further, the Fund reserves the right to issue Shares in connection with the merger or consolidation of any other investment company, trust or personal holding company with the Fund or the Fund's acquisition by the purchase or otherwise, of all or substantially all of the assets of an investment company, trust or personal holding company. Any right granted to Distributor to accept orders for Shares, or to make sales on behalf of the Fund or to purchase Shares for resale, will not apply to Shares issued in connection with the merger or consolidation of any other investment company with the Fund or its acquisition by purchase or otherwise, of all or substantially all of the assets of any investment company, trust or personal holding company, or substantially all of the outstanding shares or interests of any such entity, and such right shall not apply to Shares that may be offered by the Fund to shareholders by virtue of their being shareholders of the Fund. 4. Shares Covered by this Agreement. This Agreement relates to the issuance and sale of Shares that are duly authorized and registered and available for sale by the Fund, including redeemed or repurchased Shares if and to the extent that they may be legally sold and if, but only if, the Fund authorizes the Distributor to sell them. 5. Public Offering Price. All Shares sold by the Distributor pursuant to this Agreement shall be sold at the public offering price. The public offering price for all accepted subscriptions will be the net asset value per share, as determined in the manner provided in the Fund's Articles of Incorporation, as now in effect, or as they may be amended (and as reflected in the Fund's then current Prospectus), next after the order is accepted by the Distributor. The Distributor will process orders submitted by brokers for the sale of Shares at the public offering price exclusive of any commission charged by such broker to his customer. 6. Suspension of Sales. If and whenever the determination of net asset value is suspended and until such suspension is terminated, no further orders for Shares shall be accepted by the Distributor except such unconditional orders placed with Distributor before it had knowledge of the suspension. In addition, the Fund reserves the right to suspend sales and Distributor's authority to accept orders for Shares on behalf of the Fund if, in the judgment of the Board of Directors of the Fund, it is in the best interests of the Fund to do so, such suspension to continue for such period as may be determined by the Board of Directors of the Fund; and in that event, no orders to purchase Shares shall be processed or accepted by the Distributor on behalf of the Fund while such suspension remains in effect except for Shares PAGE 3 necessary to cover unconditional orders accepted by Distributor before it had knowledge of the suspension, unless otherwise directed by the Board of Directors of the Fund. 7. Solicitation of Orders. In consideration of the rights granted to the Distributor under this Agreement, Distributor will use its best efforts (but only in states in which Distributor may lawfully do so) to obtain from investors unconditional orders for Shares authorized for issuance by the Fund and registered under SA-33, provided that Distributor may in its discretion reject any order to purchase shares. This does not obligate the Distributor to register or maintain its registration as a broker or dealer under the state securities laws of any jurisdiction if, in the discretion of the Distributor, such registration is not practical or feasible. The Fund shall make available to the Distributor at the expense of the Distributor such number of copies of the Fund's currently effective Prospectus as the Distributor may reasonably request. The Fund shall furnish to the Distributor copies of all information, financial statements and other papers which the Distributor may reasonably request for use in connection with the distribution of Shares. 8. Authorized Representations. The Fund is not authorized by the Distributor to give on behalf of the Distributor any information or to make any representations other than the information and representations contained in a registration statement or prospectus filed with the SEC under SA-33 and/or ICA-40, covering Shares, as such registration statement and prospectus may be amended or supplemented from time to time. Distributor is not authorized by the Fund to give on behalf of the Fund any information or to make any representations in connection with the sale of Shares other than the information and representations contained in a registration statement or prospectus filed with the Securities and Exchange Commission ("SEC") under SA-33 and/or ICA-40, covering Shares, as such registration statement and prospectus may be amended or supplemented from time to time, or contained in shareholder reports or other material that may be prepared by or on behalf of the Fund for the Distributor's use. This shall not be construed to prevent the Distributor from preparing and distributing tombstone ads and sales literature or other material as it may deem appropriate. No person other than Distributor is authorized to act as principal underwriter (as such term is defined in ICA-40, as amended) for the Fund. 9. Registration and Sale of Additional Shares. The Fund will, from time to time, use its best efforts to register under SA-33, such Shares of the Fund as Distributor may reasonably be expected to sell on behalf of the Fund. In connection therewith, the Fund hereby agrees to register an indefinite number of Shares pursuant to Rule 24f-2 under ICA-40, and to register such Shares as shall be deemed advisable pursuant to Rule 24e-2 under ICA-40, as amended. The Fund will, in cooperation with the Distributor, take such action as may be necessary from time to time to qualify such Shares (so registered or otherwise qualified for sale under SA-33), in any state mutually agreeable to the Distributor and the Fund, and to maintain such qualification. 10. Expenses. The Fund shall pay all fees and expenses: a. in connection with the preparation, setting in type and filing of any registration statement and prospectus under SA-33 and/or ICA-40, and any amendments or supplements that may be made from time to time; b. in connection with the registration and qualification of Shares for sale in the various states in which the Fund PAGE 4 shall determine it advisable to qualify such Shares for sale. (Including registering the Fund as a broker or dealer or any officer of the Fund or other person as agent or salesman of the Fund in any state.); c. of preparing, setting in type, printing and mailing any report or other communication to shareholders of the Fund in their capacity as such; d. of preparing, setting in type, printing and mailing Prospectuses annually to existing shareholders; e. in connection with the issue and transfer of Shares resulting from the acceptance by Distributor of orders to purchase Shares placed with the Distributor by investors, including the expenses of confirming such purchase orders; and f. of any issue taxes or (in the case of Shares redeemed) any initial transfer taxes. The Distributor shall pay (or will enter into arrangements providing that persons other than Distributor shall pay) all fees and expenses: a. of printing and distributing any Prospectuses or reports prepared for its use in connection with the distribution of Shares to the public; b. of preparing, setting in type, printing and mailing any other literature used by the Distributor in connection with the distribution of the Shares to the public; c. of advertising in connection with the distribution of such Shares to the public; d. incurred in connection with its registration as a broker or dealer or the registration or qualification of its officers, directors or representatives under Federal and state laws; and e. incurred in connection with the sale and offering for sale of Shares which have not been herein specifically allocated to the Fund. 11. Conformity With Law. Distributor agrees that in selling Shares it shall duly conform in all respects with the laws of the United States and any state in which such Shares may be offered for sale by Distributor pursuant to this Agreement and to the rules and regulations of the NASD. 12. Independent Contractor. Distributor shall be an independent contractor and neither Distributor, nor any of its officers, directors, employees, or representatives is or shall be an employee of the Fund in the performance of Distributor's duties hereunder. Distributor shall be responsible for its own conduct and the employment, control, and conduct of its agents and employees and for injury to such agents or employees or to others through its agents or employees. Distributor assumes full responsibility for its agents and employees under applicable statutes and agrees to pay all employee taxes thereunder. PAGE 5 13. Indemnification. Distributor agrees to indemnify and hold harmless the Fund and each of its directors, officers, employees, representatives and each person, if any, who controls the Fund within the meaning of Section 15 of SA-33 against any and all losses, liabilities, damages, claims or expenses (including the reasonable costs of investigating or defending any alleged loss, liability, damage, claim or expense and reasonable legal counsel fees incurred in connection therewith) to which the Fund or such of its directors, officers, employees, representatives or controlling person may become subject under SA-33, under any other statute, at common law, or otherwise, arising out of the acquisition of any Shares by any person which (i) may be based upon any wrongful act by Distributor or any of Distributor's directors, officers, employees or representatives, or (ii) may be based upon any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, shareholder report or other information covering Shares filed or made public by the Fund or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon information furnished to the Fund by Distributor. In no case (i) is Distributor's indemnity in favor of the Fund, or any person indemnified to be deemed to protect the Fund or such indemnified person against any liability to which the Fund or such person would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of his duties or by reason of his reckless disregard of his obligations and duties under this Agreement or (ii) is Distributor to be liable under its indemnity agreement contained in this Paragraph with respect to any claim made against the Fund or any person indemnified unless the Fund or such person, as the case may be, shall have notified Distributor in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon the Fund or upon such person (or after the Fund or such person shall have received notice of such service on any designated agent). However, failure to notify Distributor of any such claim shall not relieve Distributor from any liability which Distributor may have to the Fund or any person against whom such action is brought otherwise than on account of Distributor's indemnity agreement contained in this Paragraph. Distributor shall be entitled to participate, at its own expense, in the defense, or, if Distributor so elects, to assume the defense of any suit brought to enforce any such claim, but, if Distributor elects to assume the defense, such defense shall be conducted by legal counsel chosen by Distributor and satisfactory to the Fund, to its directors, officers, employees or representatives, or to any controlling person or persons, defendant or defendants, in the suit. In the event that Distributor elects to assume the defense of any such suit and retain such legal counsel, the Fund, its directors, officers, employees, representatives or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional legal counsel retained by them. If Distributor does not elect to assume the defense of any such suit, Distributor will reimburse the Fund, such directors, officers, employees, representatives or controlling person or persons, defendant or defendants in such suit for the reasonable fees and expenses of any legal counsel retained by them. Distributor agrees to promptly notify the Fund of the commencement of any litigation or proceedings against it or any of its directors, officers, employees or representatives in connection with the issue or sale of any Shares. The Fund agrees to indemnify and hold harmless Distributor and each of its directors, officers, employees, representatives and each person, if any, who controls Distributor within the meaning of Section 15 of SA-33 against any and all losses, liabilities, damages, claims or expenses PAGE 6 (including the reasonable costs of investigating or defending any alleged loss, liability, damage, claim or expense and reasonable legal counsel fees incurred in connection therewith) to which Distributor or such of its directors, officers, employees, representatives or controlling person may become subject under SA-33, under any other statute, at common law, or otherwise, arising out of the acquisition of any Shares by any person which (i) may be based upon any wrongful act by the Fund or any of Fund's directors, officers, employees or representatives, or (ii) may be based upon any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, shareholder report or other information covering Shares filed or made public by the Fund or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon information furnished to Distributor by the Fund. In no case (i) is the Fund's indemnity in favor of the Distributor, or any person indemnified to be deemed to protect the Distributor or such indemnified person against any liability to which the Distributor or such person would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of his duties or by reason of his reckless disregard of his obligations and duties under this Agreement, or (ii) is the Fund to be liable under its indemnity agreement contained in this Paragraph with respect to any claim made against Distributor, or person indemnified unless Distributor, or such person, as the case may be, shall have notified the Fund in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon Distributor or upon such person (or after Distributor or such person shall have received notice of such service on any designated agent). However, failure to notify the Fund of any such claim shall not relieve the Fund from any liability which the fund may have to Distributor or any person against whom such action is brought otherwise than on account of the Fund's indemnity agreement contained in this Paragraph. The Fund shall be entitled to participate, at its own expense, in the defense, or, if the Fund so elects, to assume the defense of any suit brought to enforce any such claim, but, if the Fund elects to assume the defense, such defense shall be conducted by legal counsel chosen by the Fund and satisfactory to Distributor, to its directors, officers, employees or representatives, or to any controlling person or persons, defendant or defendants, in the suit. In the event that the Fund elects to assume the defense of any such suit and retain such legal counsel, Distributor, its directors, officers, employees, representatives or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional legal counsel retained by them. If the Fund does not elect to assume the defense of any such suit, the Fund will reimburse Distributor, such directors, officers, employees, representatives or controlling person or persons, defendant or defendants in such suit for the reasonable fees and expenses of any legal counsel retained by them. The Fund agrees to promptly notify Distributor of the commencement of any litigation or proceedings against it or any of its directors, officers, employees or representatives in connection with the issue or sale of any Shares. 14. Duration and Termination of This Agreement. This Agreement shall become effective upon its execution ("effective date") and, unless terminated as provided, shall remain in effect through April 30, 1982, and from year to year thereafter, but only so long as such continuance is specifically approved at least annually by the vote of a majority of the directors of the Fund who are not interested persons of Distributor or of the Fund, cast in person at a meeting called for the purpose of voting on such approval, and by vote of the PAGE 7 directors of the Fund or of a majority of the outstanding voting securities of the Fund. This Agreement may, on 60 days' written notice, be terminated at any time, without the payment of any penalty, by the vote of a majority of the directors of the Fund who are not interested persons of Distributor or the Fund, by a vote of a majority of the outstanding voting securities of the Fund, or by Distributor. This Agreement will automatically terminate in the event of its assignment. In interpreting the provisions of this Paragraph 3, the definitions contained in Section 2(a) of ICA-40 (particularly the definitions of "interested person", "assignment", and "majority of the outstanding voting securities") shall be applied. 15. Amendment of this Agreement. No provisions of this Agreement may be changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge, or termination is sought. If the Fund should at any time deem it necessary or advisable in the best interests of the Fund that any amendment of this Agreement be made in order to comply with the recommendations or requirements of the SEC or other governmental authority or to obtain any advantage under state or Federal tax laws and notifies Distributor of the form of such amendment, and the reasons therefor, and if Distributor should decline to assent to such amendment, the Fund may terminate this Agreement forthwith. If Distributor should at any time request that a change be made in the Fund's Articles of Incorporation or By-Laws or in its methods of doing business, in order to comply with any requirements of Federal law or regulations of the SEC, or of a national securities association of which Distributor is or may be a member relating to the sale of Shares, and the Fund should not make such necessary change within a reasonable time, Distributor may terminate this Agreement forthwith. 16. Miscellaneous. It is understood and expressly stipulated that neither the shareholders of the Fund, nor the directors of the Fund shall be personally liable hereunder. The captions in this Agreement are included for convenience of reference only, and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17. Notice. Any notice required or permitted to be given by either party to the other shall be deemed sufficient if sent by registered or certified mail, postage prepaid, addressed by the party giving notice to the other party at the last address furnished by the other party to the party giving notice: if to the Fund, at 100 East Pratt Street, Baltimore, Maryland 21202, and if to the Distributor, at 100 East Pratt Street, Baltimore, Maryland 21202. ATTEST: T. ROWE PRICE NEW INCOME FUND, INC. /s/Lenora V. Hornung By: /s/ Lenora V. Hornung _________________________ Secretary President ATTEST: T. ROWE PRICE MARKETING, INC. /s/Mary Louise Williams By: /s/Thomas C. Barry Mary Louise Williams Thomas C. Barry Secretary President EX-99.B8A-CUSTODIAN 8 CUSTODIAN AGREEMENT The Custodian Agreement dated September 28, 1987, as amended, between State Street Bank and Trust Company and T. Rowe Price Funds should be inserted here. PAGE 1 CUSTODIAN CONTRACT Between STATE STREET BANK AND TRUST COMPANY and EACH OF THE PARTIES INDICATED ON APPENDIX A DATED: SEPTEMBER 28, 1987 FRF 07/87 PAGE 2 TABLE OF CONTENTS 1. Employment of Custodian and Property to be Held By It1 2. Duties of the Custodian with Respect to Property of the Fund Held by the Custodian in the United States.. . . . 2 2.1 Holding Securities. . . . . . . . . . . . . . . 2 2.2 Delivery of Securities. . . . . . . . . . . . . 2 1) Sale . . . . . . . . . . . . . . . . . . . 2 2) Repurchase Agreement . . . . . . . . . . . 2 3) Securities System. . . . . . . . . . . . . 3 4) Tender Offer . . . . . . . . . . . . . . . 3 5) Redemption by Issuer . . . . . . . . . . . 3 6) Transfer to Issuer, Nominee, Exchange. . . 3 7) Sale to Broker . . . . . . . . . . . . . . 3 8) Exchange or Conversion . . . . . . . . . . 4 9) Warrants, Rights . . . . . . . . . . . . . 4 10) Loans of Securities. . . . . . . . . . . . 4 11) Borrowings . . . . . . . . . . . . . . . . 4 12) Options. . . . . . . . . . . . . . . . . . 5 13) Futures. . . . . . . . . . . . . . . . . . 5 14) In-Kind Distributions. . . . . . . . . . . 5 15) Miscellaneous. . . . . . . . . . . . . . . 5 16) Type of Payment. . . . . . . . . . . . . . 6 2.3 Registration of Securities. . . . . . . . . . . 6 2.4 Bank Accounts . . . . . . . . . . . . . . . . . 7 2.5 Sale of Shares and Availability of Federal Funds7 2.6 Collection of Income, Dividends . . . . . . . . 7 2.7 Payment of Fund Monies. . . . . . . . . . . . . 8 1) Purchases. . . . . . . . . . . . . . . . . 8 2) Exchanges. . . . . . . . . . . . . . . . . 9 3) Redemptions. . . . . . . . . . . . . . . . 9 4) Expense and Liability. . . . . . . . . . . 9 5) Dividends. . . . . . . . . . . . . . . . . 9 6) Short Sale Dividend. . . . . . . . . . . .10 7) Loan . . . . . . . . . . . . . . . . . . .10 8) Miscellaneous. . . . . . . . . . . . . . .10 2.8 Liability for Payment in Advance of Receipt of Securities Purchased. . . . . . . . . . . . .10 2.9 Appointment of Agents . . . . . . . . . . . . .10 2.10 Deposit of Securities in Securities System. . .10 1) Account of Custodian . . . . . . . . . . .11 2) Records. . . . . . . . . . . . . . . . . .11 3) Payment of Fund Monies, Delivery of Securities . . . . . . . . . . . . . . .11 4) Reports. . . . . . . . . . . . . . . . . .12 5) Annual Certificate . . . . . . . . . . . .12 6) Indemnification. . . . . . . . . . . . . .12 2.11 Fund Assets Held in the Custodian's Direct Paper System. . . . . . . . . . . . . . . . . . . .13 2.12 Segregated Account. . . . . . . . . . . . . . .14 PAGE 3 2.13 Ownership Certificates for Tax Purposes . . . .15 2.14 Proxies . . . . . . . . . . . . . . . . . . . .15 2.15 Communications Relating to Fund Portfolio Securities. . . . . . . . . . . . . . . . . .15 2.16 Reports to Fund by Independent Public Accountants . . . . . . . . . . . . . . . . .16 3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the United States. . .16 3.1 Appointment of Foreign Sub-Custodians . . . . .16 3.2 Assets to be Held . . . . . . . . . . . . . . .17 3.3 Foreign Securities Depositories . . . . . . . .17 3.4 Segregation of Securities . . . . . . . . . . .17 3.5 Access of Independent Accountants of the Fund .17 3.6 Reports by Custodian. . . . . . . . . . . . . .18 3.7 Transactions in Foreign Assets of the Fund. . .18 3.8 Responsibility of Custodian, Sub-Custodian and Fund. . . . . . . . . . . . . . . . . . . . .18 3.9 Monitoring Responsibilities . . . . . . . . . .19 3.10 Branches of U.S. Banks. . . . . . . . . . . . .19 4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund . . . . . . . . . . . . . . . .19 5. Proper Instructions. . . . . . . . . . . . . . . . .20 6. Actions Permitted Without Express Authority. . . . .21 7. Evidence of Authority, Reliance on Documents . . . .21 8. Duties of Custodian with Respect to the Books of Account and Calculations of Net Asset Value and Net Income22 9. Records, Inventory . . . . . . . . . . . . . . . . .22 10. Opinion of Fund's Independent Accountant . . . . . .23 11. Compensation of Custodian. . . . . . . . . . . . . .23 12. Responsibility of Custodian. . . . . . . . . . . . .23 13. Effective Period, Termination and Amendment. . . . .25 14. Successor Custodian. . . . . . . . . . . . . . . . .26 15. Interpretive and Additional Provisions . . . . . . .28 16. Notice . . . . . . . . . . . . . . . . . . . . . . .28 17. Bond . . . . . . . . . . . . . . . . . . . . . . . .28 18. Confidentiality. . . . . . . . . . . . . . . . . . .29 19. Exemption from Liens . . . . . . . . . . . . . . . .29 20. Massachusetts Law to Apply . . . . . . . . . . . . .29 21. Prior Contracts. . . . . . . . . . . . . . . . . . .29 22. The Parties. . . . . . . . . . . . . . . . . . . . .30 23. Governing Documents. . . . . . . . . . . . . . . . .30 24. Subcustodian Agreement . . . . . . . . . . . . . . .30 25. Directors and Trustees . . . . . . . . . . . . . . .30 26. Massachusetts Business Trust . . . . . . . . . . . .30 27. Successors of Parties. . . . . . . . . . . . . . . .31 PAGE 4 CUSTODIAN CONTRACT This Contract by and between State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 02110 (hereinafter called the "Custodian"), and each fund which is listed on Appendix A (as such Appendix may be amended from time to time) and which evidences its agreement to be bound hereby by executing a copy of this Contract (each such fund individually hereinafter called the "Fund," whose definition may be found in Section 22), WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows: 1. Employment of Custodian and Property to be Held by It The Fund hereby employs the Custodian as the custodian of its assets, including securities it desires to be held in places within the United States ("domestic securities") and securities it desires to be held outside the United States ("foreign securities") pursuant to the Governing Documents of the Fund. The Fund agrees to deliver to the Custodian all securities and cash now or hereafter owned or acquired by it, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Fund from time to time, and the cash consideration received by it for such new or treasury shares of capital stock ("Shares") of the Fund as may be issued or sold from time to time. The Custodian shall not be responsible for any property of the Fund held or received by the Fund and not delivered to the Custodian. With respect to domestic securities, upon receipt of "Proper Instructions" (within the meaning of Article 5), the Custodian shall from time to time employ one or more sub-custodians located in the United States, but only in accordance with an applicable vote by the Board of Directors/Trustees of the Fund, and provided that the Custodian shall have no more or less responsibility or liability to the Fund on account of any actions or omissions of any sub-custodian so employed than any such sub-custodian has to the Custodian, and further provided that the Custodian shall not release the sub-custodian from any responsibility or liability unless mutually agreed upon by the parties in writing. With respect to foreign securities and other assets of the Fund held outside the United States, the Custodian shall employ Chase Manhattan Bank, N.A., as a sub-custodian for the Fund in accordance with the provisions of Article 3. 2. Duties of the Custodian with Respect to Property of the Fund Held By the Custodian in the United States 2.1 Holding Securities. The Custodian shall hold and physically segregate for the account of the Fund all PAGE 5 non-cash property, to be held by it in the United States, including all domestic securities owned by the Fund, other than (a) securities which are maintained pursuant to Section 2.10 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of the Treasury, collectively referred to herein as "Securities System," and (b) commercial paper of an issuer for which the Custodian acts as issuing and paying agent ("Direct Paper") which is deposited and/or maintained in the Direct Paper System of the Custodian pursuant to Section 2.11. 2.2 Delivery of Securities. The Custodian shall release and deliver domestic securities owned by the Fund held by the Custodian or in a Securities System account of the Custodian or in the Custodian's Direct Paper book entry system account ("Direct Paper System Account") only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by mutual agreement of the parties, and only in the following cases: 1) Sale. Upon sale of such securities for the account of the Fund and receipt of payment therefor; 2) Repurchase Agreement. Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Fund; 3) Securities System. In the case of a sale effected through a Securities System, in accordance with the provisions of Section 2.10 hereof; 4) Tender Offer. To the depository agent or other receiving agent in connection with tender or other similar offers for portfolio securities of the Fund; 5) Redemption by Issuer. To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian; 6) Transfer to Issuer, Nominee. Exchange. To the issuer thereof, or its agent, for transfer into the name of the Fund or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.9 or into the name or nominee name of any sub-custodian appointed pursuant to Article 1; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units and bearing the same interest rate, maturity date and call provisions, PAGE 6 if any; provided that, in any such case, the new securities are to be delivered to the Custodian; 7) Sale to Broker or Dealer. Upon the sale of such securities for the account of the Fund, to the broker or its clearing agent or dealer, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's failure to act in accordance with its duties as set forth in Section 12. 8) Exchange or Conversion. For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization, split-up of shares, change of par value or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 9) Warrants, Rights. In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 10) Loans of Securities. For delivery in connection with any loans of securities made by the Fund, but only against receipt of adequate collateral as agreed upon from time to time by the Custodian and the Fund, which may be in the form of cash, obligations issued by the United States government, its agencies or instrumentalities, or such other property as mutually agreed by the parties, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian will not be held liable or responsible for the delivery of securities owned by the Fund prior to the receipt of such collateral, unless the Custodian fails to act in accordance with its duties set forth in Article 12; PAGE 7 11) Borrowings. For delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, but only against receipt of amounts borrowed, except where additional collateral is required to secure a borrowing already made, subject to Proper Instructions, further securities may be released for that purpose; 12) Options. For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The Options Clearing Corporation, any registered national securities exchange, any similar organization or organizations, or the Investment Company Act of 1940, regarding escrow or other arrangements in connection with transactions by the Fund; 13) Futures. For delivery in accordance with the provisions of any agreement among the Fund, the Custodian, and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, any similar organization or organizations, or the Investment Company Act of 1940, regarding account deposits in connection with transactions by the Fund; 14) In-Kind Distributions. Upon receipt of instructions from the transfer agent ("Transfer Agent") for the Fund, for delivery to such Transfer Agent or to the holders of shares in connection with distributions in kind, as may be described from time to time in the Fund's currently effective prospectus and statement of additional information ("prospectus"), in satisfaction of requests by holders of Shares for repurchase or redemption; 15) Miscellaneous. For any other proper corporate purpose, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors/Trustees or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, specifying the securities to be delivered, setting forth the purpose for which such delivery is to be made, declaring such PAGE 8 purpose to be a proper corporate purpose, and naming the person or persons to whom delivery of such securities shall be made; and 16) Type of Payment. In any or all of the above cases, payments to the Fund shall be made in cash, by a certified check upon or a treasurer's or cashier's check of a bank, by effective bank wire transfer through the Federal Reserve Wire System or, if appropriate, outside of the Federal Reserve Wire System and subsequent credit to the Fund's Custodian account, or, in case of delivery through a stock clearing company, by book-entry credit by the stock clearing company in accordance with the then current street custom, or such other form of payment as may be mutually agreed by the parties, in all such cases collected funds to be promptly credited to the Fund. 2.3 Registration of Securities. Domestic securities held by the Custodian (other than bearer securities) shall be registered in the name of the Fund or in the name of any nominee of the Fund or of any nominee of the Custodian which nominee shall be assigned exclusively to the Fund, unless the Fund has authorized in writing the appointment of a nominee to be used in common with other registered investment companies having the same investment adviser as the Fund, or in the name or nominee name of any agent appointed pursuant to Section 2.9 or in the name or nominee name of any sub-custodian appointed pursuant to Article 1. All securities accepted by the Custodian on behalf of the Fund under the terms of this Contract shall be in "street name" or other good delivery form. 2.4 Bank Accounts. The Custodian shall open and maintain a separate bank account or accounts in the United States in the name of the Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Contract, and shall hold in such account or accounts, subject to the provisions hereof all cash received by it from or for the account of the Fund, other than cash maintained by the Fund in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held by the Custodian for the Fund may be deposited for the Fund's credit in the Banking Department of the Custodian or in such other banks or trust companies as the Custodian may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified to act as a custodian under the Investment Company Act of 1940 and that each such bank or trust company and the funds to be deposited with each such bank or trust company shall be approved by vote of a majority of the Board of Directors/Trustees of the Fund. Such funds shall be PAGE 9 deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. 2.5 Sale of Shares and Availability of Federal Funds. Upon mutual agreement between the Fund and the Custodian, the Custodian shall, upon the receipt of Proper Instructions, make federal funds available to the Fund as of specified times agreed upon from time to time by the Fund and the Custodian in the amount of checks received in payment for Shares of the Fund which are deposited into the Fund's account. 2.6 Collection of Income, Dividends. The Custodian shall collect on a timely basis all income and other payments with respect to United States registered securities held hereunder to which the Fund shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to United States bearer securities if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income or other payments, as collected, to the Fund's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. The Custodian will also receive and collect all stock dividends, rights and other items of like nature as and when they become due or payable. Income due the Fund on United States securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is properly entitled. 2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by mutual agreement of the parties, the Custodian shall pay out monies of the Fund in the following cases only: 1) Purchases. Upon the purchase of domestic securities, options, futures contracts or options on futures contracts for the account of the Fund but only (a) against the delivery of such securities, or evidence of title to such options, futures contracts or options on futures contracts, to the Custodian (or any bank, banking firm or trust company doing business in the United States or abroad which is qualified under the Investment PAGE 10 Company Act of 1940, as amended, to act as a custodian and has been designated by the Custodian as its agent for this purpose in accordance with Section 2.9 hereof) registered in the name of the Fund or in the name of a nominee of the Fund or of the Custodian referred to in Section 2.3 hereof or in other proper form for transfer; (b) in the case of a purchase effected through a Securities System, in accordance with the conditions set forth in Section 2.10 hereof or (c) in the case of a purchase involving the Direct Paper System, in accordance with the conditions set forth in Section 2.11; or (d) in the case of repurchase agreements entered into between the Fund and the Custodian, or another bank, or a broker-dealer which is a member of NASD, (i) against delivery of the securities either in certificate form or through an entry crediting the Custodian's account at the Federal Reserve Bank with such securities or (ii) against delivery of the receipt evidencing purchase by the Fund of securities owned by the Custodian along with written evidence of the agreement by the Custodian to repurchase such securities from the Fund. All coupon bonds accepted by the Custodian shall have the coupons attached or shall be accompanied by a check payable on coupon payable date for the interest due on such date. 2) Exchanges. In connection with conversion, exchange or surrender of securities owned by the Fund as set forth in Section 2.2 hereof; 3) Redemptions. For the redemption or repurchase of Shares issued by the Fund as set forth in Article 4 hereof; 4) Expense and Liability. For the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: interest, taxes, management, accounting, transfer agent and legal fees, and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses; 5) Dividends. For the payment of any dividends or other distributions to shareholders declared pursuant to the Governing Documents of the Fund; 6) Short Sale Dividend. For payment of the amount of dividends received in respect of securities sold short; 7) Loan. For repayment of a loan upon redelivery of pledged securities and upon surrender of the PAGE 11 note(s), if any, evidencing the loan; 8) Miscellaneous. For any other proper purpose, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors/Trustees or of the Executive Committee of the Fund signed by an officer of the Fund and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom such payment is to be made. 2.8 Liability for Payment in Advance of Receipt of Securities Purchased. In any and every case where payment for purchase of domestic securities for the account of the Fund is made by the Custodian in advance of receipt of the securities purchased in the absence of specific written instructions from the Fund to so pay in advance, the Custodian shall be absolutely liable to the Fund for such securities to the same extent as if the securities had been received by the Custodian. 2.9 Appointment of Agents. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company, which is itself qualified under the Investment Company Act of 1940, as amended, to act as a custodian, as its agent to carry out such of the provisions of this Article 2 as the Custodian may from time to time direct; provided, however, that the appointment of any agent shall not relieve the Custodian of its responsibilities or liabilities hereunder. 2.10 Deposit of Securities in Securities Systems. The Custodian may deposit and/or maintain domestic securities owned by the Fund in a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934, which acts as a securities depository, or in the book-entry system authorized by the U.S. Department of the Treasury and certain federal agencies, collectively referred to herein as "Securities System" in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions: 1) Account of Custodian. The Custodian may keep domestic securities of the Fund in a Securities System provided that such securities are represented in an account ("Account") of the Custodian in the Securities System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise PAGE 12 for customers; 2) Records. The records of the Custodian, with respect to domestic securities of the Fund which are maintained in a Securities System, shall identify by book-entry those securities belonging to the Fund; 3) Payment of Fund Monies, Delivery of Securities. Subject to Section 2.7, the Custodian shall pay for domestic securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. Subject to Section 2.2, the Custodian shall transfer domestic securities sold for the account of the Fund upon (i) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of domestic securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Custodian and be provided to the Fund at its request. The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund; 4) Reports. The Custodian shall provide the Fund with any report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding domestic securities deposited in the Securities System, and further agrees to provide the Fund with copies of any documentation it has relating to its arrangements with the Securities Systems as set forth in this Agreement or as otherwise required by the Securities and Exchange Commission; 5) Annual Certificate. The Custodian shall have received the initial or annual certificate, as the case may be, required by Article 13 hereof; 6) Indemnification. Anything to the contrary in this Contract notwithstanding, the Custodian shall be liable to the Fund for any loss or expense, PAGE 13 including reasonable attorneys fees, or damage to the Fund resulting from use of the Securities System by reason of any failure by the Custodian or any of its agents or of any of its or their employees or agents or from failure of the Custodian or any such agent to enforce effectively such rights as it may have against the Securities System; at the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the Securities System or any other person which the Custodian may have as a consequence of any such loss, expense or damage if and to the extent that the Fund has not been made whole for any such loss, expense or damage. 2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian may deposit and/or maintain securities owned by the Fund in the Direct Paper System of the Custodian subject to the following provisions: 1) No transaction relating to securities in the Direct Paper System will be effected in the absence of Proper Instructions; 2) The Custodian may keep securities of the Fund in the Direct Paper System only if such securities are represented in an account ("Account") of the Custodian in the Direct Paper System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 3) The records of the Custodian with respect to securities of the Fund which are maintained in the Direct Paper System shall identify by book-entry those securities belonging to the Fund; 4) The Custodian shall pay for securities purchased for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such payment and transfer of securities to the account of the Fund. The Custodian shall transfer securities sold for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such transfer and receipt of payment for the account of the Fund; 5) The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund, in the form of a written advice or notice, of Direct Paper on the next business day following such transfer and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transaction in the Securities System for the account of the Fund; PAGE 14 6) The Custodian shall provide the Fund with any report on its system of internal accounting control as the Fund may reasonably request from time to time; 2.12 Segregated Account. The Custodian shall, upon receipt of Proper Instructions, which may be of a continuing nature where deemed appropriate by mutual agreement of the parties, establish and maintain a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of segregating cash or government securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchased or sold by the Fund, (iii) for the purposes of compliance by the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release, rule or policy, of the Securities and Exchange Commission relating to the maintenance of segregated accounts by registered investment companies and (iv) for other proper corporate purposes, but only, in the case of clause (iv), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors/Trustees or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper corporate purposes. 2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities of the Fund held by it and in connection with transfers of such securities. 2.14 Proxies. If the securities are registered other than in the name of the Fund or a nominee of the Fund, the Custodian shall, with respect to the domestic securities held hereunder, cause to be promptly executed by the PAGE 15 registered holder of such securities, all proxies, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such securities. 2.15 Communications Relating to Fund Portfolio Securities. The Custodian shall transmit promptly to the Fund all written information (including, without limitation, pendency of calls and maturities of domestic securities and expirations of rights in connection therewith and notices of exercise of call and put options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from issuers of the domestic securities being held for the Fund by the Custodian, an agent appointed under Section 2.9, or sub-custodian appointed under Section 1. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund all written information received by the Custodian, an agent appointed under Section 2.9, or sub-custodian appointed under Section 1 from issuers of the domestic securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian of such desired action at least 72 hours (excluding holidays and weekends) prior to the time such action must be taken under the terms of the tender, exchange offer, or other similar transaction, and it will be the responsibility of the Custodian to timely transmit to the appropriate person(s) the Fund's notice. Where the Fund does not notify the Custodian of its desired action within the aforesaid 72 hour period, the Custodian shall use its best efforts to timely transmit the Fund's notice to the appropriate person. 2.16 Reports to Fund by Independent Public Accountants. The Custodian shall provide the Fund, at such times as the Fund may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options on futures contracts, including domestic securities deposited and/or maintained in a Securities System, relating to the services provided by the Custodian under this Contract; such reports shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund to provide reasonable assurance that any material inadequacies existing or arising since the prior examination would be disclosed by such examination. The reports must describe any material inadequacies disclosed and, if there are no such inadequacies, the reports shall so state. PAGE 16 3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the United States 3.1 Appointment of Foreign Sub-Custodians. The Custodian is authorized and instructed to employ Chase Manhattan Bank, N.A, ("Chase") as sub-custodian for the Fund's securities, cash and other assets maintained outside of the United States ("foreign assets") all as described in the Subcustodian Agreement between the Custodian and Chase. Upon receipt of "Proper Instructions", together with a certified resolution of the Fund's Board of Directors/Trustees, the Custodian and the Fund may agree to designate additional proper institutions and foreign securities depositories to act as sub-custodians of the Fund's foreign assets. Upon receipt of Proper Instructions from the Fund, the Custodian shall cease the employment of any one or more of such sub-custodians for maintaining custody of the Fund's foreign assets. 3.2 Assets to be Held. The Custodian shall limit the foreign assets maintained in the custody of foreign sub- custodians to foreign assets specified under the terms of the Subcustodian Agreement between the Custodian and Chase. 3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in writing by the Custodian and the Fund, foreign assets of the Fund shall be maintained in foreign securities depositories only through arrangements implemented by the banking institutions serving as sub- custodians pursuant to the terms hereof. 3.4 Segregation of Securities. The Custodian shall identify on its books as belonging to the Fund, the foreign assets of the Fund held by Chase and by each foreign sub- custodian. 3.5 Access of Independent Accountants of the Fund. Upon request of the Fund, the Custodian will use its best efforts (subject to applicable law) to arrange for the independent accountants, officers or other representatives of the Fund or the Custodian to be afforded access to the books and records of Chase and any banking or other institution employed as a sub-custodian for the Fund by Chase or the Custodian insofar as such books and records relate to the performance of Chase or such banking or other institution under any agreement with the Custodian or Chase. Upon request of the Fund, the Custodian shall furnish to the Fund such reports (or portions thereof) of Chase's external auditors as are available to the Custodian and which relate directly to Chase's system of internal accounting controls applicable to Chase's duties as a subcustodian or which relate to the internal accounting controls of any subcustodian employed by Chase with respect to foreign assets of the Fund. PAGE 17 3.6 Reports by Custodian. The Custodian will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the foreign assets of the Fund held pursuant to the terms of the Subcustodian Agreement between the Custodian and Chase, including but not limited, to an identification of entities having possession of the Fund's foreign assets and advices or notifications of any transfers of foreign assets to or from each custodial account maintained by any sub-custodian on behalf of the Fund indicating, as to foreign assets acquired for the Fund, the identity of the entity having physical possession of such foreign assets. 3.7 Transactions in Foreign Assets of the Fund. All transactions with respect to the Fund's foreign assets shall be in accordance with, and subject to, the provisions of the Subcustodian Agreement between Chase and the Custodian. 3.8 Responsibility of Custodian, Sub-Custodian, and Fund. Notwithstanding anything to the contrary in this Custodian Contract, the Custodian shall not be liable to the Fund for any loss, damage, cost, expense, liability or claim arising out of or in connection with the maintenance of custody of the Fund's foreign assets by Chase or by any other banking institution or securities depository employed pursuant to the terms of any Subcustodian Agreement between Chase and the Custodian, except that the Custodian shall be liable for any such loss, damage, cost, expense, liability or claim to the extent provided in the Subcustodian Agreement between Chase and the Custodian or attributable to the failure of the Custodian to exercise the standard of care set forth in Article 12 hereof in the performance of its duties under this Contract or such Subcustodian Agreement. At the election of the Fund, the Fund shall be entitled to be subrogated to the rights of the Custodian under the Subcustodian Agreement with respect to any claims arising thereunder against Chase or any other banking institution or securities depository employed by Chase if and to the extent that the Fund has not been made whole therefor. As between the Fund and the Custodian, the Fund shall be solely responsible to assure that the maintenance of foreign securities and cash pursuant to the terms of the Subcustodian Agreement complies with all applicable rules, regulations, interpretations and orders of the Securities and Exchange Commission, and the Custodian assumes no responsibility and makes no representations as to such compliance. 3.9 Monitoring Responsibilities. With respect to the Fund's foreign assets, the Custodian shall furnish annually to the Fund, during the month of June, information concerning the sub-custodians employed by the Custodian. PAGE 18 Such information shall be similar in kind and scope to that furnished to the Fund in connection with the initial approval of this Contract. In addition, the Custodian will promptly inform the Fund in the event that the Custodian learns of a material adverse change in the financial condition of a sub-custodian. 3.10 Branches of U.S. Banks. Except as otherwise set forth in this Contract, the provisions of this Article 3 shall not apply where the custody of the Fund's assets is maintained in a foreign branch of a banking institution which is a "bank" as defined by Section 2(a)(5) of the Investment Company Act of 1940 which meets the qualification set forth in Section 26(a) of said Act. The appointment of any such branch as a sub-custodian shall be governed by Section 1 of this Contract. 4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund From such funds as may be available for the purpose but subject to the limitations of the Governing Documents of the Fund and any applicable votes of the Board of Directors/Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of instructions from the Transfer Agent, make funds available for payment to holders of Shares who have delivered to the Transfer Agent a request for redemption or repurchase of their Shares. In connection with the redemption or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming shareholder. In connection with the redemption or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on the Custodian by a holder of Shares, which checks have been furnished by the Fund to the holder of Shares, when presented to the Custodian in accordance with such procedures and controls as are mutually agreed upon from time to time between the Fund and the Custodian. The Custodian shall receive from the distributor for the Fund's Shares or from the Transfer Agent of the Fund and deposit as received into the Fund's account such payments as are received for Shares of the Fund issued or sold from time to time by the Fund. The Custodian will provide timely notification to the Fund and the Transfer Agent of any receipt by it of payments for Shares of the Fund. 5. Proper Instructions Proper Instructions as used herein means a writing signed or initialled by one or more person or persons as the Board of Directors/Trustees shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved, including a specific statement of the purpose for which such action is requested, or shall be a blanket instruction authorizing specific transactions of a repeated or PAGE 19 routine nature. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be confirmed in writing. Upon receipt of a certificate of the Secretary or an Assistant Secretary as to the authorization by the Board of Directors/Trustees of the Fund accompanied by a detailed description of procedures approved by the Board of Directors/Trustees, Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Board of Directors/Trustees and the Custodian are satisfied that such procedures afford adequate safeguards for the Fund's assets. 6. Actions Permitted without Express Authority The Custodian may in its discretion, without express authority from the Fund: 1) make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Contract, provided that all such payments shall be accounted for to the Fund; 2) surrender securities in temporary form for securities in definitive form; 3) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments on the same day as received; and 4) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Fund except as otherwise directed by the Board of Directors/Trustees of the Fund. 7. Evidence of Authority, Reliance on Documents The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper reasonably and in good faith believed by it to be genuine and to have been properly executed by or on behalf of the Fund in accordance with Article 5 hereof. The Custodian may receive and accept a certified copy of a vote of the Board of Directors/Trustees of the Fund as conclusive evidence (a) of the authority of any person to act in accordance with such vote or (b) of any determination or of any action by the Board of Directors/Trustees pursuant to the Governing Documents of the Fund as described in such vote, and such vote may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary. So long as and to the extent that it is in the exercise of the standard of care set forth in Article 12 hereof, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this PAGE 20 Contract and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties. 8. Duties of Custodian with Respect to the Books of Account and Calculation of Net Asset Value and Net Income The Custodian shall cooperate with and supply necessary information to the person or persons appointed by the Board of Directors/Trustees of the Fund to keep the books of account of the Fund and/or compute the net asset value per share of the outstanding shares of the Fund or, if directed in writing to do so by the Fund, shall itself keep such books of account and/or compute such net asset value per share. If so directed, the Custodian shall also calculate daily the net income of the Fund as described in the Fund's currently effective prospectus and shall advise the Fund and the Transfer Agent daily of the total amounts of such net income and, if instructed in writing by an officer of the Fund to do so, shall advise the Transfer Agent periodically of the division of such net income among its various components. The calculations of the net asset value per share and the daily income of the Fund shall be made at the time or times and in the manner described from time to time in the Fund's currently effective prospectus. 9. Records, Inventory The Custodian shall create and maintain all records relating to its activities and obligations under this Contract in such manner as will meet the obligations of the Fund under the Investment Company Act of 1940, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder, applicable federal and state tax laws and any other law or administrative rules or procedures which may be applicable to the Fund. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection and audit by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission, and, in the event of termination of this Agreement, will be delivered in accordance with Section 14 hereof. The Custodian shall, at the Fund's request, supply the Fund with a tabulation of securities owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations. The Custodian shall conduct a periodic inventory of all securities and other property subject to this Agreement and provide to the Fund a periodic reconciliation of the vaulted position of the Fund to the appraised position of the Fund. The Custodian will promptly report to the Fund the results of the reconciliation, indicating any shortages or discrepancies uncovered thereby, and take appropriate action to remedy any such shortages or discrepancies. PAGE 21 10. Opinion of Fund's Independent Accountant The Custodian shall cooperate with the Fund's independent public accountants in connection with the annual and other audits of the books and records of the Fund and take all reasonable action, as the Fund may from time to time request, to provide from year to year the necessary information to such accountants for the expression of their opinion without any qualification as to the scope of their examination, including but not limited to, any opinion in connection with the preparation of the Fund's Form N-lA, and Form N-SAR or other annual reports to the Securities and Exchange Commission and with respect to any other requirements of such Commission. 11. Compensation of Custodian The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between the Fund and the Custodian. 12. Responsibility of Custodian Notwithstanding anything to the contrary in this Agreement, the Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Contract, but shall be kept indemnified by and shall be without liability to the Fund for any action taken or omitted by it in good faith without negligence. In order for the indemnification provision contained in this Section to apply, it is understood that if in any case the Fund may be asked to indemnify or save the Custodian harmless, the Fund shall be fully and promptly advised of all pertinent facts concerning the situation in question, and it is further understood that the Custodian will use all reasonable care to identify and notify the Fund promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the Fund. The Fund, shall have the option to defend the Custodian against any claim which may be the subject of this indemnification, and in the event that the Fund so elects, it will so notify the Custodian, and thereupon the Fund shall take over complete defense of the claim and the Custodian shall in such situation initiate no further legal or other expenses for which it shall seek indemnification under this Section. The Custodian shall in no case confess any claim or make any compromise in any case in which the Fund will be asked to indemnify the Custodian except with the Fund's prior written consent. Nothing herein shall be construed to limit any right or cause of action on the part of the Custodian under this Contract which is independent of any right or cause of action on the part of the Fund. The Custodian shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund or such other counsel as may be agreed to by the parties) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. Notwithstanding the foregoing, the responsibility PAGE 22 of the Custodian with respect to redemptions effected by check shall be in accordance with a separate Agreement entered into between the Custodian and the Fund. If the Fund requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund being liable for the payment of money or incurring liability of some other form, the Fund, as a prerequisite to requiring the Custodian to take such action, shall provide indemnity to the Custodian in an amount and form satisfactory to it. If the Fund requires the Custodian to advance cash or securities for any purpose or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Fund shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of the Fund's assets to the extent necessary to obtain reimbursement, provided that the Custodian gives the Fund reasonable notice to repay such cash or securities advanced, however, such notice shall not preclude the Custodian's right to assert any lien under this provision. 13. Effective Period, Termination and Amendment This Contract shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than sixty (60) days after the date of such delivery or mailing in the case of a termination by the Fund, and not sooner than 180 days after the date of such delivery or mailing in the case of a termination by the Custodian; provided, however that the Custodian shall not act under Section 2.10 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees of the Fund has approved the initial use of a particular Securities System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees has reviewed the use by the Fund of such Securities System, as required in each case by Rule 17f-4 under the Investment Company Act of 1940, as amended and that the Custodian shall not act under Section 2.11 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees has approved the initial use of the Direct Paper System and the receipt of an annual certificate of PAGE 23 the Secretary or an Assistant Secretary that the Board of Directors/Trustees has reviewed the use by the Fund of the Direct Paper System; provided further, however, that the Fund shall not amend or terminate this Contract in contravention of any applicable federal or state regulations, or any provision of the Governing Documents of the Fund, and further provided, that the Fund may at any time by action of its Board of Directors/Trustees (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Contract in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. Upon termination of the Contract, the Fund shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements, provided that the Custodian shall not incur any costs, expenses or disbursements specifically in connection with such termination unless it has received prior approval from the Fund, which approval shall not be unreasonably withheld. 14. Successor Custodian If a successor custodian shall be appointed by the Board of Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities, funds and other properties then held by it hereunder and shall transfer to an account of the successor custodian all of the Fund's securities held in a Securities System. The Custodian shall also use its best efforts to assure that the successor custodian will continue any subcustodian agreement entered into by the Custodian and any subcustodian on behalf of the Fund. If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of a certified copy of a vote of the Board of Directors/Trustees of the Fund, deliver at the office of the Custodian and transfer such securities, funds and other properties in accordance with such vote. In the event that no written order designating a successor custodian or certified copy of a vote of the Board of Directors/Trustees shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the Investment Company Act of 1940, doing business in Boston, Massachusetts, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not PAGE 24 less than $25,000,000, all securities, funds and other properties held by the Custodian and all instruments held by the Custodian relative thereto and all other property held by it under this Contract and to transfer to an account of such successor custodian all of the Fund's securities held in any Securities System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Contract. In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to procure the certified copy of the vote referred to or of the Board of Directors/Trustees to appoint a successor custodian, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Contract relating to the duties and obligations of the Custodian shall remain in full force and effect. If while this Contract is in force the Fund shall be liquidated pursuant to law, the Custodian shall distribute, either in cash or (if the Fund so orders) in the portfolio securities and other assets of the Fund, pro rata among the holders of shares of the Fund as certified by the Transfer Agent, the property of the Fund which remains after paying or satisfying all expenses and liabilities of the Fund. Section 12 hereof shall survive any termination of this Contract. 15. Interpretive and Additional Provisions In connection with the operation of this Contract, the Custodian and the Fund may from time to time agree on such provisions interpretive of or in addition to the provisions of this Contract as may in their joint opinion be consistent with the general tenor of this Contract. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Governing Documents of the Fund. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Contract. 16. Notice Any notice shall be sufficiently given when sent by registered or certified mail, or by such other means as the parties shall agree, to the other party at the address of such party set forth above or at such other address as such party may from time to time specify in writing to the other party. 17. Bond The Custodian shall, at all times, maintain a bond in such form and amount as is acceptable to the Fund which shall be issued by a reputable fidelity insurance company authorized to do business in the place where such bond is issued against larceny PAGE 25 and embezzlement, covering each officer and employee of the Custodian who may, singly or jointly with others, have access to securities or funds of the Fund, either directly or through authority to receive and carry out any certificate instruction, order request, note or other instrument required or permitted by this Agreement. The Custodian agrees that it shall not cancel, terminate or modify such bond insofar as it adversely affects the Fund except after written notice given to the Fund not less than 10 days prior to the effective date of such cancellation, termination or modification. The Custodian shall furnish to the Fund a copy of each such bond and each amendment thereto. 18. Confidentiality The Custodian agrees to treat all records and other information relative to the Fund and its prior, present or future shareholders as confidential, and the Custodian, on behalf of itself and its employees, agrees to keep confidential all such information except, after prior notification to and approval in writing by the Fund, which approval shall not be unreasonably withheld and may not be withheld where the Custodian may be exposed to civil or criminal contempt proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when so requested by the Fund. 19. Exemption from Liens The securities and other assets held by the Custodian for the Fund shall be subject to no lien or charge of any kind in favor of the Custodian or any person claiming through the Custodian, but nothing herein shall be deemed to deprive the Custodian of its right to invoke any and all remedies available at law or equity to collect amounts due it under this Agreement. Neither the Custodian nor any sub-custodian appointed pursuant to Section 1 hereof shall have any power or authority to assign, hypothecate, pledge or otherwise dispose of any securities held by it for the Fund, except upon the direction of the Fund, duly given as herein provided, and only for the account of the Fund. 20. Massachusetts Law to Apply This Contract shall be construed and the provisions thereof interpreted under and in accordance with laws of The Commonwealth of Massachusetts. 21. Prior Contracts Without derogating any of the rights established by such contracts, this Contract supersedes and terminates, as of the date hereof, all prior contracts between the Fund and the Custodian relating to the custody of the Fund's assets. 22. The Parties All references herein to "the Fund" are to each of the funds listed on Appendix A individually, as if this Contract were between such individual fund and the Custodian. In the case of a series fund or trust, all references to "the Fund" are to the individual series or portfolio of such fund or trust, or to such fund or trust on behalf of the individual series or portfolio, as PAGE 26 appropriate. Any reference in this Contract to "the parties" shall mean the Custodian and such other individual Fund as to which the matter pertains. 23. Governing Documents. The term "Governing Documents" means the Articles of Incorporation, Agreement of Trust, By-Laws and Registration Statement filed under the Securities Act of 1933, as amended from time to time. 24. Subcustodian Agreement. Reference to the "Subcustodian Agreement" between the Custodian and Chase shall mean any such agreement which shall be in effect from time to time between Chase and the Custodian with respect to foreign assets of the Fund. 25. Directors and Trustees. It is understood and is expressly stipulated that neither the holders of shares in the Fund nor any Directors or Trustees of the Fund shall be personally liable hereunder. 26. Massachusetts Business Trust With respect to any Fund which is a party to this Contract and which is organized as a Massachusetts business trust, the term Fund means and refers to the trustees from time to time serving under the applicable trust agreement (Declaration of Trust) of such Trust as the same may be amended from time to time. It is expressly agreed that the obligations of any such Trust hereunder shall not be binding upon any of the trustees, shareholders, nominees, officers, agents or employees of the Trust, personally, but bind only the trust property of the Trust, as provided in the Declaration of Trust of the Trust. The execution and delivery of this Contract has been authorized by the trustees and signed by an authorized officer of the Trust, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them but shall bind only the trust property of the Trust as provided in its Declaration of Trust. 27. Successors of Parties. This Contract shall be binding on and shall inure to the benefit of the Fund and the Custodian and their respective successors. IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative and its seal to be hereunder affixed as of the dates indicated below. DATED: September 28, 1987 __________________ PAGE 27 STATE STREET BANK AND TRUST COMPANY ATTEST: /s/Kathleen M. Kubit By/s/Charles Cassidy _____________________ _________________________________ Assistant Secretary Vice President T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE INTERNATIONAL TRUST T. Rowe Price International Stock Fund T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE U.S. TREASURY MONEY FUND, INC. T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio PAGE 28 (SIGNATURES CONTINUED) T. ROWE PRICE STATE TAX-FREE INCOME TRUST New York Tax-Free Money Fund T. ROWE PRICE STATE TAX-FREE INCOME TRUST New York Tax-Free Bond Fund T. ROWE PRICE INTERNATIONAL TRUST T. Rowe Price International Bond Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. DATED: September 28, 1987 ___________________ ATTEST: /s/Nancy J. Wortman By/s/Carmen F. Deyesu ____________________________ __________________________________ PAGE 29 Appendix A The following Funds are parties to this Agreement and have so indicated their intention to be bound by such Agreement by executing the Agreement on the dates indicated thereon. T. Rowe Price California Tax-Free Income Trust on behalf of the California Tax-Free Bond Fund and California Tax-Free Money Fund T. Rowe Price Capital Appreciation Fund T. Rowe Price Equity Income Fund T. Rowe Price GNMA Fund T. Rowe Price Growth & Income Fund, Inc. T. Rowe Price Growth Stock Fund, Inc. T. Rowe Price High Yield Fund, Inc. T. Rowe Price Institutional Trust on behalf of the Tax-Exempt Reserve Portfolio T. Rowe Price International Trust on behalf of the T. Rowe Price International Bond Fund and T. Rowe Price International Stock Fund T. Rowe Price New America Growth Fund T. Rowe Price New Era Fund, Inc. T. Rowe Price New Horizons Fund, Inc. T. Rowe Price New Income Fund, Inc. T. Rowe Price Prime Reserve Fund, Inc. T. Rowe Price Science & Technology Fund, Inc. T. Rowe Price Short-Term Bond Fund, Inc. T. Rowe Price State Tax-Free Income Trust on behalf of the Maryland Tax-Free Bond Fund, New York Tax-Free Bond Fund and New York Tax-Free Money Fund T. Rowe Price Tax-Exempt Money Fund, Inc. T. Rowe Price Tax-Free High Yield Fund, Inc. T. Rowe Price Tax-Free Income Fund, Inc. T. Rowe Price Tax-Free Short-Intermediate Fund, Inc. T. Rowe Price U.S. Treasury Money Fund, Inc. PAGE 30 AMENDMENT NO. 1 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS THIS AGREEMENT, made as of this 24th day of June, 1988, by and between: T. Rowe Price Growth Stock Fund, Inc., T. Rowe Price New Horizons Fund, Inc., T. Rowe Price New Era Fund, Inc., T. Rowe Price New Income Fund, Inc., T. Rowe Price Prime Reserve Fund, Inc., T. Rowe Price International Trust, T. Rowe Price U.S. Treasury Money Fund, Inc., T. Rowe Price Growth & Income Fund, Inc., T. Rowe Price Tax-Exempt Money Fund, Inc., T. Rowe Price Tax-Free Income Fund, Inc., T. Rowe Price Tax-Free Short- Intermediate Fund, Inc., T. Rowe Price Short-Term Bond Fund, Inc., T. Rowe Price High Yield Fund, Inc., T. Rowe Price Tax-Free High Yield Fund, Inc., T. Rowe Price New America Growth Fund, T. Rowe Price Equity Income Fund, T. Rowe Price GNMA Fund, T. Rowe Price Capital Appreciation Fund, T. Rowe Price Institutional Trust, T. Rowe Price State Tax-Free Income Trust, T. Rowe Price California Tax-Free Income Trust, T. Rowe Price Science & Technology Fund, Inc., (hereinafter together called the "Funds" and individually "Fund") and State Street Bank and Trust Company, a Massachusetts trust, W I T N E S S E T H: It is mutually agreed that the Custodian Contract made by the parties on the 28th day of September, 1987, is hereby amended by adding thereto the T. Rowe Price Small-Cap Value Fund, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE NEW HORIZONS FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE NEW ERA FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE NEW INCOME FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President PAGE 31 (SIGNATURES CONTINUED) T. ROWE PRICE PRIME RESERVE FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE INTERNATIONAL TRUST /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE U.S. TREASURY MONEY FUND, INC. /s/Henry H.Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE GROWTH & INCOME FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE SHORT-TERM BOND FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE TAX-FREE INCOME FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE HIGH YIELD FUND, INC. /s/ Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President PAGE 32 (SIGNATURES CONTINUED) T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE NEW AMERICA GROWTH FUND /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE EQUITY INCOME FUND /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE GNMA FUND /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE CAPITAL APPRECIATION FUND /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE INSTITUTIONAL TRUST /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE STATE TAX-FREE INCOME TRUST /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President PAGE 33 (SIGNATURES CONTINUED) T. ROWE PRICE SMALL-CAP VALUE FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President STATE STREET BANK AND TRUST COMPANY /s/William Blackwell ______________________________________________ By: PAGE 34 AMENDMENT NO. 2 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of October 19, 1988, by adding thereto the T. Rowe Price International Discovery Fund, Inc., a separate series of T. Rowe Price International Trust. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL TRUST T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. ROWE PRICE U.S. TREASURY MONEY FUND, INC. T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND PAGE 35 T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President STATE STREET BANK AND TRUST COMPANY /s/Guy R. Sturgeon ______________________________________________ By: PAGE 36 AMENDMENT NO. 3 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988 and October 19, 1988, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of February 22, 1989, by adding thereto the T. Rowe Price International Equity Fund, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL TRUST T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. ROWE PRICE U.S. TREASURY MONEY FUND, INC. T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND PAGE 37 T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President STATE STREET BANK AND TRUST COMPANY /s/K. Donelson ______________________________________________ By: PAGE 38 AMENDMENT NO. 4 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988 and February 22, 1989, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of July 19, 1989, by adding thereto the Institutional International Funds, Inc., on behalf of the Foreign Equity Fund. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL TRUST T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. ROWE PRICE U.S. TREASURY MONEY FUND, INC. T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND PAGE 39 T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President STATE STREET BANK AND TRUST COMPANY /s/ ______________________________________________ By: PAGE 40 AMENDMENT NO. 5 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, and July 19, 1989 between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of September 15, 1989, by adding thereto the T. Rowe Price U.S. Treasury Funds, Inc., on behalf of the U.S. Treasury Intermediate Fund and the U.S. Treasury Long-Term Fund. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL TRUST T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. ROWE PRICE U.S. TREASURY MONEY FUND, INC. T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND PAGE 41 T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President STATE STREET BANK AND TRUST COMPANY /s/ ______________________________________________ By: PAGE 42 AMENDMENT NO. 6 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989 and September 15, 1989, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of December 15, 1989, by restating Section 2.15 as follows: 2.15 Communications Relating to Fund Portfolio Securities. The Custodian shall transmit promptly to the Fund all written information (including, without limitation, pendency of calls and maturities of domestic securities and expirations of rights in connection therewith and notices of exercise of call and put options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from issuers of the domestic securities being held for the Fund by the Custodian, an agent appointed under Section 2.9, or sub-custodian appointed under Section 1. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund all written information received by the Custodian, an agent appointed under Section 2.9, or sub-custodian appointed under Section 1 from issuers of the domestic securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian of such desired action at least 48 hours (excluding holidays and weekends) prior to the time such action must be taken under the terms of the tender, exchange offer, or other similar transaction, and it will be the responsibility of the Custodian to timely transmit to the appropriate person(s) the Fund's notice. Where the Fund does not notify the custodian of its desired action within the aforesaid 48 hour period, the Custodian shall use its best efforts to timely transmit the Fund's notice to the appropriate person. It is expressely noted that the parties may negotiate and agree to alternative procedures with respect to such 48 hour notice period on a selective and individual basis. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. PAGE 43 T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL TRUST T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. ROWE PRICE U.S. TREASURY MONEY FUND, INC. T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. PAGE 44 T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U. S. TREASURY FUNDS, INC. U. S. Treasury Intermediate Fund U. S. Treasury Long-Term Fund /s/Carmen F. Deyesu ______________________________________________ By: Carmen F. Deyesu, Treasurer STATE STREET BANK AND TRUST COMPANY /s/ E. D. Hawkes, Jr. ______________________________________________ By: E. D. Hawkes, Jr. Vice President PAGE 45 Amendment No. 7 filed on Form SE January 25, 1990 with International Trust (CIK 313212) Post Effective Amendment No. 17. PAGE 46 AMENDMENT NO. 8 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, and December 20, 1989, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of January 25, 1990, by adding thereto the T. Rowe Price European Stock Fund, a separate series of T. Rowe Price International Trust. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL TRUST T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. ROWE PRICE U.S. TREASURY MONEY FUND, INC. T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND PAGE 47 T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund /s/Henry H. Hopkins ______________________________________________ By: Henry H. Hopkins Vice President STATE STREET BANK AND TRUST COMPANY /s/ ______________________________________________ By: PAGE 48 AMENDMENT NO. 9 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, and January 25, 1990 between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of February 21, 1990, by adding thereto the T. Rowe Price Index Trust, Inc., on behalf of the T. Rowe Price Equity Index Fund. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL TRUST T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. ROWE PRICE U.S. TREASURY MONEY FUND, INC. T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND PAGE 49 T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund /s/Henry H. Hopkins __________________________________________ By: Henry H. Hopkins Vice President STATE STREET BANK AND TRUST COMPANY /s/ ___________________________________________ By: PAGE 50 AMENDMENT NO. 10 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of June 12, 1990, by adding thereto the T. Rowe Price Spectrum Fund, Inc., on behalf of the Spectrum Growth Fund and the Spectrum Income Fund. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL TRUST T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. ROWE PRICE U.S. TREASURY MONEY FUND, INC. T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND PAGE 51 T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund /s/Henry H. Hopkins __________________________________________ By: Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ ___________________________________________ By: PAGE 52 AMENDMENT NO. 11 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, and June 12, 1990 between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of July 18, 1990, by adding thereto the T. Rowe Price New Asia Fund, a separate series of the T. Rowe Price International Funds, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND PAGE 53 T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund /s/Henry H. Hopkins __________________________________________ By: Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ Guy R. Sturgeon ___________________________________________ By: Guy R. Sturgeon PAGE 54 AMENDMENT NO. 12 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, and July 18, 1990 between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of October 15, 1990, by adding thereto the T. Rowe Price Global Government Bond Fund, a separate series of the T. Rowe Price International Funds, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND PAGE 55 T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE INSTITUTIONAL TRUST Tax-Exempt Reserve Portfolio T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund /s/Henry H. Hopkins __________________________________________ By: Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ Guy R. Sturgeon ___________________________________________ By: PAGE 56 AMENDMENT NO. 13 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, and October 15, 1990, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of February 13, 1991, by adding thereto the Virginia Tax-Free Bond Fund and New Jersey Tax-Free Bond Fund, two separate series of the T. Rowe Price State Tax- Free Income Trust T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. PAGE 57 T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund /s/Henry H. Hopkins __________________________________________ By: Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ Guy Sturgeon ___________________________________________ By: Vice President PAGE 58 AMENDMENT NO. 14 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, and February 13, 1991, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of March 6, 1991, by adding thereto the T. Rowe Price Balanced Fund, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND PAGE 59 T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. /s/Henry H. Hopkins __________________________________________ By: Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ ___________________________________________ By: PAGE 60 AMENDMENT NO. 15 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, and March 6, 1991, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of September 12, 1991, by adding thereto the T. Rowe Price Adjustable Rate U.S. Government Fund, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND PAGE 61 T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. /s/Henry H. Hopkins __________________________________________ By: Henry H. Hopkins, Vice President PAGE 62 STATE STREET BANK AND TRUST COMPANY /s/ ___________________________________________ By: PAGE 63 AMENDMENT NO. 16 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991 and September 12, 1991, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of November 6, 1991, by adding thereto the T. Rowe Price Japan Fund, a separate series of the T. Rowe Price International Funds, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. PAGE 64 T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. PAGE 65 /s/Henry H. Hopkins __________________________________________ By: Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ ___________________________________________ By: PAGE 66 AMENDMENT NO. 17 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991 and November 6, 1991, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of April 23, 1992, by adding thereto the T. Rowe Price Mid-Cap Growth Fund, Inc. and T. Rowe Price Short-Term Global Income Fund, a separate series of the T. Rowe Price International Funds, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Income Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. PAGE 67 T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE MID-CAP GROWTH FUND, INC. /s/Henry H. Hopkins __________________________________ By:Henry H. Hopkins, Vice President PAGE 68 STATE STREET BANK AND TRUST COMPANY /s/ _________________________________________ By: PAGE 69 AMENDMENT NO. 18 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991, November 6, 1991, and April 23, 1992, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of September 2, 1992, by adding thereto the T. Rowe Price OTC Fund, a series of the T. Rowe Price OTC Fund, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE OTC FUND, INC. T. Rowe Price OTC Fund T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Income Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. PAGE 70 T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE MID-CAP GROWTH FUND, INC. /s/Henry H. Hopkins ______________________________________________ By:Henry H. Hopkins, Vice President PAGE 71 STATE STREET BANK AND TRUST COMPANY /s/ _____________________________________________ By: PAGE 72 AMENDMENT NO. 19 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991, November 6, 1991, April 23, 1992, and September 2, 1992, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of November 3, 1992, by adding thereto the T. Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Income Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND PAGE 73 T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE MID-CAP GROWTH FUND, INC. T. ROWE PRICE OTC FUND, INC. T. Rowe Price OTC Fund T. ROWE PRICE TAX-FREE INSURED INTEREMEDIATE BOND FUND, INC. PAGE 74 /s/Henry H. Hopkins ______________________________________________ By:Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ ______________________________________________ By: PAGE 75 AMENDMENT NO. 20 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991, November 6, 1991, April 23, 1992, September 2, 1992, and November 3, 1992, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of December 16, 1992, by adding thereto the T. Rowe Price Dividend Growth Fund, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Income Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND PAGE 76 T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE MID-CAP GROWTH FUND, INC. T. ROWE PRICE OTC FUND, INC. T. Rowe Price OTC Fund T. ROWE PRICE TAX-FREE INSURED INTEREMEDIATE BOND FUND, INC. T. ROWE PRICE DIVIDEND GROWTH FUND, INC. PAGE 77 /s/Henry H. Hopkins ______________________________________________ By:Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ ______________________________________________ By: PAGE 78 AMENDMENT NO. 21 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991, November 6, 1991, April 23, 1992, September 2, 1992, November 3, 1992, and December 16, 1992, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of December 21, 1992, by adding thereto the Maryland Short-Term Tax-Free Bond Fund, an additional series to the T. Rowe Price State Tax-Free Income Trust. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Income Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. PAGE 79 T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE MID-CAP GROWTH FUND, INC. T. ROWE PRICE OTC FUND, INC. T. Rowe Price OTC Fund PAGE 80 T. ROWE PRICE TAX-FREE INSURED INTEREMEDIATE BOND FUND, INC. T. ROWE PRICE DIVIDEND GROWTH FUND, INC. /s/Henry H. Hopkins ______________________________________________ By:Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ ______________________________________________ By: PAGE 81 AMENDMENT NO. 22 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991, November 6, 1991, April 23, 1992, September 2, 1992, November 3, 1992, December 16, 1992, and December 21, 1992, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of January 28, 1993, by adding thereto the Georgia Tax-Free Bond Fund and the Florida Insured Intermediate Tax-Free Fund, additional series to the T. Rowe Price State Tax-Free Income Trust. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Income Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. PAGE 82 T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund Georgia Tax-Free Bond Fund Florida Insured Intermediate Tax-Free Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE MID-CAP GROWTH FUND, INC. PAGE 83 T. ROWE PRICE OTC FUND, INC. T. Rowe Price OTC Fund T. ROWE PRICE TAX-FREE INSURED INTEREMEDIATE BOND FUND, INC. T. ROWE PRICE DIVIDEND GROWTH FUND, INC. /s/Henry H. Hopkins ______________________________________________ By:Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ ______________________________________________ By: PAGE 84 AMENDMENT NO. 23 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991, November 6, 1991, April 23, 1992, September 2, 1992, November 3, 1992, December 16, 1992, December 21, 1992, and January 28, 1993, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of April 22, 1993, by adding thereto the T. Rowe Price Blue Chip Growth Fund, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Income Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. PAGE 85 T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund Georgia Tax-Free Bond Fund Florida Insured Intermediate Tax-Free Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE MID-CAP GROWTH FUND, INC. T. ROWE PRICE OTC FUND, INC. T. Rowe Price OTC Fund PAGE 86 T. ROWE PRICE TAX-FREE INSURED INTEREMEDIATE BOND FUND, INC. T. ROWE PRICE DIVIDEND GROWTH FUND, INC. T. ROWE PRICE BLUE CHIP GROWTH FUND, INC. /s/Henry H. Hopkins ______________________________________________ By:Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ _______________________________________________ By: PAGE 87 AMENDMENT NO. 24 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991, November 6, 1991, April 23, 1992, September 2, 1992, November 3, 1992, December 16, 1992, December 21, 1992, January 28, 1993, April 22, 1993, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of September 16, 1993, by adding thereto the T. Rowe Price Summit Funds, Inc. and T. Rowe Price Summit Municipal Funds, Inc. Notwithstanding anything to the contrary herein, it is understood that the T. Rowe Price Summit Funds, Inc. and T. Rowe Price Summit Municipal Funds, Inc. (collectively referred to as the "Funds") shall not be responsible for paying any of the fees or expenses set forth herein but that, in accordance with the Investment Management Agreement, dated September 16, 1993, between the Funds and T. Rowe Price Associates, Inc. ("T. Rowe Price"), the Funds will require T. Rowe Price to pay all such fees and expenses. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Income Fund PAGE 88 T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund Georgia Tax-Free Bond Fund Florida Insured Intermediate Tax-Free Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund PAGE 89 T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE MID-CAP GROWTH FUND, INC. T. ROWE PRICE OTC FUND, INC. T. Rowe Price OTC Fund T. ROWE PRICE TAX-FREE INSURED INTEREMEDIATE BOND FUND, INC. T. ROWE PRICE DIVIDEND GROWTH FUND, INC. T. ROWE PRICE BLUE CHIP GROWTH FUND, INC. T. ROWE PRICE SUMMIT FUNDS, INC. T. Rowe Price Summit Cash Reserves Fund T. Rowe Price Summit Limited-Term Bond Fund T. Rowe Price Summit GNMA Fund T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC. T. Rowe Price Summit Municipal Money Market Fund T. Rowe Price Summit Municipal Intermediate Fund T. Rowe Price Summit Municipal Income Fund /s/Henry H. Hopkins _____________________________________________ By:Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ _____________________________________________ By: PAGE 90 AMENDMENT NO. 25 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991, November 6, 1991, April 23, 1992, September 2, 1992, November 3, 1992, December 16, 1992, December 21, 1992, January 28, 1993, April 22, 1993, and September 16, 1993, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of November 3, 1993, by adding thereto the T. Rowe Price Latin America Fund, a separate series of the T. Rowe Price International Funds, Inc. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Income Fund T. Rowe Price Latin America Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. PAGE 91 T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund Georgia Tax-Free Bond Fund Florida Insured Intermediate Tax-Free Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. PAGE 92 T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE MID-CAP GROWTH FUND, INC. T. ROWE PRICE OTC FUND, INC. T. Rowe Price OTC Fund T. ROWE PRICE TAX-FREE INSURED INTEREMEDIATE BOND FUND, INC. T. ROWE PRICE DIVIDEND GROWTH FUND, INC. T. ROWE PRICE BLUE CHIP GROWTH FUND, INC. T. ROWE PRICE SUMMIT FUNDS, INC. T. Rowe Price Summit Cash Reserves Fund T. Rowe Price Summit Limited-Term Bond Fund T. Rowe Price Summit GNMA Fund T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC. T. Rowe Price Summit Municipal Money Market Fund T. Rowe Price Summit Municipal Intermediate Fund T. Rowe Price Summit Municipal Income Fund /s/Henry H. Hopkins _____________________________________________ By:Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ _____________________________________________ By: PAGE 93 AMENDMENT NO. 26 TO CUSTODIAN CONTRACT BETWEEN STATE STREET BANK AND TRUST COMPANY AND THE T. ROWE PRICE FUNDS W I T N E S S E T H: The Custodian Contract of September 28, 1987, as amended June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989, September 15, 1989, December 15, 1989, December 20, 1989, January 25, 1990, February 21, 1990, June 12, 1990, July 18, 1990, October 15, 1990, February 13, 1991, March 6, 1991, September 12, 1991, November 6, 1991, April 23, 1992, September 2, 1992, November 3, 1992, December 16, 1992, December 21, 1992, January 28, 1993, April 22, 1993, September 16, 1993, and November 3, 1993, between State Street Bank and Trust Company and each of the Parties listed on Appendix A thereto is hereby further amended, as of March 1, 1994, by adding thereto the T. Rowe Price Equity Income Portfolio and T. Rowe Price New America Growth Portfolio, two separate series of the T. Rowe Price Equity Series, Inc. and T. Rowe Price International Stock Portfolio, a separate series of the T. Rowe Price International Series, Inc. Notwithstanding anything to the contrary herein, it is understood that the T. Rowe Price Equity Series, Inc. and T. Rowe Price International Series, Inc. (collectively referred to as the "Funds") shall not be responsible for paying any of the fees or expenses set forth herein but that, in accordance with the Investment Management Agreements, dated March 1, 1994, between the Funds and T. Rowe Price Associates, Inc. and Rowe Price- Fleming International, Inc. (collectively referred to as "T. Rowe Price"), the Funds will require T. Rowe Price to pay all such fees and expenses. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE NEW HORIZONS FUND, INC. T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. PAGE 94 T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Income Fund T. Rowe Price Latin America Fund T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund Virginia Tax-Free Bond Fund New Jersey Tax-Free Bond Fund Georgia Tax-Free Bond Fund Florida Insured Intermediate Tax-Free Fund T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. PAGE 95 T. ROWE PRICE SMALL-CAP VALUE FUND, INC. INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE MID-CAP GROWTH FUND, INC. T. ROWE PRICE OTC FUND, INC. T. Rowe Price OTC Fund T. ROWE PRICE TAX-FREE INSURED INTEREMEDIATE BOND FUND, INC. T. ROWE PRICE DIVIDEND GROWTH FUND, INC. T. ROWE PRICE BLUE CHIP GROWTH FUND, INC. T. ROWE PRICE SUMMIT FUNDS, INC. T. Rowe Price Summit Cash Reserves Fund T. Rowe Price Summit Limited-Term Bond Fund T. Rowe Price Summit GNMA Fund T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC. T. Rowe Price Summit Municipal Money Market Fund T. Rowe Price Summit Municipal Intermediate Fund T. Rowe Price Summit Municipal Income Fund T. ROWE PRICE EQUITY SERIES, INC. T. Rowe Price Equity Income Portfolio T. Rowe Price New America Growth Portfolio PAGE 96 T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International Stock Portfolio /s/Henry H. Hopkins _____________________________________________ By:Henry H. Hopkins, Vice President STATE STREET BANK AND TRUST COMPANY /s/ _____________________________________________ By: EX-99.B9A-TRANSFER 9 TRANSFER AGENT AGREEMENT The Transfer Agency and Service Agreement between T. Rowe Price Services, Inc. and T. Rowe Price Funds, dated January 1, 1994, as amended, should be inserted here. PAGE 1 TRANSFER AGENCY AND SERVICE AGREEMENT between T. ROWE PRICE SERVICES, INC. and EACH OF THE PARTIES INDICATED ON APPENDIX A PAGE 2 TABLE OF CONTENTS Page Article A Terms of Appointment . . . . . . . . . . . . . .2 Article B Duties of Price Services . . . . . . . . . . . .3 1. Receipt of Orders/Payments. . . . . . . . .3 2. Written Redemptions . . . . . . . . . . . .4 3. Transfers . . . . . . . . . . . . . . . . .6 4. Confirmations . . . . . . . . . . . . . . .6 5. Issuance of Share Certificates. . . . . . .6 6. Returned Checks and ACH Debits. . . . . . 7 7. Redemptions of Shares under Ten Day Hold. 7 8. Dividends, Distributions and Other Corporate Actions. . . . . . . . . . . . 9 9. Unclaimed Payments and Certificates . . .10 10. Books and Records . . . . . . . . . . . .10 11. Authorized Issued and Outstanding Shares.12 12. Tax Information . . . . . . . . . . . . .13 13. Information to be Furnished to the Fund .13 14. Correspondence. . . . . . . . . . . . . .13 15. Lost or Stolen Securities . . . . . . . .14 16. Telephone Services . . . . . . . . . . .14 17. Proxies . . . . . . . . . . . . . . . . .14 18. Form N-SAR. . . . . . . . . . . . . . . .15 19. Cooperation With Accountants. . . . . . .15 20. Blue Sky. . . . . . . . . . . . . . . . .15 21. Other Services. . . . . . . . . . . . . .15 22. Fees and Out-of-Pocket Expenses . . . . .15 Article C Representations and Warranties of the Price Services. . . . . . . . . . . . . . . . . . .17 Article D Representations and Warranties of the Fund . .18 Article E Standard of Care/Indemnification . . . . . . .18 Article F Dual Interests . . . . . . . . . . . . . . . . 20 Article G Documentation. . . . . . . . . . . . . . . . . 20 Article H References to Price Services . . . . . . . . . 22 Article I Compliance with Governmental Rules and Regulations . . . . . . . . . . . . . . . . . 22 Article J Ownership of Software and Related Material . . 22 PAGE 3 Article K Quality Service Standards. . . . . . . . . . . 23 Article L As of Transactions . . . . . . . . . . . . . . 23 Article M Term and Termination of Agreement. . . . . . . 26 Article N Notice . . . . . . . . . . . . . . . . . . . . 26 Article O Assignment . . . . . . . . . . . . . . . . . . 26 Article P Amendment/Interpretive Provisions. . . . . . . 26 Article Q Further Assurances . . . . . . . . . . . . . . 27 Article R Maryland Law to Apply. . . . . . . . . . . . . 27 Article S Merger of Agreement. . . . . . . . . . . . . . 27 Article T Counterparts . . . . . . . . . . . . . . . . . 27 Article U The Parties. . . . . . . . . . . . . . . . . . 27 Article V Directors, Trustees, Shareholders and Massachusetts Business Trust . . . . . . . . . . . . . . . . 28 Article W Captions . . . . . . . . . . . . . . . . . . . 28 PAGE 4 TRANSFER AGENCY AND SERVICE AGREEMENT AGREEMENT made as of the first day of January, 1994, by and between T. ROWE PRICE SERVICES, INC., a Maryland corporation having its principal office and place of business at 100 East Pratt Street, Baltimore, Maryland 21202 ("Price Services"), and EACH FUND WHICH IS LISTED ON APPENDIX A (as such Appendix may be amended from time to time) and which evidences its agreement to be bound hereby by executing a copy of this Agreement (each such Fund individually hereinafter referred to as "the Fund", whose definition may be found in Article U); WHEREAS, the Fund desires to appoint Price Services as its transfer agent, dividend disbursing agent and agent in connection with certain other activities, and Price Services desires to accept such appointment; WHEREAS, Price Services represents that it is registered with the Securities and Exchange Commission as a Transfer Agent under Section 17A of the Securities Exchange Act of 1934 ("'34 Act") and will notify each Fund promptly if such registration is revoked or if any proceeding is commenced before the Securities and Exchange Commission which may lead to such revocation; WHEREAS, certain of the Funds are named investment options under various tax-sheltered retirement plans including, but not limited to, individual retirement accounts, simplified employee pension plans, deferred compensation plans, 403(b) plans, and profit sharing, thrift, and money purchase pension plans for self-employed individuals and professional partnerships and corporations, (collectively referred to as "Retirement Plans"); PAGE 5 WHEREAS, Price Services has the capability of providing special services, on behalf of the Funds, for the accounts of shareholders participating in these Retirement Plans ("Retirement Accounts"). WHEREAS, Price Services may subcontract or jointly contract with other parties, on behalf of the Funds, including, but not limited to, DST, SRI, Moore Business Forms, Boston Financial Data Services, Inc., and the 440 Financial Group, to perform certain of the functions and services described herein including services to Retirement Plans and Retirement Accounts. Price Services may also enter into, on behalf of the Funds, certain banking relationships to perform various banking services including, but not limited to, check deposits, check disbursements, automated clearing house transactions ("ACH") and wire transfers. Subject to guidelines mutually agreed upon by the Funds and Price Services, excess balances, if any, resulting from these banking relationships will be invested and the income therefrom will be used to offset fees which would otherwise be charged to the Funds under this Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: A. Terms of Appointment Subject to the terms and conditions set forth in this Agreement, the Fund hereby employs and appoints Price Services to act, and Price Services agrees to act, as the Fund's transfer agent, dividend disbursing agent and agent in connection with: (1) the Fund's authorized and issued shares of its common stock or shares of beneficial interest (all such stock and shares to be PAGE 6 referred to as "Shares"); (2) any accumulation, open-account or similar plans provided to the shareholders of the Fund ("Shareholders"), including, without limitation, any periodic investment plan or periodic withdrawal program; and (3) certain Retirement Plan and Retirement Accounts as agreed upon by the parties. The parties to the Agreement hereby acknowledge that from time to time, Price Services and T. Rowe Price Trust Company may enter into contracts ("Other Contracts") with employee benefit plans and/or their sponsors for the provision of certain plan participant services to Retirement Plans and Retirement Accounts. Compensation paid to Price Services pursuant to this Agreement is with respect to the services described herein and not with respect to services provided under Other Contracts. B. Duties of Price Services Price Services agrees that it will perform the following services: 1. Receipt of Orders/Payments Receive for acceptance, orders/payments for the purchase of Shares and promptly deliver payment and appropriate documentation thereof to the authorized custodian of the Fund (the "Custodian"). Upon receipt of any check or other instrument drawn or endorsed to it as agent for, or identified as being for the account of, the Fund, Price Services will process the order as follows: o Examine the check to determine if the check conforms to the Funds' acceptance procedures (including certain third-party check procedures). If the check conforms, PAGE 7 Price Services will endorse the check and include the date of receipt, will process the same for payment, and deposit the net amount to the parties agreed upon designated bank account prior to such deposit in the Custodial account, and will notify the Fund and the Custodian, respectively, of such deposits (such notification to be given on a daily basis of the total amount deposited to said accounts during the prior business day); o Open a new account, if necessary, and credit the account of the investor with the number of Shares to be purchased according to the price of the Fund's Shares in effect for purchases made on that date, subject to any instructions which the Fund may have given to Price Services with respect to acceptance of orders for Shares relating to payments so received by it; o Maintain a record of all unpaid purchases and report such information to the Fund daily; o Process periodic payment orders, as authorized by investors, in accordance with the payment procedures for pre-authorized checking ("PAC") and ACH purchases mutually agreed upon by both parties; o Receive monies from Retirement Plans and determine the proper allocation of such monies to the Retirement Accounts based upon instructions received from Retirement Plan participants or Retirement Plan administrators ("Administrators"); and PAGE 8 o Process telephone orders for purchases of Fund shares from the Shareholder's bank account (via wire or ACH) to the Fund in accordance with procedures mutually agreed upon by both parties. Upon receipt of funds through the Federal Reserve Wire System that are designated for purchases in Funds which declare dividends at 12:00 p.m. (or such time as set forth in the Fund's current prospectus), Price Services shall promptly notify the Fund and the Custodian of such deposit. 2. Redemptions Receive for acceptance redemption requests, including telephone redemptions and requests received from Administrators for distributions to participants or their designated beneficiaries or for payment of fees due the Administrator or such other person, including Price Services, and deliver the appropriate documentation thereofto the Custodian. Price Services shall receive and stamp with the date of receipt, all requests for redemptions of Shares (including all certificates delivered to it for redemption) and shall process said redemption requests as follows, subject to the provisions of Section 7 hereof: o Examine the redemption request and, for written redemptions, the supporting documentation, to determine that the request is in good order and all requirements have been met; o Notify the Fund on the next business day of the total number of Shares presented and covered by all such requests; PAGE 9 o As set forth in the prospectus of the Fund, and in any event, on or prior to the seventh (7th) calendar day succeeding any such request for redemption, Price Services shall, from funds available in the accounts maintained by Price Services as agent for the Funds, pay the applicable redemption price in accordance with the current prospectus of the Fund, to the investor, participant, beneficiary, Administrator or such other person, as the case may be; o If any request for redemption does not comply with the Fund's requirements, Price Services shall promptly notify the investor of such fact, together with the reason therefore, and shall effect such redemption at the price in effect at the time of receipt of all appropriate documents; o Make such withholdings as may be required under applicable Federal and State tax law; o In the event redemption proceeds for the payment of fees are to be wired through the Federal Reserve Wire System or by bank wire, Price Services shall cause such proceeds to be wired in Federal funds to the bank account designated; and o Process periodic redemption orders as authorized by the investor in accordance with the periodic withdrawal procedures for Systematic Withdrawal Plan ("SWP") and systematic ACH redemptions mutually agreed upon by both parties. PAGE 10 Procedures and requirements for effecting and accepting redemption orders from investors by telephone, Tele*Access, Mailgram, or written instructions shall be established by mutual agreement between Price Services and the Fund consistent with the Fund's current prospectus. 3. Transfers Effect transfers of Shares by the registered owners thereof upon receipt of appropriate instructions and documentation and examine such instructions for conformance with appropriate procedures and requirements. In this regard, Price Services, upon receipt of a proper request for transfer, including any transfer involving the surrender of certificates of Shares, is authorized to transfer, on the records of the Fund, Shares of the Fund, including cancellation of surrendered certificates, if any, to credit a like amount of Shares to the transferee and to countersign, issue and deliver new certificates, if requested, for those Funds issuing certificates. 4. Confirmations Mail all confirmations and other enclosures requested by the Fund to the shareholder, and in the case of Retirement Accounts, to the Administrators, as may be required by the Funds or by applicable Federal or state law. 5. Issuance of Share Certificates o Those Funds which issue stock certificates shall supply Price Services with a sufficient supply of blank stock certificates and shall renew such supply upon request of Price Services. Such blank stock certificates shall PAGE 11 be properly signed, manually or facsimile, if authorized by the Fund, and shall bear the seal or facsimile thereof of the Fund; and notwithstanding the death, resignation or removal of any officers of the Fund authorized to sign certificates of stock, on behalf of the Fund, Price Services may continue to countersign certificates which bear the manual or facsimile signature of such officer until otherwise directed by the Fund. o If an investor requests a share certificate of a Fund which issues stock certificates (except shares in Retirement Plans and Retirement Accounts which will be non certificated), Price Services will countersign and mail by first class mail, a share certificate to the investor at his address as set forth on the transfer books of the Fund, subject to any other instructions for delivery of certificates which the Fund may give to Price Services with respect to certificates representing newly purchased Shares. 6. Returned Checks and ACH Debits In order to minimize the risk of loss to the Fund by reason of any check being returned unpaid, Price Services will promptly identify and follow-up on any check or ACH debit returned unpaid. For items returned, Price Services may telephone the investor and/or redeposit the check or debit for collection or cancel the purchase, as deemed appropriate. PAGE 12 7. Redemption of Shares under Ten Day Hold o Uncollected Funds Shares purchased by personal, corporate, or governmental check, or by ACH will be considered uncollected until the tenth calendar date following the trade date of the trade ("Uncollected Funds"); o Good Funds Share purchased by treasurer's, cashier, certified, or official check, or by wire transfer will be considered collected immediately ("Good Funds"). Absent information to the contrary (i.e., notification from the payee institution), Uncollected Funds will be considered Good Funds on the tenth calendar day following trade date. o Redemption of Uncollected Funds o Shareholders making telephone requests for redemption of shares purchased with Uncollected Funds will be given two options: 1. The Shareholder will be permitted to exchange to a money market fund to preserve principal until the funds are deemed Good Funds, 2. The redemption can be processed utilizing the same procedures for written redemptions described below. o If a written redemption request is made for shares where any portion of the payment for said shares is in Uncollected Funds, and the request is in good order, Price Services will promptly obtain PAGE 13 the information relative to the payment necessary to determine when the payment becomes Good Funds. The redemption will be processed in accordance with normal procedures, and the proceeds will be held until confirmation that the payment is Good Funds. On the seventh (7th) calendar day after trade date, and each day thereafter until either confirmation is received or the tenth (10th) calendar day, Price Services will call the paying institution to request confirmation that the check or ACH in question has been paid. On the tenth calendar day after trade date, the redemption proceeds will be released, regardless of whether confirmation has been received. o Checkwriting Redemptions. o Daily, all checkwriting redemptions $10,000 and over reported as Uncollected Funds or insufficient funds will be reviewed. An attempt will be made to contact the shareholder to make good the funds (through wire, exchange, transfer). Generally by 12:00 p.m. the same day, if the matter has not been resolved, the redemption request will be rejected and the check returned to the Shareholder. o All checkwriting redemptions under $10,000 reported as Uncollected or insufficient funds will PAGE 14 be rejected and the check returned to the Shareholder. o Confirmations of Available Funds The Fund expects that situations may develop whereby it would be beneficial to determine if a person who has placed an order for Shares has sufficient funds in his or her checking account to cover the payment for the Shares purchased. When this situation occurs, Price Services may call the bank in question and request that it confirm that sufficient funds to cover the purchase are currently credited to the account in question. Price Services will maintain written documentation or a recording of each telephone call which is made under the procedures outlined above. None of the above procedures shall preclude Price Services from inquiring as to the status of any check received by it in payment for the Fund's Shares as Price Services may deem appropriate or necessary to protect both the Fund and Price Services. If a conflict arises between Section 2 and this Section 7, Section 7 will govern. 8. Dividends, Distributions and Other Corporate Actions o The Fund will promptly inform Price Services of the declaration of any dividend, distribution, stock split or any other distributions of a similar kind on account of its Capital Stock. PAGE 15 o Price Services shall act as Dividend Disbursing Agent for the Fund, and as such, shall prepare and make income and capital gain payments to investors. As Dividend Disbursing Agent, Price Services will on or before the payment date of any such dividend or distribution, notify the Custodian of the estimated amount required to pay any portion of said dividend or distribution which is payable in cash, and the Fund agrees that on or before the payment date of such distribution, it shall instruct the Custodian to make available to Price Services sufficient funds for the cash amount to be paid out. If an investor is entitled to receive additional Shares by virtue of any such distribution or dividend, appropriate credits will be made to his or her account. 9. Unclaimed Payments and Certificates In accordance with procedures agreed upon by both parties, report abandoned property to appropriate state and governmental authorities of the Fund. Price Services shall, 90 days prior to the annual reporting of abandoned property to each of the states, make reasonable attempts to locate Shareholders for which (a) checks or share certificates have been returned; (b) for which accounts have aged outstanding checks; or (c) accounts with unissued shares that have been coded with stop mail and meet the dormancy period guidelines specified in the individual states. Price Services shall PAGE 16 make reasonable attempts to contact shareholders for those accounts which have significant aged outstanding checks. 10. Books and Records Maintain records showing for each Shareholder's account, Retirement Plan or Retirement Account, as the case may be, the following: o Names, address and tax identification number; o Number of Shares held; o Certain historical information regarding the account of each Shareholder, including dividends and distributions distributed in cash or invested in Shares; o Pertinent information regarding the establishment and maintenance of Retirement Plans and Retirement Accounts necessary to properly administer each account; o Information with respect to the source of dividends and distributions allocated among income (taxable and nontaxable income), realized short- term gains and realized long-term gains; o Any stop or restraining order placed against a Shareholder's account; o Information with respect to withholdings on domestic and foreign accounts; o Any instructions from a Shareholder including, all forms furnished by the Fund and executed by a PAGE 17 Shareholder with respect to (i) dividend or distribution elections, and (ii) elections with respect to payment options in connection with the redemption of Shares; o Any correspondence relating to the current maintenance of a Shareholder's account; o Certificate numbers and denominations for any Shareholder holding certificates; o Any information required in order for Price Services to perform the calculations contemplated under this Agreement. Price Services shall maintain files and furnish statistical and other information as required under this Agreement and as may be agreed upon from time to time by both parties or required by applicable law. However, Price Services reserves the right to delete, change or add any information to the files maintained; provided such deletions, changes or additions do not contravene the terms of this Agreement or applicable law and do not materially reduce the level of services described in this Agreement. Price Services shall also use its best efforts to obtain additional statistical and other information as each Fund may reasonably request for additional fees as may be agreed to by both parties. Any such records maintained pursuant to Rule 31a-1 under the Investment Company Act of 1940 ("the Act") will be PAGE 18 preserved for the periods and maintained in a manner prescribed in Rule 31a-2 thereunder. Disposition of such records after such prescribed periods shall be as mutually agreed upon by the Fund and Price Services. The retention of such records, which may be inspected by the Fund at reasonable times, shall be at the expense of the Fund. All records maintained by Price Services in connection with the performance of its duties under this Agreement will remain the property of the Fund and, in the event of termination of this Agreement, will be delivered to the Fund as of the date of termination or at such other time as may be mutually agreed upon. All books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential, and shall not be voluntarily disclosed to any other person, except after prior notification to and approval by the other party hereto, which approval shall not be unreasonably withheld and may not be withheld where Price Services or the Fund may be exposed to civil or criminal contempt proceedings for failure to comply; when requested to divulge such information by duly constituted governmental authorities; or after so requested by the other party hereto. 11. Authorized Issued and Outstanding Shares Record the issuance of Shares of the Fund and maintain, pursuant to Rule 17Ad-10(e) of the '34 Act, a record of the total number of Shares of the Fund which are authorized, PAGE 19 issued and outstanding, based upon data provided to it by the Fund. Price Services shall also provide the Fund on a regular basis the total number of Shares which are authorized and issued and outstanding. Price Services shall have no obligation, when recording the issuance of Shares, to monitor the issuance of such Shares or to take cognizance of any laws relating to the issuance or sale of such Shares. 12. Tax Information Prepare and file with the Internal Revenue Service and with other appropriate state agencies and, if required, mail to investors, those returns for reporting dividends and distributions paid as required to be so filed and mailed, and shall withhold such sums required to be withheld under applicable Federal and state income tax laws, rules, and regulations. Additionally, Price Services will file and, as applicable, mail to investors, any appropriate information returns required to be filed in connection with Retirement Plan processing, such as 1099R, 5498, as well as any other appropriate forms that the Fund or Price Services may deem necessary. The Fund and Price Services shall agree to procedures to be followed with respect to Price Services' responsibilities in connection with compliance with back-up withholding and other tax laws. 13. Information to be Furnished to the Fund Furnish to the Fund such information as may be agreed upon between the Fund and Price Services including any information that the Fund and Price Services agree is necessary to the daily operations of the business. PAGE 20 14. Correspondence Promptly and fully answer correspondence from shareholders and Administrators relating to Shareholder Accounts, Retirement Accounts, transfer agent procedures, and such other correspondence as may from time to time be mutually agreed upon with the Funds. Unless otherwise instructed, copies of all correspondence will be retained by Price Services in accordance with applicable law and procedures. 15. Lost or Stolen Securities Pursuant to Rule 17f-1 of the '34 Act, report to the Securities Information Center and/or the FBI or other appropriate person on Form X-17-F-1A all lost, stolen, missing or counterfeit securities. Provide any other services relating to lost, stolen or missing securities as may be mutually agreed upon by both parties. 16. Telephone Services Maintain a Telephone Servicing Staff of representatives ("Representatives") sufficient to timely respond to all telephonic inquiries reasonably foreseeable. The Representatives will also effect telephone purchases, redemptions, exchanges, and other transactions mutually agreed upon by both parties, for those Shareholders who have authorized telephone services. The Reprentatives shall require each Shareholder effecting a telephone transaction to properly identify themself before the transaction is effected, in accordance with procedures agreed upon between by both parties. Procedures for processing telephone PAGE 21 transactions will be mutually agreed upon by both parties. Price Services will also be responsible for providing Tele*Access, PC*Access and such other Services as may be offered by the Funds from time to time. Price Services will maintain a special Shareholder Servicing staff to service certain Shareholders with substantial relationships with the Funds. 17. Proxies Monitor the mailing of proxy cards and other material supplied to it by the Fund in connection with Shareholder meetings of the Fund and shall coordinate the receipt, examination and tabulation of returned proxies and the certification of the vote to the Fund. 18. Form N-SAR Maintain such records, if any, as shall enable the Fund to fulfill the requirements of Form N-SAR. 19. Cooperation With Accountants Cooperate with each Fund's independent public accountants and take all reasonable action in the performance of its obligations under the Agreement to assure that the necessary information is made available to such accountants for the expression of their opinion without any qualification as to the scope of their examination, including, but not limited to, their opinion included in each such Fund's annual report on Form N-SAR and annual amendment to Form N-1A. PAGE 22 20. Blue Sky Provide to the Fund or its agent, on a daily, weekly, monthly and quarterly basis, and for each state in which the Fund's Shares are sold, sales reports and other materials for blue sky compliance purposes as shall be agreed upon by the parties. 21. Other Services Provide such other services as may be mutually agreed upon between Price Services and the Fund. 22. Fees and Out-of-Pocket Expenses Each Fund shall pay to Price Services and/or its agents for its Transfer Agent Services hereunder, fees computed as set forth in Schedule A attached. Except as provided below, Price Services will be responsible for all expenses relating to the providing of Services. Each Fund, however, will reimburse Price Services for the following out-of-pocket expenses and charges incurred in providing Services: o Postage. The cost of postage and freight for mailing materials to Shareholders and Retirement Plan participants, or their agents, including overnight delivery, UPS and other express mail services and special courier services required to transport mail between Price Services locations and mail processing vendors. o Proxies. The cost to mail proxy cards and other material supplied to it by the Fund and costs related to the receipt, examination and tabulation PAGE 23 of returned proxies and the certification of the vote to the Fund. o Communications o Print. The printed forms used internally and externally for documentation and processing Shareholder and Retirement Plan participant, or their agent's inquiries and requests; paper and envelope supplies for letters, notices, and other written communications sent to Shareholders and Retirement Plan participants, or their agents. o Print & Mail House. The cost of internal and third party printing and mail house services, including printing of statements and reports. o Voice and Data. The cost of equipment (including associated maintenance), supplies and services used for communicating to and from the Shareholders of the Fund and Retirement Plan participants, or their agents, the Fund's transfer agent, other Fund offices, and other agents of either the Fund or Price Services. These charges shall include: o telephone toll charges (both incoming and outgoing, local, long distance and mailgrams); and PAGE 24 o data and telephone lines and associated equipment such as modems, multiplexers, and facsimile equipment. o Record Retention. The cost of maintenance and supplies used to maintain, microfilm, copy, record, index, display, retrieve, and store, in microfiche or microfilm form, documents and records. o Disaster Recovery. The cost of services, equipment, facilities and other charges necessary to provide disaster recovery for any and all services listed in this Agreement. Out-of-pocket costs will be billed at cost to the Funds. Allocation of monthly costs among the Funds will generally be made based upon the number of Shareholder and Retirement Accounts serviced by Price Services each month. Some invoices for these costs will contain costs for both the Funds and other funds serviced by Price Services. These costs will be allocated based on a reasonable allocation mehodology. Where possible, such as in the case of inbound and outbound WATS charges, allocation will be made on the actual distribution or usage. C. Representations and Warranties of Price Services Price Services represents and warrants to the Fund that: 1. It is a corporation duly organized and existing and in good standing under the laws of Maryland; PAGE 25 2. It is duly qualified to carry on its business in Maryland and California; 3. It is empowered under applicable laws and by its charter and by-laws to enter into and perform this Agreement; 4. All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement; 5. It is registered with the Securities and Exchange Commission as a Transfer Agent pursuant to Section 17A of the '34 Act; and 6. It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. D. Representations and Warranties of the Fund The Fund represents and warrants to Price Services that: 1. It is a corporation or business trust duly organized and existing and in good standing under the laws of Maryland or Massachusetts, as the case may be; 2. It is empowered under applicable laws and by its Articles of Incorporation or Declaration of Trust, as the case may be, and By-Laws to enter into and perform this Agreement; 3. All proceedings required by said Articles of Incorporation or Declaration of Trust, as the case may be, and By-Laws have been taken to authorize it to enter into and perform this Agreement; 4. It is an investment company registered under the Act; and PAGE 26 5. A registration statement under the Securities Act of 1933 ("the '33 Act") is currently effective and will remain effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of the Fund being offered for sale. E. Standard of Care/Indemnification Notwithstanding anything to the contrary in this Agreement: 1. Price Services shall not be liable to any Fund for any act or failure to act by it or its agents or subcontractors on behalf of the Fund in carrying or attempting to carry out the terms and provisions of this Agreement provided Price Services has acted in good faith and without negligence or willful misconduct and selected and monitored the performance of its agents and subcontractors with reasonable care. 2. The Fund shall indemnify and hold Price Services harmless from and against all losses, costs, damages, claims, actions and expenses, including reasonable expenses for legal counsel, incurred by Price Services resulting from: (i) any action or omission by Price Services or its agents or subcontractors in the performance of their duties hereunder; (ii) Price Services acting upon instructions believed by it to have been executed by a duly authorized officer of the Fund; or (iii) Price Services acting upon information provided by the Fund in form and under policies agreed to by Price Services and the Fund. Price Services shall not be entitled to such indemnification in respect of actions or omissions constituting negligence or willful PAGE 27 misconduct of Price Services or where Price Services has not exercised reasonable care in selecting or monitoring the performance of its agents or subcontractors. 3. Except as provided in Article L of this Agreement, Price Services shall indemnify and hold harmless the Fund from all losses, costs, damages, claims, actions and expenses, including reasonable expenses for legal counsel, incurred by the Fund resulting from the negligence or willful misconduct of Price Services or which result from Price Services' failure to exercise reasonable care in selecting or monitoring the performance of its agents or subcontractors. The Fund shall not be entitled to such indemnification in respect of actions or omissions constituting negligence or willful misconduct of such Fund or its agents or subcontractors; unless such negligence or misconduct is attributable to Price Services. 4. In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes or other causes reasonably beyond its control, such party shall not be liable to the other party for any loss, cost, damage, claim, action or expense resulting from such failure to perform or otherwise from such causes. 5. In order that the indemnification provisions contained in this Article E shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the PAGE 28 other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim, or to defend against said claim in its own name or in the name of the other party. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party's prior written consent. 6. Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement. F. Dual Interests It is understood that some person or persons may be directors, officers, or shareholders of both the Funds and Price Services (including Price Services's affiliates), and that the existence of any such dual interest shall not affect the validity of this Agreement or of any transactions hereunder except as otherwise provided by a specific provision of applicable law. G. Documentation o As requested by Price Services, the Fund shall promptly furnish to Price Services the following: o A certified copy of the resolution of the Directors/Trustees of the Fund authorizing the appointment of Price Services and the execution and delivery of this Agreement; PAGE 29 o A copy of the Articles of Incorporation or Declaration of Trust, as the case may be, and By- Laws of the Fund and all amendments thereto; o Specimens of all forms of outstanding and new stock/share certificates in the forms approved by the Board of Directors/Trustees of the Fund with a certificate of the Secretary of the Fund as to such approval; o All account application forms and other documents relating to Shareholders' accounts; o An opinion of counsel for the Fund with respect to the validity of the stock, the number of Shares authorized, the status of redeemed Shares, and the number of Shares with respect to which a Registration Statement has been filed and is in effect; and o A copy of the Fund's current prospectus. The delivery of any such document for the purpose of any other agreement to which the Fund and Price Services are or were parties shall be deemed to be delivery for the purposes of this Agreement. o As requested by Price Services, the Fund will also furnish from time to time the following documents: o Each resolution of the Board of Directors/Trustees of the Fund authorizing the original issue of its Shares; PAGE 30 o Each Registration Statement filed with the Securities and Exchange Commission and amendments and orders thereto in effect with respect to the sale of Shares with respect to the Fund; o A certified copy of each amendment to the Articles of Incorporation or Declaration of Trust, and the By-Laws of the Fund; o Certified copies of each vote of the Board of Directors/Trustees authorizing officers to give instructions to the Transfer Agent; o Specimens of all new certificates accompanied by the Board of Directors/Trustees' resolutions approving such forms; o Such other documents or opinions which Price Services, in its discretion, may reasonably deem necessary or appropriate in the proper performance of its duties; and o Copies of new prospectuses issued. Price Services hereby agrees to establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices. H. References to Price Services Each Fund agrees not to circulate any printed matter which contains any reference to Price Services without the prior PAGE 31 approval of Price Services, excepting solely such printed matter that merely identifies Price Services as agent of the Fund. The Fund will submit printed matter requiring approval to Price Services in draft form, allowing sufficient time for review by Price Services and its legal counsel prior to any deadline for printing. I. Compliance With Governmental Rules and Regulations Except as otherwise provided in the Agreement and except for the accuracy of information furnished to the Fund by Price Services, each Fund assumes full responsibility for the preparation, contents and distribution of its prospectuses and compliance with all applicable requirements of the Act, the '34 Act, the '33 Act, and any other laws, rules and regulations of governmental authorities having jurisdiction over the Fund. Price Services shall be responsible for complying with all laws, rules and regulations of governmental authorities having jurisdiction over transfer agents and their activities. J. Ownership of Software and Related Material All computer programs, magnetic tapes, written procedures and similar items purchased and/or developed and used by Price Services in performance of the Agreement shall be the property of Price Services and will not become the property of the Fund. K. Quality Service Standards Price Services and the Fund may from time to time agree to certain quality service standards, as well as incentives and penalties with respect to Price Services' hereunder. PAGE 32 L. As Of Transactions For purposes of this Article L, the term "Transaction" shall mean any single or "related transaction" (as defined below) involving the purchase or redemption of Shares (including exchanges) that is processed at a time other than the time of the computation of the Fund's net asset value per Share next computed after receipt of any such transaction order by Price Services. If more than one Transaction ("Related Transaction") in the Fund is caused by or occurs as a result of the same act or omission, such transactions shall be aggregated with other transactions in the Fund and be considered as one Transaction. o Reporting Price Services shall: 1. Utilize a system to identify all Transactions, and shall compute the net effect of such Transactions upon the Fund on a daily, monthly and rolling 365 day basis. The monthly and rolling 365 day periods are hereafter referred to as "Cumulative". 2. Supply to the Fund, from time to time as mutually agreed upon, a report summarizing the Transactions and the daily and Cumulative net effects of such Transactions both in terms of aggregate dilution and loss ("Dilution") or gain and negative dilution ("Gain") experienced by the Fund, and the impact such Gain or Dilution has had upon the Fund's net asset value per Share. PAGE 33 3. With respect to any Transaction which causes Dilution to the Fund of $25,000 or more, immediately provide the Fund: (i) a report identifying the Transaction and the Dilution resulting therefrom, (ii) the reason such Transaction was processed as described above, and (iii) the action that Price Services has or intends to take to prevent the reoccurrence of such as of processing ("Report"). o Liability 1. It will be the normal practice of the Funds not to hold Price Services liable with respect to any Transaction which causes Dilution to any single Fund of less than $25,000. Price Services will, however, closely monitor for each Fund the daily and Cumulative Gain/Dilution which is caused by Transactions of less than $25,000. When the Cumulative Dilution to any Fund exceeds 3/10 of 1% per share, Price Services, in consultation with counsel to the Fund, will make appropriate inquiry to determine whether it should take any remedial action. Price Services will report to the Board of Directors/Trustees of the Fund ("Board") any action it has taken. 2. Where a Transaction causes Dilution to a Fund of $25,000 or more ("Significant Transaction"), Price Services will review with counsel to the Fund the Report and the circumstances surrounding the underlying PAGE 34 Transaction to determine whether the Transaction was caused by or occurred as a result of a negligent act or omission by Price Services. If it is determined that the Dilution is the result of a negligent action or omission by Price Services, Price Services and outside counsel for the Fund will negotiate settlement. All such Significant Transactions will be reported to the Board at its next meeting (unless the settlement fully compensates the Fund for any Dilution). Any Significant Transaction, however, causing Dilution in excess of the lesser of $100,000 or a penny per Share will be promptly reported to the Board. Settlement will not be entered into with Price Services until approved by the Board. The factors the Board would be expected to consider in making any determination regarding the settlement of a Significant Transaction would include but not be limited to: o Procedures and controls adopted by Price Services to prevent "As Of" processing; o Whether such procedures and controls were being followed at the time of the Significant Transaction; o The absolute and relative volume of all transactions processed by Price Services on the day of the Significant Transaction; PAGE 35 o The number of Transactions processed by Price Services during prior relevant periods, and the net Dilution/Gain as a result of all such transactions to the Fund and to all other Price Funds; o The prior response of Price Services to recommendations made by the Funds regarding improvement to the Transfer Agent's "As Of" Processing Procedures. M. Term and Termination of Agreement o This Agreement shall run for a period of one (1) year from the date first written above and will be renewed from year to year thereafter unless terminated by either party as provided hereunder. o This Agreement may be terminated by the Fund upon one hundred twenty (120) days' written notice to Price Services; and by Price Services, upon three hundred sixty-five (365) days' writing notice to the Fund. o Upon termination hereof, the Fund shall pay to Price Services such compensation as may be due as of the date of such termination, and shall likewise reimburse for out-of- pocket expenses related to its services hereunder. N. Notice Any notice as required by this Agreement shall be sufficiently given (i) when sent to an authorized person of the other party at the address of such party set forth above or at PAGE 36 such other address as such party may from time to time specify in writing to the other party; or (ii) as otherwise agreed upon by appropriate officers of the parties hereto. O. Assignment Neither this Agreement nor any rights or obligations hereunder may be assigned either voluntarily or involuntarily, by operation of law or otherwise, by either party without the prior written consent of the other party, provided this shall not preclude Price Services from employing such agents and subcontractors as it deems appropriate to carry out its obligations set forth hereunder. P. Amendment/Interpretive Provisions The parties by mutual written agreement may amend this Agreement at any time. In addition, in connection with the operation of this Agreement, Price Services and the Fund may agree from time to time on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions are to be signed by all parties and annexed hereto, but no such provision shall contravene any applicable Federal or state law or regulation and no such interpretive or additional provision shall be deemed to be an amendment of this Agreement. Q. Further Assurances Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof. PAGE 37 R. Maryland Law to Apply This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of Maryland. S. Merger of Agreement This Agreement, including the attached Appendices and Schedules supersedes any prior agreement with respect to the subject hereof, whether oral or written. T. Counterparts This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instruments. U. The Parties All references herein to "the Fund" are to each of the Funds listed on Appendix A individually, as if this Agreement were between such individual Fund and Price Services. In the case of a series Fund or trust, all references to "the Fund" are to the individual series or portfolio of such Fund or trust, or to such Fund or trust on behalf of the individual series or portfolio, as appropriate. The "Fund" also includes any T. Rowe Price Funds which may be established after the execution of this Agreement. Any reference in this Agreement to "the parties" shall mean Price Services and such other individual Fund as to which the matter pertains. V. Directors, Trustees and Shareholders and Massachusetts Business Trust It is understood and is expressly stipulated that neither the holders of Shares in the Fund nor any Directors or Trustees PAGE 38 of the Fund shall be personally liable hereunder. With respect to any Fund which is a party to this Agreement and which is organized as a Massachusetts business trust, the term "Fund" means and refers to the trustees from time to time serving under the applicable trust agreement (Declaration of Trust) of such Trust as the same may be amended from time to time. It is expressly agreed that the obligations of any such Trust hereunder shall not be binding upon any of the trustees, shareholders, nominees, officers, agents or employees of the Trust, personally, but bind only the trust property of the Trust, as provided in the Declaration of Trust of the Trust. The execution and delivery of this Agreement has been authorized by the trustees and signed by an authorized officer of the Trust, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them, but shall bind only the trust property of the Trust as provided in its Declaration of Trust. W. Captions The captions in the Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. PAGE 39 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf under their seals by and through their duly authorized officers. DATED: 2/18/94 T. ROWE PRICE SERVICES, INC. ATTEST: /s/Barbara A. VanHorn /s/Mark E. Rayford ____________________ BY:___________________________ Barbara A. VanHorn Mark E. Rayford T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE BLUE CHIP GROWTH FUND, INC. T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE DIVIDEND GROWTH FUND, INC T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund PAGE 40 T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Discovery Fund T. Rowe Price International Stock Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Fund T. Rowe Price Latin America Fund T. ROWE PRICE MID-CAP GROWTH FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW HORIZONS FUNDS, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE OTC FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund New Jersey Tax-Free Money Fund Virginia Tax-Free Money Fund Florida Insured Intermediate Tax-Free Fund Georgia Tax-Free Bond Fund T. ROWE PRICE SUMMIT FUNDS, INC. Summit Cash Reserves Fund Summit Limited-Term Bond Fund Summit GNMA Fund PAGE 41 T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC. Summit Municipal Money Market Fund Summit Municipal Intermediate Fund Summit Municipal Income Fund T. ROWE PRICE TAX-EXEMPT MONEY FUND,INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-FREE INSURED INTERMDIATE BOND FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund DATED: 2/16/94 ATTEST: /s/Lenora V. Hornung /s/Carmen F. Deyesu _________________________ BY:__________________________ Lenora V. Hornung Carmen F. Deyesu PAGE 42 APPENDIX A The following Funds are parties to this Agreement, and have so indicated their intention to be bound by such Agreement by executing the Agreement on the dates indicated thereon. T. Rowe Price Adjustable Rate U.S. Government Fund, Inc. T. Rowe Price Blue Chip Growth Fund, Inc. T. Rowe Price Balanced Fund, Inc. T. Rowe Price California Tax-Free Income Trust on behalf of the California Tax-Free Bond Fund and California Tax-Free Money Fund T. Rowe Price Capital Appreciation Fund T. Rowe Price Dividend Growth Fund, Inc. T. Rowe Price Equity Income Fund T. Rowe Price GNMA Fund T. Rowe Price Growth & Income Fund, Inc. T. Rowe Price Growth Stock Fund, Inc. T. Rowe Price High Yield Fund, Inc. T. Rowe Price Index Trust, Inc. on behalf of the T. Rowe Price Equity Index Fund T. Rowe Price Institutional International Funds, Inc. on behalf of the Foreign Equity Fund T. Rowe Price International Funds, Inc. on behalf of the T. Rowe Price International Bond Fund and T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Fund T. Rowe Price Latin America Fund T. Rowe Price Mid-Cap Growth Fund PAGE 43 T. Rowe Price New America Growth Fund T. Rowe Price New Era Fund, Inc. T. Rowe Price New Horizons Fund, Inc. T. Rowe Price New Income Fund, Inc. T. Rowe Price Prime Reserve Fund, Inc. T. Rowe Price OTC Fund, Inc. T. Rowe Price Science & Technology Fund, Inc. T. Rowe Price Short-Term Bond Fund, Inc. T. Rowe Price Small-Cap Value Fund, Inc. T. Rowe Price Spectrum Fund, Inc. on behalf of the Spectrum Growth Fund Spectrum Income Fund T. Rowe Price State Tax-Free Income Trust on behalf of the Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund New Jersey Tax-Free Bond Fund Virginia Tax-Free Bond Fund Georgia Tax-Free Bond Fund Florida Insured Intermediate Tax-Free Fund T. Rowe Price Tax-Exempt Money Fund, Inc. T. Rowe Price Tax-Free High Yield Fund, Inc. T. Rowe Price Tax-Free Income Fund, Inc. T. Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc. T. Rowe Price Tax-Free Short-Intermediate Fund, Inc. T. Rowe Price U.S. Treasury Funds, Inc. on behalf of the U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. Rowe Price Summit Funds, Inc. on behalf of the Summit Cash Reserves Fund Summit Limited-Term Bond Fund Summit GNMA Fund PAGE 44 T. Rowe Price Summit Municipal Funds, Inc. on behalf of the Summit Municipal Money Market Fund Summit Municipal Intermediate Fund Summit Municipal Income Fund PAGE 45 SCHEDULE A - FEE SCHEDULE Effective January 1, 1994 to December 31, 1994, For the account of: THE T. ROWE PRICE FUNDS EQUITY FUNDS T. Rowe Price New American Growth Fund T. Rowe Price Growth Stock Fund, Inc. T. Rowe Price New Horizons Fund, Inc. T. Rowe Price New Era Fund, Inc. T. Rowe Price International Stock Fund T. Rowe Price Equity Income Fund T. Rowe Price Growth & Income Fund, Inc. T. Rowe Price Capital Appreciation Fund T. Rowe Price Science & Technology Fund, Inc. T. Rowe Price Small Capital Value Fund, Inc. T. Rowe Price International Discovery Fund Foreign Equity Fund T. Rowe Price Equity Index Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Spectrum Growth Fund T.Rowe Price Japan Fund T. Rowe Price Latin America Fund T. Rowe Price Balanced Fund, Inc. T. Rowe Price Dividend Growth Fund, Inc. T. Rowe Price Mid-Cap Growth Fund, Inc. T. Rowe Price Over-the-Counter Fund, Inc. T. Rowe Price Blue Chip Growth Fund, Inc. BOND FUNDS T. Rowe Price New Income Fund, Inc. T. Rowe Price Tax-Free Income Fund, Inc. T. Rowe Price New Jersey Tax-Free Bond Fund T. Rowe Price Virginia Tax-Free Bond Fund T. Rowe Price Short Term Bond Fund, Inc. T. Rowe Price Tax-Free Short Intermediate Fund, Inc. T. Rowe Price High Yield Fund, Inc. T. Rowe Price Tax-Free High Yield Fund, Inc. T. Rowe Price Adjustable Rate U.S. Government Fund, Inc. T. Rowe Price GNMA Fund T. Rowe Price New York Tax-Free Bond Fund T. Rowe Price California Tax-Free Bond Fund T. Rowe Price International Bond Fund T. Rowe Price Maryland Short-Term Tax-Free Bond Fund T. Rowe Price Maryland Tax-Free Bond Fund T. Rowe Price U.S. Treasury Intermediate Fund T. Rowe Price U.S. Treasury Long-Term Fund T. Rowe Price Global Government Bond Fund PAGE 46 T. Rowe Price Spectrum Income Fund T. Rowe Price Short-term Global Bond Fund T. Rowe Price Tax-Free Insured Intermediate Fund, Inc. T. Rowe Price Georgia Tax-Free Bond Fund T. Rowe Price Florida Insured Intermediate Tax-Free Fund T. Rowe Price Summit Limited-Term Bond Fund T. Rowe Price Summit GNMA Fund T. Rowe Price Summit Municipal Intermediate Fund T. Rowe Price Summit Municipal Income Fund Money Market Funds T. Rowe Price Prime Reserve Fund, Inc. T. Rowe Price Tax-Exempt Money Fund, Inc. T. Rowe Price U.S. Treasury Money Fund T. Rowe Price New York Tax-Free Money Fund T. Rowe Price California Tax-Free Money Fund T. Rowe Price Summit Cash Reserves Fund T. Rowe Price Summit Municipal Money Market Fund PAGE 47 The following fees for services provided by T. Rowe Price Services, Inc. (TRPS) and vendors will be billed by TRPS for 1994: I. T. Rowe Price Services Maintenance and Transaction Charges - Billable Monthly A. Base Fee 1. Per Fund - Beginning January 1, 1994, chargeable at the rate of $1,000 per month to each Fund shown on the previous page. The fee is waived for new Funds for the first 6 months after effective date. 2. Monthly - $5,987,000 payable in twelve monthly installments of $498,917. B. Per Account Annual Fee - $3.63 for each Equity, Bond, and Money Market Account serviced. The Per Account Annual Fee will be billed monthly at a rate of 1/12 of the annual fee for each Fund account serviced during the month. Accounts serviced is defined as all open accounts at month end plus accounts which closed during the month. C. Transaction Fees 1. New Account Fees a. $3.00 for every account opened, including fiduciary accounts, excluding those opened by exchange and those established as described in (b) below. b. A fee of $1.00 will be assessed for accounts established within the model and list functions programs and under the agreement that the registrant's name will be quality controlled subsequent to its establishment. 2. Non-Automated Transactions a. $1.05 for each non-automated transaction and maintenance item processed for the Fund Group as a whole during a month. The non-automated transaction count will include all manually processed price dependent and maintenance transactions. Also, the number of new account setups will be excluded from the number of non-automated transactions. b. Fee to be charged to the Funds based on each Fund's number of total non-automated transactions and maintenance. c. Fee to be billed monthly for that month. PAGE 48 d. NOTE: The transaction count should not include correction of transactions caused by non-shareholder errors. D. Telephone Fee Billed at the rate of $5.20 per call for shareholder servicing calls received in excess of 34,000 calls per month. Calls received in Retail Services are allocated to the Funds based on accounts serviced and calls received in Telephone Services are allocated based on actual calls received. E. Items Scanned $.29 will be billed for each document page scanned. It will be allocated based on the number of items indexed to each Fund. F. Tele*Access Base fee, per month for all calls is $39,000. G. Institutional Electronic Interface Maximum fee calculated is 10 basis points or less per Fund. 10 basis points < $500 million 8 basis points > $500 million < $1 billion 5 basis points > $1 billion < $2 billion 3 basis points > $2 billion H. Correspondence $4.20 billed for each shareholder correspondence request completed in writing or by phone. Allocated to the Funds based on accounts serviced. I. Telephone Transaction Fee Each price dependent transaction initiated through the Telephone Services Group will be charged $.50. II. Vendor Fees A. DST 1. Annual Open Account Fee a. $1.77 for each Equity Fund account serviced. b. $4.20 for each Bond Fund account serviced. c. $4.20 for each Money Market Fund account serviced. PAGE 49 The Open Account Fee will be billed monthly at a rate of 1/12 of the annual fee for each Fund account serviced during the month. 2. Closed Account Fee (Annualized) Payable at an annual rate of $1.44. The Closed Account Fee will be billed monthly at a rate of 1/12 of the annual rate and will be charged in the month following the month during which such account is closed and shall cease to be charged in the month following the Purge Date. 3. Fiduciary Sub-Accounting Payable at the rate of $1.00 per month for each fiduciary account. Fiduciary accounts closed during the prior year will not be included as billable items. 4. Annual Base Fee Per Fund Annual Fee of $7,205.88 will be charged at a monthly rate of $600.49. The fee is waived for the first six (6) months after a new Fund is effective. The definition of new Fund excludes Funds created by mergers, purchases, or reorganizations. 5. Bank Account Reconciliation System (Comp/Recon) Annual charge of $120,000 payable at a rate of $10,000 per month. 6. TRAC 2000 - $7.00 per participant, per year 7. Voice Response Unit a. $500 Set-up Fee will be charged for each investment company unit. b. $2,500 Maintenance Fee will be billed each month. c. $.50 will be billed per call connected to the VRU. 8. Contingent Deferred Sales Charge. Billed to each Fund utilizing this service at an annual rate of $1.03 per open account. B. State Street Bank 1. NSCC Settlements PAGE 50 a. $11.30 for net redemptions b. $ 5.14 per net purchases 2. Checkwriting Fees $.565 for each checkwriting item processed (i.e. those resulting in either redemptions or returned as non- processable). This includes signature card maintenance and verification, manual or special processing of checks, stop payment processing, settlement functions, and postage and mailing expenses to return canceled checks to shareholders. 3. Stop Payments - Redemption/Distribution Accounts $15.00 for each manual stop payment placed on a redemption or distribution check. 4. ACH Transactions $.06 for each ACH transaction processed by the Bank and submitted to the ACH network. 5. Internal Book Transfers $1.08 billed for money movement between TRP DDA's at the Bank. Money is transferred by debit and credit memos. 6. Wire Fees $4.00 for each incoming, manual, and internal bank transfer wire; $3.75 for each outgoing transmission wire. 7. Paid checks $.18 for each paid check processed. 8. DDA Research $1.03 per request. 9. Special Handling $2,917 billed per month for the special handling of checks at Marina Bay. 10. Nightly Audits $.0285 per page for the audit of the DST nightly update. PAGE 51 11. VAX Computer Usage Billed at the rate of $8,318 per month which covers both: a. System Fee - for use of sub-systems such as capital stock interface, PDPS, Direct Deposit, etc. b. Communication Fee - charge for the line, modems, and statistical multiplexers. 12. Abandoned Property Services based on the following fee schedule: a. Administrative charge $125/Fund b. Processing charges $1.00/account c. Due Diligence Mailings $1.50/account d. Labor will be charged based on the number of hours required. 13. Account maintenance $16.00 per account per month 14. Reporting (SSCAN) for selected accounts - $50.00 per account per month 15. FDIC Passthrough - charged at prevailing FDIC rates C. J.P. Morgan Bank 1. Wire Transfer Fees Annual Account Maintenance $250.00 Annual MORCOM/CASH First Account $5,000.00 Subsequent Accounts $3,000.00 Batch File Transfer (BFT) Transmission $15.00 each (capped at 10 per month) BFT Per Outgoing Wire Peak (8 a.m. and 8 p.m.) $0.064 Off Peak (8 p.m. and 8 a.m.) $0.032 Outgoing Wires Straight-through (Repetive or Freetype) 80% of total volume $3.25 Book Transfer (IBT) $1.50 Repair (Freeform) $7.00 Zero Balance Transfer $1.00 PAGE 52 Incoming Wires Fed or CHIPS $3.25 Book (IBT) $1.50 FDIC Passthrough - charged at prevailing FDIC rates 2. Controlled Disbursement Fees Annual Account Maintenance (capped at 6 accounts) $760.00 per account Annual MORCOM Next Day $1,385.00 per account Annual MORCOM Check $715.00 per account Batch File Transfer (BFT) Transmission (capped at 10 per month) $15.00 each Same Day Match Pay (Dividend & Redemption Checks) DCD Match $2,500.00 per account TRPS Matches .005 per item Checks Paid Up to 500,000 items $0.051 Up to 750,000 items $0.042 Up to 1,000,000 items $0.035 Stops On-line $3.00 Returned Checks $3.00 per item 3. The bank may charge interest at a rate in excess of normal borrowing rates if the TRPS balance is overdrawn or is in a negative collected balance status. D. Fleet Bank of Massachusetts 1. Demand Deposit Services a. Monthly Account Maintenance $13.00/ 14.00 in May PAGE 53 b. Deposit Ticket $.85 c. Deposited Item Fee (all inclusive) $.054 d. Return of a Deposited Item Redeposit Fee per deposit $1.00 Per redeposited item $.50 Returned item $3.00 2. Treasury Master System a. Previous Day Balance Reporting Monthly module charge $60.00 Per Account $10.00 b. Previous Day Detail Monthly module charge $70.00 Per Transaction $.10 c. Current Day Detail Monthly module charge $70.00 Per Transaction $.10 d. Depository Transfer Monthly module charge $75.00 Per Transfer $.25 e. Money Movers per transfer $.50 f. Wire Transfer no addt'l charge- normal wire fees only 3. Wire Transfer a. Outgoing Repetitive Wire Placed prior to 1:00 pm $9.00 Placed after 1:00 pm $10.00 b. Outgoing Non-Repetitive Wire Placed prior to 1:00 pm $12.00 Placed after 1:00 pm $13.00 c. Incoming Wire $6.00 4. The bank may charge interest at a rate in excess of normal borrowing rates if the TRPS balance is overdrawn or is in a negative collected balance status. 5. FDIC Passthrough - charged at prevailing FDIC rates. E. First National Bank of Maryland 1. Internal Fund Transfer $5.40 2. Returned Items $2.70 PAGE 54 3. Deposit Items Charge varies 4. Deposit Tickets $.45 5. Return/redeposit items $2.25 6. Deposit Corrections $4.50 7. Check copy $9.00 8. First Facts CDA Repetitive Wire $4.05 System Reports/Per Module $27.00 Per Report Previous Day $1.80 Per Report Current Day $3.60 9. Account maintenance $11.25 10. Debit item $.54 11. Credit transaction $.54 12. Foreign Deposit $4.50 13. ACH Debit $.117 14. Tax Deposits $.90 15. Film - Monthly $121.50 16. TRPS may be charged interest when TRPS's balance at FNB is in a negative collected balance status. TRPS may also receive balance credits on a positive investable balance 17. FDIC Passthrough charged at prevailing FDIC rates III. New Funds Funds added during the term of this contract may have their Maintenance and Transaction charges and other charges (Section I) waived for a period of time, as agreed to by TRPS and Fund Directors, following the establishment of the Fund. Out-of- pocket expenses will be billed to the Fund from the Fund's inception. IN WITNESS WHEREOF, T.Rowe Price Funds and T.Rowe Price Services, Inc. have agreed upon this fee schedule to be executed in their names and on their behalf through their duly authorized officers: T. ROWE PRICE FUNDS T. ROWE PRICE SERVICES, INC. /s/Carmen F. Deyesu /s/Mark E. Rayford NAME ____________________ NAME ________________________ Carmen F. Deyesu Mark E. Rayford TITLE Treasurer TITLE President DATE 2/16/94 DATE 2/18/94 PAGE 55 AMENDMENT NO. 1 TRANSFER AGENCY AND SERVICE AGREEMENT Between T. ROWE PRICE SERVICES, INC. And THE T. ROWE PRICE FUNDS The Transfer Agency and Service Agreement of January 1, 1994, between T. Rowe Price Services, Inc. and each of the Parties listed on Appendix A thereto is hereby amended, as of March 1, 1994, by adding thereto the T. Rowe Price Equity Series, Inc. and T. Rowe Price International Series, Inc. Notwithstanding anything to the contrary herein, it is understood that the T. Rowe Price Equity Series, Inc. and T. Rowe Price International Series, Inc. (collectively referred to as the "Funds") shall not be responsible for paying any of the fees or expenses set forth herein but that, in accordance with the Investment Management Agreements, dated March 1, 1994, between the Funds and T. Rowe Price Associates, Inc. and Rowe Price- Fleming International, Inc. (collectively referred to as "T. Rowe Price"), the Funds will require T. Rowe Price to pay all such fees and expenses. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE BLUE CHIP GROWTH FUND, INC. T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE DIVIDEND GROWTH FUND, INC PAGE 56 T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE EQUITY SERIES, INC. T. Rowe Price Equity Income Portfolio T. Rowe Price New America Growth Portfolio T. ROWE PRICE GNMA FUND T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Discovery Fund T. Rowe Price International Stock Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Fund T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International Stock Portfolio T. ROWE PRICE MID-CAP GROWTH FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW HORIZONS FUNDS, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE OTC FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. PAGE 57 T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund New Jersey Tax-Free Money Fund Virginia Tax-Free Money Fund Florida Insured Intermediate Tax-Free Fund Georgia Tax-Free Bond Fund T. ROWE PRICE SUMMIT FUNDS, INC. T. Rowe Price Summit Cash Reserves Fund T. Rowe Price Summit Limited-Term Bond Fund T. Rowe Price Summit GNMA Fund T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC. T. Rowe Price Summit Municipal Money Market Fund T. Rowe Price Summit Municipal Intermediate Fund T. Rowe Price Summit Municipal Income Fund T. ROWE PRICE TAX-EXEMPT MONEY FUND,INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund Attest: /s/Lenora V. Hornung /s/Carmen F. Deyesu ______________________ ______________________________ Lenora V. Hornung, By: Carmen F. Deyesu Secretary PAGE 58 Attest: T. ROWE PRICE SERVICES, INC. /s/Barbara A. VanHorn /s/Henry H. Hopkins ______________________ ______________________________ Barbara A. VanHorn, By: Henry H. Hopkins, Assistant Secretary Vice President EX-99.B9B-FUNDACCT 10 FUND ACCOUNTING AGREEMENT The Agreement between T. Rowe Price Associates, Inc. and T. Rowe Price Funds for Fund Accounting Services, dated January 1, 1994, as amended, should be inserted here. PAGE 1 AGREEMENT between T. ROWE PRICE ASSOCIATES, INC. and THE T. ROWE PRICE FUNDS for FUND ACCOUNTING SERVICES PAGE 2 TABLE OF CONTENTS Page Article A Terms of Appointment/Duties of Price Associates .1 Article B Fees and Out-of-Pocket Expenses . . . . . . . . .2 Article C Representations and Warranties of Price Associates3 Article D Representations and Warranties of the Fund. . . .3 Article E Ownership of Software and Related Material. . . .3 Article F Quality Service Standards . . . . . . . . . . . .4 Article G Standard of Care/Indemnification. . . . . . . . .4 Article H Dual Interests. . . . . . . . . . . . . . . . . .5 Article I Documentation . . . . . . . . . . . . . . . . . .5 Article J Recordkeeping/Confidentiality . . . . . . . . . .5 Article K Compliance with Governmental Rules and Regulations6 Article L Terms and Termination of Agreement. . . . . . . .6 Article M Notice. . . . . . . . . . . . . . . . . . . . . . 6 Article N Assignment. . . . . . . . . . . . . . . . . . . . 7 Article O Amendment/Interpretive Provisions . . . . . . . .7 Article P Further Assurances. . . . . . . . . . . . . . . .7 Article Q Maryland Law to Apply . . . . . . . . . . . . . .7 Article R Merger of Agreement . . . . . . . . . . . . . . .7 Article S Counterparts. . . . . . . . . . . . . . . . . . .8 Article T The Parties . . . . . . . . . . . . . . . . . . . 8 Article U Directors, Trustee and Shareholders and Massachusetts Business Trust. . . . . . . . . . . . . . . . . .8 PAGE 3 Article V Captions. . . . . . . . . . . . . . . . . . . . . 9 PAGE 4 AGREEMENT made as of the first day of January, 1994, by and between T. ROWE PRICE ASSOCIATES, INC., a Maryland corporation having its principal office and place of business at 100 East Pratt Street, Baltimore, Maryland 21202 ("Price Associates"), and each Fund which is listed on Appendix A (as such Appendix may be amended from time to time) and which evidences its agreement to be bound hereby by executing a copy of this Agreement (each such Fund individually hereinafter referred to as "the Fund", whose definition may be found in Article T); WHEREAS, Price Associates has the capability of providing the Funds with certain accounting services ("Accounting Services"); WHEREAS, the Fund desires to appoint Price Associates to provide these Accounting Services and Price Associates desires to accept such appointment; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: A. Terms of Appointment/Duties of Price Associates Subject to the terms and conditions set forth in this Agreement, the Fund hereby employs and appoints Price Associates to provide, and Price Associates agrees to provide, the following Accounting Services: a. Maintain for each Fund a daily trial balance, a general ledger, subsidiary records and capital stock accounts; PAGE 5 b. Maintain for each Fund an investment ledger, including amortized bond and foreign dollar denominated costs where applicable; c. Maintain for each Fund all records relating to the Fund's income and expenses; d. Provide for the daily valuation of each Fund's portfolio securities and the computation of each Fund's daily net asset value per share. Such daily valuations shall be made in accordance with the valuation policies established by each of the Fund's Board of Directors including, but not limited to, the utilization of such pricing valuation sources and/or pricing services as determined by the Boards. Price Associates shall have no liability for any losses or damages incurred by the Fund as a result of erroneous portfolio security evaluations provided by such designated sources and/or pricing services; provided that, Price Associates reasonably believes the prices are accurate, has adhered to its normal verification control procedures, and has otherwise met the standard of care as set forth in Article G of this Agreement; e. Provide daily cash flow and transaction status information to each Fund's adviser; f. Prepare for each Fund such financial information that is reasonably necessary for shareholder reports, reports to PAGE 6 the Board of Directors and to the officers of the Fund, and reports to the Securities and Exchange Commission and the Internal Revenue Service and other Federal and state regulatory agencies; g. Provide each Fund with such advice that may be reasonably necessary to properly account for all financial transactions and to maintain the Fund's accounting procedures and records so as to insure compliance with generally accepted accounting and tax practices and rules; h. Maintain for each Fund all records that may be reasonably required in connection with the audit performed by each Fund's independent accountant, the Securities and Exchange Commission, the Internal Revenue Service or such other Federal or state regulatory agencies; and i. Cooperate with each Fund's independent public accountants and take all reasonable action in the performance of its obligations under the Agreement to assure that the necessary information is made available to such accountants for the expression of their opinion without any qualification as to the scope of their examination including, but not limited to, their opinion included in each such Fund's annual report on Form N-SAR and annual amendment to Form N-1A. B. Fees and Out-of-Pocket Expenses Each Fund shall pay to Price Associates for its Accounting Services hereunder, fees as set forth in the Schedule attached hereto. In addition, each Fund will reimburse Price Associates PAGE 7 for out-of-pocket expenses such as postage, printed forms, voice and data transmissions, record retention, disaster recovery, third party vendors, equipment leases and other similar items as may be agreed upon between Price Associates and the Fund. Some invoices will contain costs for both the Funds and other funds services by Price Associates. In these cases, a reasonable allocation methodogy will be used to allocate these costs to the Funds. C. Representations and Warrantees of Price Associates Price Associates represents and warrants to the Fund that: 1. It is a corporation duly organized and existing in good standing under the laws of Maryland. 2. It is duly qualified to carry on its business in Maryland. 3. It is empowered under applicable laws and by its charter and By-Laws to enter into and perform this Agreement. 4. All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. 5. It has, and will continue to have, access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. D. Representations and Warrantees of the Fund The Fund represents and warrants to Price Associates that: 1. It is a corporation or business trust, as the case may be, duly organized and existing and in good standing under the laws of Maryland or Massachusetts, as the case may be. PAGE 8 2. It is empowered under applicable laws and by its Articles of Incorporation or Declaration of Trust, as the case may be, and By-Laws have been taken to authorize it to enter into and perform this Agreement. 3. All proceedings required by said Articles of Incorporation or Declaration of Trust, as the case may be, and By-Laws have been taken to authorize it to enter into and perform this Agreement. E. Ownership of Software and Related Material All computer programs, magnetic tapes, written procedures, and similar items purchased and/or developed and used by Price Associates in performance of the Agreement shall be the property of Price Associates and will not become the property of the Funds. F. Quality Service Standards Price Associates and the Fund may, from time to time, agree to certain quality service standards, with respect to Price Associates' services hereunder. G. Standard of Care/Indemnification Notwithstanding anything to the contrary in this Agreement: 1. Price Associates shall not be liable to any Fund for any act or failure to act by it or its agents or subcontractors on behalf of the Fund in carrying or attempting to carry out the terms and provisions of the Agreement provided Price Associates has acted in good faith and without negligence or willful misconduct and selected and monitored the performance of its agents and subcontractors with reasonable care. PAGE 9 2. The Fund shall indemnify and hold Price Associates harmless from and against all losses, costs, damages, claims, actions, and expenses, including reasonable expenses for legal counsel, incurred by Price Associates resulting from: (i) any action or omission by Price Associates or its agents or subcontractors in the performance of their duties hereunder; (ii) Price Associates acting upon instructions believed by it to have been executed by a duly authorized officer of the Fund; or (iii) Price Associates acting upon information provided by the Fund in form and under policies agreed to by Price Associates and the Fund. Price Associates shall not be entitled to such indemnification in respect of actions or omissions constituting negligence or willful misconduct of Price Associates or where Price Associates has not exercised reasonable care in selecting or monitoring the performance of its agents or subcontractors. 3. Price Associates shall indemnify and hold harmless the Fund from all losses, costs, damages, claims, actions and expenses, including reasonable expenses for legal counsel, incurred by the Fund resulting from the negligence or willful misconduct of Price Associates or which result from Price Associates' failure to exercise reasonable care in selecting or monitoring the performance of its agents or subcontractors. The Fund shall not be entitled to such indemnification with respect to actions or omissions constituting negligence or willful misconduct of such Fund or its agents or subcontractors; unless such negligence or misconduct is attributable to Price Associates. PAGE 10 4. In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes or other causes reasonably beyond its control, such party shall not be liable to the other party for any loss, cost, damage, claim, action or expense resulting from such failure to perform or otherwise from such causes. 5. In order that the indemnification provisions contained in this Article F shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim, or to defend against said claim in its own name or in the name of the other party. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party's prior written consent. 6. Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement. H. Dual Interests It is understood that some person or persons may be directors, officers, or shareholders of both the Fund and Price PAGE 11 Associates (including Price Associates' affiliates), and that the existence of any such dual interest shall not affect the validity of this Agreement or of any transactions hereunder except as otherwise provided by a specific provision of applicable law. I. Documentation As requested by Price Associates, the Fund shall promptly furnish to Price Associates such documents as it may reasonably request and as are necessary for Price Associates to carry out its responsibilities hereunder. J. Recordkeeping/Confidentiality 1. Price Associates shall keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable, provided that Price Associates shall keep all records in such form and in such manner as required by applicable law, including the Investment Company Act of 1940 ("the Act") and the Securities Exchange Act of 1934 ("the '34 Act"). 2. Price Associates and the Fund agree that all books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential, and shall not be voluntarily disclosed to any other person, except: (a) after prior notification to and approval in writing by the other party hereto, which approval shall not be unreasonably withheld and may not be withheld where Price Associates or Fund may be exposed to civil or criminal contempt proceedings for failure to comply; (b) when requested to divulge PAGE 12 such information by duly constituted governmental authorities; or (c) after so requested by the other party hereto. K. Compliance With Governmental Rules and Regulations Except as otherwise provided in the Agreement and except for the accuracy of information furnished to the Funds by Price Associates, each Fund assumes full responsibility for the preparation, contents and distribution of its prospectuses, and for complying with all applicable requirements of the Act, the '34 Act, the Securities Act of 1933 (the "33 Act"), and any laws, rules and regulations of governmental authorities having jurisdiction over the Funds. L. Term and Termination of Agreement 1. This Agreement shall run for a period of one (1) year from the date first written above and will be renewed from year to year thereafter unless terminated by either party as provided hereunder. 2. This Agreement may be terminated by the Fund upon sixty (60) days' written notice to Price Associates; and by Price Associates, upon three hundred sixty-five (365) days' writing notice to the Fund. 3. Upon termination hereof, the Fund shall pay to Price Associates such compensation as may be due as of the date of such termination, and shall likewise reimburse for out-of-pocket expenses related to its services hereunder. M. Notice Any notice as required by this Agreement shall be sufficiently given (i) when sent to an authorized person of the PAGE 13 other party at the address of such party set forth above or at such other address as such party may from time to time specify in writing to the other party; or (ii) as otherwise agreed upon by appropriate officers of the parties hereto. N. Assignment Neither this Agreement nor any rights or obligations hereunder may be assigned either voluntarily or involuntarily, by operation of law or otherwise, by either party without the prior written consent of the other party, provided this shall not preclude Price Associates from employing such agents and subcontractors as it deems appropriate to carry out its obligations set forth hereunder. O. Amendment/Interpretive Provisions The parties by mutual written agreement may amend this Agreement at any time. In addition, in connection with the operation of this Agreement, Price Associates and the Fund may agree from time to time on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions are to be signed by all parties and annexed hereto, but no such provision shall contravene any applicable Federal or state law or regulation and no such interpretive or additional provision shall be deemed to be an amendment of this Agreement. PAGE 14 P. Further Assurances Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof. Q. Maryland Law to Apply This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of Maryland. R. Merger of Agreement This Agreement, including the attached Appendices and Schedules supersedes any prior agreement with respect to the subject hereof, whether oral or written. S. Counterparts This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instruments. T. The Parties All references herein to "the Fund" are to each of the Funds listed on Appendix A individually, as if this Agreement were between such individual Fund and Price Associates. In the case of a series Fund or trust, all references to "the Fund" are to the individual series or portfolio of such Fund or trust, or to such Fund or trust on behalf of the individual series or portfolio, as appropriate. The "Fund" also includes any T. Rowe Price Funds which may be established after the execution of this PAGE 15 Agreement. Any reference in this Agreement to "the parties" shall mean Price Associates and such other individual Fund as to which the matter pertains. U. Directors, Trustees and Shareholders and Massachusetts Business Trust It is understood and is expressly stipulated that neither the holders of shares in the Fund nor any Directors or Trustees of the Fund shall be personally liable hereunder. With respect to any Fund which is a party to this Agreement and which is organized as a Massachusetts business trust, the term "Fund" means and refers to the trustees from time to time serving under the applicable trust agreement (Declaration of Trust) of such Trust as the same may be amended from time to time. It is expressly agreed that the obligations of any such Trust hereunder shall not be binding upon any of the trustees, shareholders, nominees, officers, agents or employees of the Trust, personally, but bind only the trust property of the Trust, as provided in the Declaration of Trust of the Trust. The execution and delivery of this Agreement has been authorized by the trustees and signed by an authorized officer of the Trust, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them, but shall bind only the trust property of the Trust as provided in its Declaration of Trust. PAGE 16 V. Captions The captions in the Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf under their seals by and through their duly authorized officers. DATED: 2/22/94 T. ROWE PRICE ASSOCIATES, INC. ATTEST: /s/Barbara A. VanHorn /s/Alvin M. Younger _________________________ BY:___________________________ Barbara A. VanHorn Managing Director PAGE 17 T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE BLUE CHIP GROWTH FUND T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE DIVIDEND GROWTH FUND, INC. T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Discovery Fund T. Rowe Price International Stock Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Fund T. Rowe Price Latin America Fund T. ROWE PRICE MID-CAP GROWTH FUND T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE NEW ERA FUND, INC. PAGE 18 T. ROWE PRICE NEW HORIZONS FUNDS, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE OTC FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund New Jersey Tax-Free Bond Fund Virginia Tax-Free Bond Fund Florida Insured Intermediate Tax-Free Fund Georgia Tax-Free Bond Fund T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC. T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund PAGE 19 T. ROWE PRICE SUMMIT FUNDS, INC. Summit Cash Reserves Fund Summit Limited-Term Bond Fund Summit GNMA Fund T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC. Summit Municipal Money Market Fund Summit Municipal Intermediate Fund Summit Municipal Income Fund DATED: 2/16/94 ATTEST: /s/Lenora V. Hornung /s/Carmen F. Deyesu _________________________ BY:______________________________ Lenora V. Hornung Carmen F. Deyesu PAGE 20 APPENDIX A The following Funds are parties to this Agreement, and have so indicated their intention to be bound by such Agreement by executing the Agreement on the dates indicated thereon. T. Rowe Price Adjustable Rate U.S. Government Fund, Inc. T. Rowe Price Blue Chip Growth Fund, Inc. T. Rowe Price Balanced Fund, Inc. T. Rowe Price California Tax-Free Income Trust on behalf of the California Tax-Free Bond Fund and California Tax-Free Money Fund T. Rowe Price Capital Appreciation Fund T. Rowe Price Dividend Growth Fund, Inc. T. Rowe Price Equity Income Fund T. Rowe Price GNMA Fund T. Rowe Price Growth & Income Fund, Inc. T. Rowe Price Growth Stock Fund, Inc. T. Rowe Price High Yield Fund, Inc. T. Rowe Price Index Trust, Inc. on behalf of the T. Rowe Price Equity Index Fund T. Rowe Price Institutional International Funds, Inc. on behalf of the Foreign Equity Fund T. Rowe Price International Equity Fund, Inc. PAGE 21 T. Rowe Price International Funds, Inc. on behalf of the T. Rowe Price International Bond Fund and T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Fund T. Rowe Price Latin American Fund T. Rowe Price Mid-Cap Growth Fund T. Rowe Price New America Growth Fund T. Rowe Price New Era Fund, Inc. T. Rowe Price New Horizons Fund, Inc. T. Rowe Price New Income Fund, Inc. T. Rowe Price OTC Fund, Inc. T. Rowe Price Prime Reserve Fund, Inc. T. Rowe Price Science & Technology Fund, Inc. T. Rowe Price Short-Term Bond Fund, Inc. T. Rowe Price Small-Cap Value Fund, Inc. T. Rowe Price Spectrum Fund, Inc. on behalf of the Spectrum Growth Fund Spectrum Income Fund T. Rowe Price State Tax-Free Income Trust on behalf of the Maryland Tax-Free Bond Fund, Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund and New York Tax-Free Money Fund New Jersey Tax-Free Bond Fund Virginia Tax-Free Bond Fund Florida Insured Intermediate Tax-Free Bond Fund Georgia Tax-Free Bond Fund PAGE 22 T. Rowe Price Tax-Exempt Money Fund, Inc. T. Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc. T. Rowe Price Tax-Free High Yield Fund, Inc. T. Rowe Price Tax-Free Income Fund, Inc. T. Rowe Price Tax-Free Short-Intermediate Fund, Inc. T. Rowe Price U.S. Treasury Funds, Inc. on behalf of the U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. Rowe Price Summit Funds, Inc. on behalf of the Summit Cash Reserves Fund Summit Limited-Term Bond Fund Summit GNMA Fund T. Rowe Price Summit Municipal Funds, Inc. on behalf of Summit Municipal Money Market Fund Summit Municipal Intermediate Fund Summit Municipal Income Fund PAGE 23 FUND ACCOUNTING SERVICES 1994 FEE SCHEDULE A. Fee Structure 1. Base Fee Domestic Funds $60,000 each International Funds $100,000 each Spectrum Funds $35,000 each Per Fund fee for basic recordkeeping and financial reporting 2. Individual Fund Fee Total fees reflecting special $ 883,000 characteristics of each Fund 3. Stock Lending Fee Allocated to each Fund based $ 75,000 on ratio of net earnings from stock loans 4. Additional Funds Domestic Funds $60,000 each International Funds $100,000 each Spectrum Funds $35,000 each B. Total Cost Per Fund Growth Stock Fund $ 114,000 New Horizons Fund 95,000 Equity Income Fund 85,000 New Era Fund 72,000 International Stock Fund 115,000 Growth & Income Fund 85,000 New America Growth Fund 70,000 Capital Appreciation Fund 85,000 Small-Cap Value Fund 60,000 Foreign Equity Fund 105,000 International Discovery Fund 125,000 Science & Technology Fund 60,000 High Yield Fund 165,000 Tax-Free Income Fund 110,000 New Income Fund 100,000 Tax-Free High Yield Fund 110,000 European Stock Fund 100,000 Equity Index Fund 60,000 PAGE 24 New Asia Fund 110,000 Spectrum Growth Fund 35,000 GNMA Fund 120,000 International Bond Fund 125,000 Balanced Fund 90,000 Maryland Bond Fund 81,000 Tax-Free Short Intermediate Fund 85,000 Short-Term Bond Fund 120,000 California Bond Fund 72,000 New York Bond Fund 72,000 U.S. Treasury Short-Intermediate Fund 60,000 U.S. Treasury Long-Term Bond Fund 60,000 Spectrum Income Fund 35,000 Prime Reserve Fund 85,000 Tax-Exempt Money Fund 93,000 U.S. Treasury Money Fund 60,000 California Money Fund 67,000 New York Money Fund 67,000 Adjustable Rate Government Fund 110,000 Virginia Bond Fund 60,000 New Jersey Bond Fund 60,000 Global Government Bond Fund 100,000 OTC Fund 85,000 Japan Fund 100,000 Mid-Cap Growth Fund 60,000 Short-Term Global Fund 100,000 Maryland Short-Term Tax-Free Bond Fund 60,000 Florida Insured Intermediate Tax-Free Fund 60,000 Georgia Tax-Free Bond Fund 60,000 Tax-Free Insured Intermediate Bond Fund 60,000 Blue Chip Growth Fund 60,000 Dividend Growth Fund 65,000 Latin America Fund 100,000 Summit Cash Reserve Fund 60,000 Summit Limited-Term Bond Fund 60,000 Summit GNMA Fund 60,000 Summit Municipal Money Market Fund 60,000 Summit Municipal Intermediate Fund 60,000 Summit Municipal Income Fund 60,000 IN WITNESS WHEREOF, T. Rowe Price Funds and T. Rowe Price Associates, Inc. have agreed upon this fee schedule to be executed in their names and on their behalf through their duly authorized officers: T. ROWE PRICE FUNDS T. ROWE PRICE ASSOCIATES, INC. /s/Carmen F. Deyesu /s/Alvin M. Younger Name_________________________ Name__________________________ Carmen F. Deyesu Alvin M. Younger Title Treasurer Title Treasurer and Managing Director Date 2/16/94 Date 2/16/94 PAGE 25 AMENDMENT NO. 1 AGREEMENT between T. ROWE PRICE ASSOCIATES, INC. and THE T. ROWE PRICE FUNDS for FUND ACCOUNTING SERVICES The Agreement for Fund Accounting Services of January 1, 1994, between T. Rowe Price Associates, Inc. and each of the Parties listed on Appendix A thereto is hereby amended, as of March 1, 1994, by adding thereto the T. Rowe Price Equity Series, Inc. and T. Rowe Price International Series, Inc. Notwithstanding anything to the contrary herein, it is understood that the T. Rowe Price Equity Series, Inc. and T. Rowe Price International Series, Inc. (collectively referred to as the "Funds") shall not be responsible for paying any of the fees or expenses set forth herein but that, in accordance with the Investment Management AgreementS, dated March 1, 1994, between the Funds and T. Rowe Price Associates, Inc. and Rowe Price- Fleming International, Inc. (collectively referred to as "T. Rowe Price"), the Funds will require T. Rowe Price to pay all such fees and expenses. T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE BLUE CHIP GROWTH FUND, INC. T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST California Tax-Free Bond Fund California Tax-Free Money Fund T. ROWE PRICE CAPITAL APPRECIATION FUND PAGE 26 T. ROWE PRICE DIVIDEND GROWTH FUND, INC. T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE EQUITY SERIES, INC. T. Rowe Price Equity Income Portfolio T. Rowe Price New America Growth Portfolio T. ROWE PRICE GNMA FUND T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Discovery Fund T. Rowe Price International Stock Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Fund T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International Stock Portfolio T. ROWE PRICE MID-CAP GROWTH FUND T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW HORIZONS FUNDS, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE OTC FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. PAGE 27 T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE STATE TAX-FREE INCOME TRUST Maryland Tax-Free Bond Fund Maryland Short-Term Tax-Free Bond Fund New York Tax-Free Bond Fund New York Tax-Free Money Fund New Jersey Tax-Free Bond Fund Virginia Tax-Free Bond Fund Florida Insured Intermediate Tax-Free Fund Georgia Tax-Free Bond Fund T. ROWE PRICE SUMMIT FUNDS, INC. T. Rowe Price Summit Cash Reserves Fund T. Rowe Price Summit Limited-Term Bond Fund T. Rowe Price Summit GNMA Fund T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC. T. Rowe Price Summit Municipal Money Market Fund T. Rowe Price Summit Municipal Intermediate Fund T. Rowe Price Summit Municipal Income Fund T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE FUND, INC. T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC. T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC. T. ROWE PRICE TAX-FREE INCOME FUND, INC. T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC. T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund PAGE 28 Attest: /s/Lenora V. Hornung /s/Carmen F. Deyesu ________________________ ___________________________________ Lenora V. Hornung, By: Carmen F. Deyesu Secretary Attest: T. ROWE PRICE SERVICES, INC. /s/Barbara A. VanHorn /s/Henry H. Hopkins ________________________ ___________________________________ Barbara A. VanHorn, By: Henry H. Hopkins, Vice President Assistant Secretary EX-99.B9C-RPS 11 RPS AGREEMENT The Agreement between T. Rowe Price Retirement Plan Services, Inc. and the Taxable Funds, dated January 1, 1994, should be inserted here. PAGE 1 AGREEMENT between T. ROWE PRICE RETIREMENT PLAN SERVICES, INC. and EACH OF THE PARTIES INDICATED ON APPENDIX A PAGE 2 TABLE OF CONTENTS Page Article A Terms of Appointment . . . . . . . . . . . . .2 Article B Duties of RPS. . . . . . . . . . . . . . . . .2 1. Purchases - Retirement Plans and Retirement Accounts . . . . . . . . . . .2 2. Retirement Plans - Redemptions to Cover Distributions . . . . . . . . . . . . . .3 3. Exchanges. . . . . . . . . . . . . . . . .4 4. Shares held by Retirement Accounts . . . .4 5. Books and Records. . . . . . . . . . . . .4 6. Tax Information. . . . . . . . . . . . . .5 7. Other Information to be furnished to the Funds. . . . . . . . . . . . . . .6 8. Correspondence . . . . . . . . . . . . . .6 9. Mailings/Confirmation Statements . . . . .6 10. Proxies. . . . . . . . . . . . . . . . . .6 11. Form N-SAR . . . . . . . . . . . . . . . .6 12. Backup Withholding . . . . . . . . . . . .6 Article C Fee and Out-of-Pocket Expenses . . . . . . . .7 1. Postage. . . . . . . . . . . . . . . . . .7 2. Proxies. . . . . . . . . . . . . . . . . .7 3. Communications . . . . . . . . . . . . . .7 4. Record Retention . . . . . . . . . . . . .8 5. Disaster Recovery. . . . . . . . . . . . .8 Article D Representations and Warranties of RPS. . . . .8 Article E Representations and Warranties of the Fund . .8 Article F Standard of Care/Indemnification . . . . . . .9 Article G Dual Interests . . . . . . . . . . . . . . . 11 Article H Documentation. . . . . . . . . . . . . . . . 11 Article I Recordkeeping/Confidentiality. . . . . . . . 12 Article J Ownership of Software and Related Material . 13 PAGE 3 Article K As of Transactions . . . . . . . . . . . . . 13 1. Reporting. . . . . . . . . . . . . . . . 13 2. Liability. . . . . . . . . . . . . . . . 14 Article L Term and Termination of Agreement. . . . . . 15 Article M Notice . . . . . . . . . . . . . . . . . . . . 16 Article N Assignment . . . . . . . . . . . . . . . . . . 16 Article O Amendment/Interpretive Provisions. . . . . . 16 Article P Further Assurances . . . . . . . . . . . . . 16 Article Q Maryland Law to Apply. . . . . . . . . . . . 16 Article R Merger of Agreement. . . . . . . . . . . . . 17 Article S Counterparts . . . . . . . . . . . . . . . . 17 Article T The Parties. . . . . . . . . . . . . . . . . . 17 Article U Directors, Trustees and Shareholders and Massachusetts Business Trust. . . . . . . . . . . . . . . 17 Article V Captions . . . . . . . . . . . . . . . . . . . 18 PAGE 4 AGREEMENT, made as of the first day of January, 1994, by and between T. ROWE PRICE RETIREMENT PLAN SERVICES, INC., a Maryland corporation having its principal office and place of business at 100 East Pratt Street, Baltimore, Maryland 21202 ("RPS"), and EACH FUND WHICH IS LISTED ON APPENDIX A (as such Appendix may be amended from time to time) and which evidences its agreement to be bound hereby by executing a copy of this Agreement (each Fund hereinafter referred to as "the Fund") whose definition may be found in Article T; WHEREAS, the Funds are named investment options under various tax-sheltered plans, including, but not limited to, state deferred compensation plans, 403(b) plans, and profit sharing, thrift, and money purchase pension plans for self-employed individuals, professional partnerships and corporations, (collectively referred to as "Retirement Plans"); and the Fund has determined that such investments of Retirement Plans in the Funds are in the best long-term interest of the Funds; WHEREAS, RPS has the capability of providing special services, on behalf of the Fund, for the accounts ("Retirement Accounts") of shareholders participating in these Retirement Plans; WHEREAS, RPS represents that it is registered with the Securities and Exchange Commission as a Transfer Agent under PAGE 5 Section 17A of the Securities Exchange Act of 1934 ("the '34 Act"). WHEREAS, RPS may subcontract or jointly contract with other parties on behalf of the Funds to perform certain of the functions described herein, RPS may also enter into, on behalf of the Funds, certain banking relationships to perform various banking services, including, but not limited to, check deposits, disbursements, automatic clearing house transactions ("ACH") and wire transfers. Subject to guidelines mutually agreed upon by the Funds and RPS, excess balances, if any, resulting from these banking relationships will be invested and the income therefrom will be used to offset fees which would otherwise be charged to the Funds under this Agreement. WHEREAS, the Fund desires to contract with RPS the foregoing functions and services described herein in connection with the Retirement Plans and Retirement Accounts; NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: A. Terms of Appointment Subject to the terms and conditions set forth in this Agreement, the Fund hereby employs and appoints RPS to perform the services and functions described herein in connection with PAGE 6 certain Retirement Plan and Retirement Accounts as agreed upon by the parties. B. Duties of RPS: RPS agrees that it will perform the following services: 1. Purchases - Retirement Plans and Retirement Accounts After RPS has received monies from Retirement Plans and has determined the proper allocation of such monies to the Retirement Accounts or Retirement Plan participants ("Participants") based upon instructions received from Participants, Retirement Plans or their designees, or Retirement Plan Administrator(s) ("Administrator(s)"), RPS will, as a responsibility under the Agreement: a. Transmit by check or wire the aggregate money allocated to each Fund to the Fund's custodian; b. In the case of a new Participant, establish and maintain a Retirement Account for such Participant; and c. Compute the number of shares of each Fund to which the Participant is entitled according to the price of such Fund shares as provided by such Fund for purchases made at that time and date, and credit each such Account with the number of shares of the Fund so purchased. PAGE 7 2. Retirement Plans - Redemptions to Cover Distributions. After RPS has received instructions from the Administrator regarding distributions to be made to Participants or their designated beneficiaries from Funds designated as investment options under the Retirement Plan, RPS will, as a responsibility under the Agreement: a. Compute the amount due for shares to be redeemed from each Retirement Account or compute the number of shares to be redeemed from each such Retirement Account for such distributions and the total number of all shares of each Fund to be redeemed in accordance with the price per share at that time and date of such Fund as calculated and provided by the Fund. After such computation, inform the Fund of the amount necessary to be redeemed. Distribute to Participants or their designated beneficiaries the amount to be disbursed. b. After RPS has received instructions from the Administrator regarding disbursements to be made regarding the payment of fees due the Administrator, or other persons including RPS, RPS will, as a responsibility under this Agreement: PAGE 8 i. Compute the number of shares to be redeemed from each Retirement Account to pay for such disbursements and the total number of all shares to be redeemed in accordance with the price per share at that time and date, of such Fund as calculated and provided by the Fund; ii. Effect the necessary redemption from the Fund's custodian to cover such disbursements; and iii. Mail to the Administrator or such other person as designated by the Administrator the amount to be disbursed. c. Other Provisions i. If any instruction tendered by an Administrator to redeem shares in a Retirement Account is not satisfactory to RPS, RPS shall promptly notify the Administrator of such fact together with the reason therefor; ii. The authority of RPS to perform its responsibilities under Paragraph B(2) with respect to each Fund shall be suspended upon receipt of notification by such Fund of the suspension of the determination of the Fund's net asset value per PAGE 9 share and shall remain suspended until proper notification; and iii. The Fund will promptly inform RPS of the declaration of any dividend or distribution on account of the capital stock of any Fund so that RPS may properly credit income and capital gain payments to each Retirement Account. 3. Exchanges Effect exchanges of shares of the Funds upon receipt of appropriate instructions from the Administrator and/or Participant. 4. Shares held by Retirement Accounts will be Noncertificate Shares RPS will have neither responsibility nor authority to issue stock certificates evidencing ownership of Fund shares held by Participants. All shares held in Retirement Accounts maintained by RPS shall be noncertificated shares. 5. Books and Records RPS shall maintain records showing for each Retirement Plan or Retirement Account, the following: a. Names, addresses and tax identification numbers, when provided; b. Number of shares held; PAGE 10 c. Historical information regarding the account of each Participant and/or Retirement Plan, including dividends and distributions invested in shares; d. Pertinent information regarding the establishment and maintenance of Retirement Plans and Retirement Accounts necessary to properly administer each account. e. Any instructions from a Participant or Administrator including, all forms furnished by the Fund and executed by a Participant with respect to (i) elections with respect to payment options in connection with the redemption of shares; or distribution elections, if applicable; and f. Any information required in order for RPS to perform the calculations contemplated under this Agreement. Any such records maintained pursuant to Rule 31a-1 under the Investment Company Act of 1940 ("the Act") will be preserved for the periods prescribed in Rule 31a-2 thereunder. Disposition of such records after such prescribed periods shall be as mutually agreed upon from time to time by RPS and the Funds. The retention of such records, which may be inspected by the Fund at reasonable times, shall be at the expense of the Funds. All records maintained by PAGE 11 RPS in connection with the performance of its duties under this Agreement will remain the property of the Funds and, in the event of termination of this Agreement, will be delivered to the Fund as of the date of termination or at such other time as may be mutually agreed upon. 6. Tax Information RPS shall also prepare and file with appropriate federal and state agencies, such information returns and reports as required by applicable Federal and State statutes relating to redemptions effected in Retirement Accounts which constitute reportable distributions. RPS will also prepare and submit to Participants, such reports containing information as is required by applicable Federal and State law. 7. Other Information to be furnished to the Funds RPS will furnish to the Fund, such information, including shareholder lists and statistical information as may be agreed upon from time to time between RPS and the Fund. 8. Correspondence RPS will promptly and fully answer correspondence from Administrators and in some cases, Participants, relating to Retirement Accounts, transfer agent procedures, and such other correspondence as may from time to time be mutually agreed upon with the Funds. Unless otherwise instructed, PAGE 12 copies of all correspondence will be retained by RPS in accordance with applicable law. 9. Mailings/Confirmation Statements RPS will be responsible for mailing all confirmations and other enclosures and mailings, as requested by the Administrators and as may be required of the Funds by applicable Federal or state law. 10. Proxies RPS shall monitor the mailing of proxy cards and other material supplied to it by the Fund in connection with shareholder meetings of the Fund and shall coordinate the receipt, examination and tabulation of returned proxies and the certification of the vote to the Fund. 11. Form N-SAR RPS shall maintain such records, if any, as shall enable the Fund to fulfill the requirements of Form N-SAR. 12. Withholding The Fund and RPS shall agree to procedures to be followed with respect to RPS's responsibilities in connection with compliance for federal withholding for Participants. PAGE 13 C. Fees and Out-of-Pocket Expenses Each Fund shall pay to RPS for its services hereunder fees computed as set forth in the Schedule attached hereto. Except as provided below, RPS will be responsible for all expenses relating to the providing of services. Each Fund, however, will reimburse RPS for the following out-of-pocket expenses and charges incurred in providing services: 1. Postage. The cost of postage and freight for mailing materials to Participants, or their agents, including overnight delivery, UPS and other express mail services and special courier services required to transport mail between RPS locations and mail processing vendors. 2. Proxies. The cost to mail proxy cards and other material supplied to it by the Fund and costs related to the receipt, examination and tabulation of returned proxies and the certification of the vote to the Fund. 3. Communications a. Print. The printed forms used internally and externally for documentation and processing Participant, or their agent's, inquiries and requests; paper and envelope supplies for letters, notices, and other written communications sent to Administrators and Participants, or their agents. PAGE 14 b. Print & Mail House. The cost of internal and third party printing and mail house services, including printing of statements and reports. c. Voice and Data. The cost of equipment (including associated maintenance), supplies and services used for communicating to and from the Participants, or their agents, the Fund's transfer agent, other Fund offices, and other agents of either the Fund or RPS. These charges shall include: o telephone toll charges (both incoming and outgoing, local, long distance and mailgrams); and o data and telephone lines and associated equipment such as modems, multiplexers, and facsimile equipment. 4. Record Retention. The cost of maintenance and supplies used to maintain, microfilm, copy, record, index, display, retrieve, and store, in microfiche or microfilm form, documents and records. 5. Disaster Recovery. The cost of services, equipment, facilities and other charges necessary to provide disaster recovery for any and all services listed in this Agreement. PAGE 15 D. Representations and Warranties of RPS RPS represents and warrants to the Fund that: 1. It is a corporation duly organized and existing and in good standing under the laws of Maryland. 2. It is duly qualified to carry on its business in Maryland. 3. It is empowered under applicable laws and by its charter and by-laws to enter into and perform this Agreement. 4. All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. 5. It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 6. It is registered with the Securities and Exchange Commission as a Transfer Agent pursuant to Section 17A of the '34 Act. E. Representations and Warranties of the Fund The Fund represents and warrants to RPS that: 1. It is a corporation or business trust duly organized and existing and in good standing under the laws of Maryland, or Massachusetts, as the case may be. 2. It is empowered under applicable laws and by its Articles of Incorporation or Declaration of Trust, as the PAGE 16 case may be, and By-Laws to enter into and perform this Agreement. 3. All proceedings required by said Articles of Incorporation or Declaration of Trust, as the case may be, and By-Laws have been taken to authorize it to enter into and perform this Agreement. 4. It is an investment company registered under the Act. 5. A registration statement under the Securities Act of 1933 ("the '33 Act") is currently effective and will remain effective, and appropriate state securities law filing have been made and will continue to be made, with respect to all shares of the Fund being offered for sale. F. Standard of Care/Indemnification Notwithstanding anything to the contrary in this Agreement: 1. RPS shall not be liable to the Fund for any act or failure to act by it or its agents or subcontractors on behalf of the Fund in carrying or attempting to carry out the terms and provisions of this Agreement provided RPS has acted in good faith and without negligence or willful misconduct and selected and monitored the performance of its agents and subcontractors with reasonable care. 2. The Fund shall indemnify and hold RPS harmless from and against all losses, costs, damages, claims, actions and PAGE 17 expenses, including reasonable expenses for legal counsel, incurred by RPS resulting from: (i) any action or omission by RPS or its agents or subcontractors in the performance of their duties hereunder; (ii) RPS acting upon instructions believed by it to have been executed by a duly authorized officer of the Fund; or (iii) RPS acting upon information provided by the Fund in form and under policies agreed to by RPS and the Fund. RPS shall not be entitled to such indemnification in respect of actions or omissions constituting negligence or willful misconduct of RPS or where RPS has not exercised reasonable care in selecting or monitoring the performance of its agents or subcontractors. 3. Except as provided in Article K of this Agreement, RPS shall indemnify and hold harmless the Fund from all losses, costs, damages, claims, actions and expenses, including reasonable expenses for legal counsel, incurred by the Fund resulting from negligence or willful misconduct of RPS or which result from RPS' failure to exercise reasonable care in selecting or monitoring the performance of its agents or subcontractors. The Fund shall not be entitled to such indemnification in respect of actions or omissions PAGE 18 constituting negligence or willful misconduct of such Fund or its agents or subcontractors; unless such negligence or misconduct is attributable to RPS. 4. In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes or other causes reasonably beyond its control, such party shall not be liable to the other party for any loss, cost, damage, claims, actions or expense resulting from such failure to perform or otherwise from such causes. 5. In order that the indemnification provisions contained in this Article F shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim, or to defend against said claim in its own name or in the name of the other party. The party seeking indemnification shall in no case confess any claim or make any compromise in any case PAGE 19 in which the other party may be required to indemnify it except with the other party's prior written consent. 6. Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement. G. Dual Interests It is understood that some person or persons may be directors, officers, or shareholders of both RPS and the Fund and that the existence of any such dual interest shall not affect the validity of this Agreement or of any transactions hereunder except as otherwise provided by a specific provision of applicable law. H. Documentation 1. As requested by RPS, the Fund shall promptly furnish to RPS the following: a. A certified copy of the resolution of the Directors/Trustees of the Fund authorizing the appointment of RPS and the execution and delivery of this Agreement; b. A copy of the Articles of Incorporation or Declaration of Trust, as the case may be, and By-Laws of the Fund and all amendments thereto; PAGE 20 c. Specimens of all forms of outstanding and new stock/share certificates in the forms approved by the Board of Directors/Trustees of the Fund with a certificate of the Secretary of the Fund as to such approval; d. All account application forms and other documents relating to shareholders' accounts; e. An opinion of counsel for the Fund with respect to the validity of the stock, the number of Shares authorized, the status of redeemed Shares, and the number of Shares with respect to which a Registration Statement has been filed and is in effect; and f. A copy of the Fund's current prospectus. The delivery of any such document for the purpose of any other agreement to which the Fund and RPS are or were parties shall be deemed to be delivery for the purposes of this Agreement. 2. As requested by RPS, the Fund will also furnish from time to time the following documents: a. Each resolution of the Board of Directors/Trustees of the Fund authorizing the original issue of its shares; PAGE 21 b. Each Registration Statement filed with the Securities and Exchange Commission and amendments and orders thereto in effect with respect to the sale of shares with respect to the Fund; c. A certified copy of each amendment to the Articles of Incorporation or Declaration of Trust, and the By-Laws of the Fund; d. Certified copies of each vote of the Board of Directors/Trustees authorizing officers to give instructions to the Fund; e. Specimens of all new certificates accompanied by the Board of Directors/Trustees' resolutions approving such forms; f. Such other documents or opinions which RPS, in its discretion, may reasonably deem necessary or appropriate in the proper performance of its duties; and g. Copies of new prospectuses issued. 3. RPS hereby agrees to establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of check forms and facsimile signature imprinting devices, if any, and for the preparation or use, and for keeping account of, such forms and devices. PAGE 22 I. Recordkeeping/Confidentiality 1. RPS shall keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable, provided that RPS shall keep all records in such form and in such manner as required by applicable law, including the Act and the '34 Act. 2. RPS and the Fund agree that all books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential, and shall not be voluntarily disclosed to any other person, except: (a) after prior notification to and approval in writing by the other party hereto, which approval shall not be unreasonably withheld and may not be withheld where RPS or the Fund may be exposed to civil or criminal contempt proceedings for failure to comply; (b) when requested to divulge such information by duly constituted governmental authorities; or (c) after so requested by the other party hereto. J. Ownership of Software and Related Material All computer programs, magnetic tapes, written procedures and similar items purchased and/or developed and used by RPS in PAGE 23 performance of the Agreement shall be the property of RPS and will not become the property of the Fund. K. As Of Transactions For purposes of this Article K, the term "Transaction" shall mean any single or "related transaction" (as defined below) involving the purchase or redemption of shares (including exchanges) that are processed at a time other than the time of the computation of the Fund's net asset value per share next computed after receipt of any such transaction order by RPS. If more than one Transaction ("Related Transaction") in the Fund is caused by or occurs as a result of the same act or omission, such transactions shall be aggregated with other transactions in the Fund and be considered as one Transaction. 1. Reporting RPS shall: a. Utilize a system to identify all Transactions, and shall compute the net effect of such Transactions upon the Fund on a daily, monthly and rolling 365 day basis. The Monthly and rolling 365 day periods are hereinafter referred to as ("Cumulative"). b. Supply to the Fund, from time to time as mutually agreed upon, a report summarizing the Transactions and the daily and Cumulative net effects of such PAGE 24 Transactions both in terms of aggregate dilution and loss ("Dilution") or gain and negative dilution ("Gain") experienced by the Fund, and the impact such Gain or Dilution has had upon the Fund's net asset value per share. c. With respect to any Transaction which causes Dilution to the Fund of $25,000 or more, immediately provide the Fund: (i) a report identifying the Transaction and the Dilution resulting therefrom, (ii) the reason such Transaction was processed as described above, and (iii) the action that RPS has or intends to take to prevent the reoccurrence of such as of processing ("Report"). 2. Liability a. It will be the normal practice of the Fund not to hold RPS liable with respect to any Transaction which causes Dilution to any single Fund of less than $25,000. RPS will, however, closely monitor for each Fund the daily and Cumulative Gain/Dilution which is caused by Transactions of less than $25,000. When the Cumulative Dilution to any Fund exceeds 3/10 of 1% per share, RPS, in consultation with counsel to the Fund, will make appropriate inquiry to determine PAGE 25 whether it should take any remedial action. RPS will report to the Board of Directors/Trustees of the Fund ("Board"), as appropriate, any action it has taken. b. Where a Transaction causes Dilution to a Fund of $25,000 or more ("Significant Transaction"), RPS will review with counsel to the Fund, the Report and the circumstances surrounding the underlying Transaction to determine whether the Transaction was caused by or occurred as a result of a negligent act or omission by RPS. If it is determined that the Dilution is the result of a negligent action or omission by RPS, RPS and outside counsel for the Fund, as appropriate, will negotiate settlement. All such Significant Transactions will be reported to the Board at its next meeting (unless the settlement fully compensates the Fund for any Dilution). Any Significant Transaction, however, causing Dilution in excess of the lesser of $100,000 or a penny per share will be promptly reported to the Board. Settlement will not be entered into with RPS until approved by the Board. The factors the Board or the Funds would be expected PAGE 26 to consider in making any determination regarding the settlement of a Significant Transaction would include but not be limited to: i. Procedures and controls adopted by RPS to prevent As Of processing; ii. Whether such procedures and controls were being followed at the time of the Significant Transaction; iii. The absolute and relative volume of all transactions processed by RPS on the day of the Significant Transaction; iv. The number of Transactions processed by RPS during prior relevant periods, and the net Dilution/Gain as a result of all such transactions to the Fund and to all other Price Funds; and v. The prior response of RPS to recommendations made by the Funds regarding improvement to the Transfer Agent's As Of Processing Procedures. L. Term and Termination of Agreement 1. This Agreement shall run for a period of one (1) year from the date first written above and will be renewed from year to year thereafter unless terminated by either party as provided hereunder. PAGE 27 2. This Agreement may be terminated by the Funds upon one hundred twenty (120) days' written notice to RPS; and by RPS, upon three hundred sixty-five (365) days' writing notice to the Fund. 3. Upon termination hereof, the Fund shall pay to RPS such compensation as may be due as of the date of such termination, and shall likewise reimburse for out-of-pocket expenses related to its services hereunder. M. Notice Any notice as required by this Agreement shall be sufficiently given (i) when sent to an authorized person of the other party at the address of such party set forth above or at such other address as such party may from time to time specify in writing to the other party; or (ii) as otherwise agreed upon by appropriate officers of the parties hereto. N. Assignment Neither this Agreement nor any rights or obligations hereunder may be assigned either voluntarily or involuntarily, by operation of law or otherwise, by either party without the prior written consent of the other party O. Amendment/Interpretive Provisions The parties by mutual written agreement may amend this Agreement at any time. In addition, in connection with the PAGE 28 operation of this Agreement, RPS and the Fund may agree from time to time on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions are to be signed by all parties and annexed hereto, but no such provision shall contravene any applicable federal or state law or regulation and no such interpretive or additional provision shall be deemed to be an amendment of this Agreement. P. Further Assurances Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof. Q. Maryland Law to Apply This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of Maryland. R. Merger of Agreement This Agreement, including the attached Schedule supersede any prior agreement with respect to the subject hereof, whether oral or written. S. Counterparts This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken PAGE 29 together shall be deemed to constitute one and the same instruments. T. The Parties All references herein to "the Fund" are to each of the Funds listed on Appendix A individually, as if this Agreement were between such individual Fund and RPS. In the case of a series Fund or trust, all references to "the Fund" are to the individual series or portfolio of such fund or trust, or to such Fund or trust on behalf of the individual series or portfolio, as appropriate. Any reference in this Agreement to "the parties" shall mean RPS and such other individual Fund as to which the matter pertains. The "Fund" also includes any T. Rowe Price Fund which may be established after the date of this Agreement. Any reference in this Agreement to "the parties" shall mean the Funds and RPS. U. Directors, Trustees and Shareholders and Massachusetts Business Trust It is understood and is expressly stipulated that neither the holders of shares in the Fund nor any Directors or Trustees of the Fund shall be personally liable hereunder. With respect to any Fund which is a party to this Agreement and which is organized as a Massachusetts business trust, the term "Fund" means and refers to the trustees from time to time serving under PAGE 30 the applicable trust agreement (Declaration of Trust) of such Trust as the same may be amended from time to time. It is expressly agreed that the obligations of any such Trust hereunder shall not be binding upon any of the trustees, shareholders, nominees, officers, agents or employees of the Trust, personally, but bind only the trust property of the Trust, as provided in the Declaration of Trust of the Trust. The execution and delivery of this Agreement has been authorized by the trustees and signed by an authorized officer of the Trust, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them, but shall bind only the trust property of the Trust as provided in its Declaration of Trust. V. Captions The captions in the Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf under their seals by and through their duly authorized officers. PAGE 31 T. ROWE PRICE RETIREMENT PLAN DATED:2/18/94 SERVICES, INC. ATTEST: /s/Steve J. Zients By: ________________________ ________________________ Steve J. Zients T. ROWE PRICE ADJUSTABLE RATE U.S GOVERNMENT FUND, INC. T. ROWE PRICE BALANCED FUND, INC. T. ROWE PRICE BLUE CHIP GROWTH FUND, INC. T. ROWE PRICE CAPITAL APPRECIATION FUND T. ROWE PRICE DIVIDEND GROWTH FUND, INC. T. ROWE PRICE EQUITY INCOME FUND T. ROWE PRICE GNMA FUND T. ROWE PRICE GROWTH & INCOME FUND, INC. T. ROWE PRICE GROWTH STOCK FUND, INC. T. ROWE PRICE HIGH YIELD FUND, INC. T. ROWE PRICE INDEX TRUST, INC. T. Rowe Price Equity Index Fund INSTITUTIONAL INTERNATIONAL FUNDS, INC. Foreign Equity Fund T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC. PAGE 32 T. ROWE PRICE INTERNATIONAL FUNDS, INC. T. Rowe Price International Bond Fund T. Rowe Price International Discovery Fund T. Rowe Price International Stock Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Fund T. Rowe Price Latin America Fund T. ROWE PRICE MID-CAP GROWTH FUND, INC. T. ROWE PRICE OTC FUND, INC. T. ROWE PRICE NEW AMERICA GROWTH FUND T. ROWE PRICE NEW ERA FUND, INC. T. ROWE PRICE NEW HORIZONS FUNDS, INC. T. ROWE PRICE NEW INCOME FUND, INC. T. ROWE PRICE PRIME RESERVE FUND, INC. T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC. T. ROWE PRICE SHORT-TERM BOND FUND, INC. T. ROWE PRICE SMALL-CAP VALUE FUND, INC. T. ROWE PRICE SPECTRUM FUND, INC. Spectrum Growth Fund Spectrum Income Fund T. ROWE PRICE U.S. TREASURY FUNDS, INC. U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund T. ROWE PRICE SUMMIT FUNDS, INC. Summit Cash Reserves Fund Summit Limited-Term Bond Fund Summit GNMA Fund PAGE 33 DATED: 2/16/94 ATTEST: /s/Carmen F. Deyesu _________________________BY:_____________________________ /s/Carmen F. Deyesu PAGE 34 APPENDIX A The following Funds are parties to this Agreement, and have so indicated their intention to be bound by such Agreement by executing the Agreement on the dates indicated thereon. T. Rowe Price Adjustable Rate U.S. Government Fund, Inc. T. Rowe Price Balanced Fund, Inc. T. Rowe Price Blue Chip Growth Fund, Inc. T. Rowe Price Capital Appreciation Fund T. Rowe Price Dividend Growth Fund, Inc. T. Rowe Price Equity Income Fund T. Rowe Price GNMA Fund T. Rowe Price Growth & Income Fund, Inc. T. Rowe Price Growth Stock Fund, Inc. T. Rowe Price High Yield Fund, Inc. T. Rowe Price Index Trust, Inc. on behalf of the T. Rowe Price Equity Index Fund T. Rowe Price Institutional International Funds, Inc. on behalf of the Foreign Equity Fund T. Rowe Price International Equity Fund, Inc. PAGE 35 T. Rowe Price International Funds, Inc. on behalf of the T. Rowe Price International Bond Fund T. Rowe Price International Stock Fund T. Rowe Price International Discovery Fund T. Rowe Price European Stock Fund T. Rowe Price New Asia Fund T. Rowe Price Global Government Bond Fund T. Rowe Price Japan Fund T. Rowe Price Short-Term Global Fund T. Rowe Price Latin America Fund T. Rowe Price New America Growth Fund T. Rowe Price New Era Fund, Inc. T. Rowe Price New Horizons Fund, Inc. T. Rowe Price New Income Fund, Inc. T. Rowe Price OTC Fund, Inc. T. Rowe Price Prime Reserve Fund, Inc. T. Rowe Price Science & Technology Fund, Inc. T. Rowe Price Short-Term Bond Fund, Inc. T. Rowe Price Small-Cap Value Fund, Inc. T. Rowe Price Spectrum Fund, Inc. on behalf of the Spectrum Growth Fund Spectrum Income Fund T. Rowe Price U.S. Treasury Funds, Inc. on behalf of the U.S. Treasury Intermediate Fund U.S. Treasury Long-Term Fund U.S. Treasury Money Fund PAGE 36 T. Rowe Price Summit Funds, Inc. Summit Cash Reserves Fund Summit Limited-Term Bond Fund Summit GNMA Fund PAGE 37 T. ROWE PRICE RETIREMENT PLAN SERVICES, INC. FEE SCHEDULE Fees for transfer agent services performed for retirement plan accounts serviced by T. Rowe Price Retirement Plan Services, Inc. ("RPS"). Effective January 1, 1994 to December 31, 1994. A. Base Fee A monthly base fee of $500,000 ($6,000,000 per year) allocated pro rata by account. B. Per Participant Fee A monthly per participant fee of $3.752 for each active (non- zero balance) participant being serviced at the end of the month. This fee will be allocated among the Funds based on the relative number of non-zero accounts open at the end of the month. C. Per Transaction Fee A fee for each Account transaction will be charged at the rate of $.15 per transaction, except for dividend transactions. D. Institutional Support Group (ISG) Telephone Call A fee of $5.24 per ISG telephone call will be charged to the Fund(s) involved in the telephone call. E. New Participant Fee A one-time new participant fee of $3.31 will be charged each time a participant is added to the records. F. Perks Fee Fees for selected PERKS plans will be $10 per account, maximum $40 per participant, capped at 25 basis points. PAGE 38 G. Billing Procedures RPS will render to each two monthly invoices (one for PAS and one for PERKS) each of which shall state: the number of participants in existence at month-end and the Fund's pro rata share, the assets by Fund at month-end, the number of transactions recorded during the month for each Fund, the number of new participants added during the month and the fund's pro rata share; the out-of-pocket expenses for which RPS is entitled to reimbursement under the Agreement, and the Fund's pro rata share; and the total compensation due for the month. H. New Funds Funds added during the term of this Agreement may have their Maintenance and Transaction charges waived for a period of time agreed upon between RPS and the Funds following the establishment of the Fund. Out-of-pocket expenses will be billed to the Fund from the Fund's inception. IN WITNESS WHEREOF, T. Rowe Price Funds and T. Rowe Price Retirement Plan Services, Inc. have agreed upon this fee schedule to be executed in their names and on their behalf through their duly authorized officers: T. ROWE PRICE FUNDS T. ROWE PRICE RETIREMENT PLAN SERVICES, INC. Name /s/Carmen F. Deyesu Name /s/Steve J. Zients Title Treasurer Title Vice President Date 2/16/94 Date 2/17/94 EX-99.B11-CONSENT 12 PW CONSENT PAGE 1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus and Statement of Additional Information constituting parts of this Post-Effective Amendment No. 42 to the Registration Statement on Form N-1A (the "Registration Statement") of our report dated March 17, 1994, relating to the financial statements and selected per share data and ratios appearing in the February 28, 1994 Annual Report to Shareholders of the T. Rowe Price New Income Fund, Inc., which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the heading "Financial Highlights" in the Prospectus and under the heading "Independent Accountants" in the Statement of Additional Information. /s/Price Waterhouse PRICE WATERHOUSE Baltimore, Maryland April 25, 1994 EX-99.B16-TOTALRETUR 13 TOTAL RETURN PERFORMANCE PAGE 1 (16) TOTAL RETURN PERFORMANCE The cumulative total return performance of the Fund is measured by using an index of adjusted net asset values that reflect both the assumed investment of one share on the inception date of the Fund and the inclusion of shares received from the reinvestment of all Fund distributions, capital gains and income dividends, during the Fund's history. As an example, the following index assumes an investment of 1 share of the T. Rowe Price New Income Fund on August 31, 1973, its inception. Each year the dividends and capital gains per share were accumulated on the shares held and were reinvested in additional fund shares at the Fund's actual reinvestment price. At various points in time the investment was evaluated at the net asset value of the Fund. These valuation points comprise the performance index. Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ 1.000000000 X $10.00 = $ 10.00000 08/31/73 1.000000000 X 9.97 = 9.97000 12/31/73 1974 ($0.07640 x 1.000000000) / 9.86 = 0.007748479 1.007748479 X 9.91 - 9.98679 02/28/74 ($0.1800 x 1.007748478) / 9.64 = 0.018816880 1.026565359 X 9.58 - 9.83450 05/31/74 ($0.1850 x 1.026565358) / 9.20 = 0.020642890 1.047208249 X 9.16 - 9.59243 08/31/74 ($0.2170 x 1.047208248) / 9.00 = 0.025249354 1.072457603 X 9.45 = 10.13472 11/30/74 1.072457603 X 9.39 = 10.07038 12/31/74 1975 ($0.2075 x 1.072457602) / 9.29 = 0.023954247 1.096411850 X 9.64 = 10.56941 02/28/75 ($0.1945 x 1.096411850) / 9.25 = 0.023054282 1.119466132 X 9.44 = 10.56776 05/31/75 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.1890 x 1.119466132) / 9.37 = 0.022580480 1.142046612 X 9.41 = 10.74666 08/31/75 PAGE 2 ($0.1983 x 1.142046612) / 9.16 = 0.024723564 1.166770176 X 9.43 = 11.00264 11/30/75 1.166770176 x 9.66 = 11.27100 12/31/75 1976 ($0.1952 x 1.166770176) / 9.48 = 0.024024635 1.190794811 X 9.75 = 11.61025 02/29/76 ($0.1946 x 1.190794811) / 9.67 = 0.023963668 1.214758479 X 9.68 = 11.75886 05/31/76 ($0.1945 x 1.214758479) / 9.61 = 0.024585903 1.239344382 x 9.92 = 12.29430 08/31/76 ($0.1982 x 1.239344382) / 9.86 = 0.024912582 1.264256964 X 10.10 = 12.76900 11/30/76 1.264256964 X 10.23 = 12.93335 12/31/76 1977 ($0.2006 x 1.264256964) / 9.99 = 0.025386381 1.289643345 x 10.00 = 12.89643 02/28/77 ($0.1946 x 1.289643345) / 9.87 = 0.025427011 1.315070356 x 10.05 = 13.21646 05/31/77 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.1872 x 1.315070356) / 9.99 = 0.024642760 1.339713116 X 10.12 = 13.55790 08/31/77 ($0.1879 X 1.339713116) / 9.94 = 0.025325160 1.365038276 x 10.00 = 13.65038 11/30/77 1.365038276 x 10.01 = 13.66403 12/31/77 1978 ($0.2087 x 1.365038276) / 9.78 = 0.029129191 1.394167467 x 9.80 = 13.66284 02/28/78 ($0.1903 x 1.394167467) / 9.66 = 0.027464810 1.421632277 x 9.68 = 13.76140 05/31/78 ($0.1876 x 1.421632277) / 9.53 = 0.027985122 1.449617399 X 9.69 = 14.04679 08/31/78 ($0.1932 x 1.449617399) / 9.53 = 0.029387836 1.479005235 X 9.61 = 14.21324 11/30/78 1.479005235 x 9.66 = 14.28719 12/31/78 1979 ($0.2131 x 1.479005235) / 9.45 = 0.033351959 1.512357194 X 9.59 = 14.50351 02/28/79 ($0.2283 X 1.512357194) / 9.47 = 0.036459466 1.548816660 PAGE 3 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.0753 x 1.548816660) / 9.44 = 0.012354438 1.561171098 X 9.44 = 14.73746 04/30/79 ($0.0770 x 1.561171098) / 9.46 = 0.012707207 1.573878305 X 9.46 = 14.88889 05/31/79 ($0.0733 x 1.573878305) / 9.50 = 0.012143714 1.586022019 x 9.50 = 15.06721 06/30/79 ($0.0787 x 1.586022019 / 9.44 = 0.013222451 1.599244470 X 9.44 = 15.09687 07/31/79 ($0.0777 x 1.599244470 / 9.41 = 0.013205239 1.612449709 X 9.41 = 15.17315 08/31/79 ($0.0738 x 1.612449709) / 9.35 = 0.012727143 1.625176852 X 9.35 = 15.19540 09/30/79 ($0.0914 x 1.625176852) / 9.20 = 0.016145779 1.641322631 x 9.20 = 15.10017 10/31/79 ($0.0912 x 1.641322631) / 9.23 = 0.016217619 1.657540250 x 9.23 = 15.29910 11/30/79 ($0.0974 x 1.657540250) / 9.22 = 0.017510241 1.675050491 x 9.22 = 15.44397 12/31/79 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ 1980 ($0.0977 x l.67505049 / 9.14 = 0.017905080 1.692955571 x 9.14 = 15.47361 01/31/80 ($0.0945 x 1.692955571) / 9.08 = 0.017619416 1.710574987 x 9.08 = 15.53202 02/29/80 ($0.1085 x 1.710574987) / 9.07 = 0.020462777 1.731037764 x 9.07 = 15.70051 03/31/80 ($0.1204 x 1.731037764) / 9.15 = 0.022777808 1.753815572 x 9.15 = 16.04741 04/30/80 ($0.1020 x 1.753815572) / 9.22 = 0.019402298 1.773217870 x 9.22 = 16.34907 05/31/80 ($0.0957 X 1.773217870) / 9.24 = 0.018365471 1.791583341 x 9.24 - 16.55423 06/30/80 PAGE 4 ($0.0868 X 1.791583341) / 8.91 = 0.017453360 1.809036701 x 8.91 = 16.11852 07/31/80 ($0.0789 x 1.80903.6701) / 8.67 = 0.016462860 1.825499561 x 8.67 = 15.82708 08/31/80 ($0.0883 x 1.825499561) / 8.49 = 0.018986056 1.844485617 x 8.49 = 15.65968 09/30/80 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.0822 x 1.844485617) / 8.32 = 0.018223163 1.862708780 X 8.32 = 15.49774 10/31/80 ($0.0790 X 1.862708780) / 8.31 = 0.017708062 1.880416842 X 8.31 = 15.62626 11/30/80 ($0.0975 x 1.880416842) / 8.35 = 0.021956963 1.902373805 x 8.35 = 15.88482 12/31/80 1981 ($0.0889 x 1.902373805) / 8.22 = 0.020574335 1.922948140 x 8.22 = 15.80663 01/31/81 ($0.0872 x l.922948l40) / 8.06 = 0.020804104 1.943752244 x 8.06 = 15.66664 02/28/81 ($0.0923 x 1.943752244) / 8.13 = 0.022067446 1.965819690 x 8.13 = 15.98211 03/31/81 ($0.0877 x 1.965819690) / 7.80 = 0.022102870 1.987922560 x 7.80 = 15.50580 04/30/81 ($0.0839 x 1.987922560) / 7.94 = 0.021005882 2.008928442 x 7.94 = 15.95089 05/31/81 ($0.0949 X 2.008928442) / 7.87 = 0.024224563 2.033153005 x 7.87 = 16.00091 06/30/81 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.0906 x 2.033l53005) / 7.67 = 0.024016123 2.057169128 x 7.67 = 15.77849 07/31/81 ($0.0915 x 2.057169128) / 7.48 = 0.025164569 2.082333697 x 7.48 = 15.57586 08/31/81 ($0.0918 x 2.082333697) / 7.44 = 0.025693311 2.108027008 x 7.44 = 15.68372 09/30/81 ($0.0897 x 2.108027008) / 7.62 = 0.024814963 2.132841971 x 7.62 = 16.25226 10/31/81 PAGE 5 ($0.0724 x 2.132841971) / 7.87 = 0.019621062 2.152463033 x 7.98 = 17.17666 11/30/81 ($0.0957 x 2.152463033) / 7.78 = 0.026476955 2.178939988 x 7.79 = 16.97394 12/31/81 1982 ($0.0842 x 2.l78939988) / 7.66 = 0.023951272 2.202891260 X 7.72 = 17.00632 01/31/82 ($0.0850 x 2.202891260) / 7.65 = 0.024476570 2.227367830 x 7.72 = 17.19528 02/28/82 ($0.0967 x 2.227367830) / 7.74 = 0.027827709 2.255195539 x 7.73 = 17.43266 03/31/82 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.0885 x 2.255195539) / 7.81 = 0.025555033 2.280750572 x 7.80 = 17.78985 04/30/82 ($0.0813 x 2.280750572) / 7.83 = 0.023681357 2.304431929 x 7.84 = 18.06675 05/31/82 ($0.0977 x 2.304431929) / 7.67 = 0.029353716 2.333785645 x 7.73 = 18.04016 06/30/82 ($0.0889 x 2.333785645) / 7.85 = 0.026429751 2.360215396 X 7.85 = 18.52769 07/31/82 ($0.0970 x 2.360215396 / 8.06 = 0.028404577 2.388619973 x 7.97 = 19.03730 08/31/82 ($0.0888 x 2.388619973) / 8.10 = 0.026186352 2.414806325 X 8.13 = 19.63238 09/30/82 ($0.0836 x 2.414806325) / 8.32 = 0.024264160 2.439070485 X 8.35 = 20.36624 10/31/82 ($0.0892 x 2.439070485) / 8.42 = 0.025839084 2.464909569 X 8.37 = 20.63129 11/30/82 ($0.0869 x 2.464909569) / 8.43 = 0.025409329 2.490318898 X 8.46 = 21.06810 12/31/82 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ 1983 ($0.0872 x 2.490318898) / 8.43 = 0.025759882 2.516078780 X 8.41 = 21.16022 01/31/83 PAGE 6 ($0.0830 x 2.516078780) / 8.48 = 0.024626714 2.540705494 X 8.56 = 21.74844 02/28/83 ($0.0815 X 2.540705494) / 8.51 = 0.024332256 2.565037750 X 8.54 = 21.90542 03/31/83 ($0.0779 x 2.565037750) / 8.62 0.023180562 2.588218312 X 8.69 = 22.49162 04/30/83 ($0.101981203 x I588218312) / 8.50 = 0.031052896 2.619271208 X 8.50 = 22.26381 05/31/83 ($0.079029080 x 2.619271208) / 8.47 = 0.024439031 2.643710239 X 8.47 = 22.39223 06/30/83 ($0.078013810 x 2.643710239) / 8.28 = 0.024908926 2.668619165 X 8.28 = 22.09617 07/31/83 ($0.074811677 x 2.668619165) / 8.25 = 0.024199258 2.692818423 X 8.25 = 22.21575 08/31/83 ($0.080473774 x 2.692818423) / 8.32 = 0.026045825 2.718864248 X 8.32 = 22.62095 09/30/83 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.073946149 x 2.718864248) / 8.28 = 0.024281346 2.743145594 X 8.28 = 22.71325 10/31/83 ($0.076215616 x 2.743145594) / 8.31 = 0.025158909 2.768304503 X 8.31 = 23.00461 11/30/83 ($0.081800490 x 2.768304503) / 8.27 = 0.027381943 2.795686446 X 8.27 = 23.12033 12/31/83 1984 ($0.071773125 x 2.795686446) / 8.31 = 0.024146228 2.819832674 X 8.31 = 23.43281 01/31/84 ($0.073250963 x 2.819832674) / 8.24 = 0.025067410 2.844900084 X 8.24 = 23.44198 02/29/84 ($0.078284182 x 2.844900084) / 8.20 = 0.027159839 2.872059923 X 8.20 = 23.55089 03/31/84 ($0.072255435 x 2.872059923) / 8.16 = 0.025431610 2.897491533 x 8.16 = 23.64353 04/30/84 ($0.074508007 x 2.897491533) / 8.06 = 0.026784903 2.924276436 x 8.06 = 23.56967 05/31/84 ($0.077192617 x 2.924276436) / 8.05 = 0.028041311 2.952317747 x 8.05 = 23.76616 06/30/84 PAGE 7 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.076738873 x 2.952317747) / 8.10 = 0.027970066 2.980287813 x 8.10 = 24.14033 07/31/84 ($0.088451035 x 2.980287813) / 8.07 = 0.032665371 3.012953184 x 8.07 = 24.31453 08/31/84 ($0.072726535 x 3.012953184) / 8.11 = 0.027018699 3.039971883 x 8.11 = 24.65417 09/30/84 ($0.079495270 x 3.39971883) / 8.19 = 0.029507129 3.069479012 x 8.19 = 25.13903 10/31/84 ($0.084851551 x 3.069479012) / 8.24 = 0.031608016 3.101087028 x 8.24 = 25.55296 11/30/84 ($0.078677549 x 3.101087028) / 8.26 = 0.029538248 3.130625276 x 8.26 = 25.85896 12/31/84 1985 ($0.079257328 x 3.130625276) / 8.31 = 0.029858603 3.160483879 x 8.31 = 26.26362 01/31/85 ($0.078323817 x 3.160483879) / 8.18 = 0.030261756 3.190745635 x 8.18 = 26.10030 02/28/85 ($0.079039367 x 3.190745635) / 8.20 = 0.030755429 13.221501064 X 8.20 = 26.4 1631 03/31/85 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.077110889 x 3.221501064) / 8.24 = 0.030147186 3.251648250 X 8.24 - 26.79358 04/30/85 ($0.083173640 x 3.251648250) / 8.43 = 0.032082019 3.283730269 X 8.43 - 27.68185 05/31/85 ($0.070668135 X 3.283730269) / 8.44 = 0.027494679 3.311224948 X 8.44 - 27.94674 06/30/85 ($0.076023268 x 3.311224948) / 8.35 = 0.030147322 3.341372270 X 8.35 - 27.90046 07/31/85 ($0.076469357 x 3.341372270) / 8.41 = 0.030381996 3.371754266 X 8.41 = 28.35645 08/31/85 ($0.065026356 x 3.371754266) / 8.37 = 0.026195089 3.397949355 X 8.37 - 28.44084 09/30/85 PAGE 8 ($0.071189150 x 3.397949355) / 8.45 = 0.028626879 3.426576234 X 8.45 = 28.95457 10/31/85 ($0.073517326 x 3.426576234) / 8.56 = 0.029429056 3.456005290 x 8.56 - 29.58341 11/30/85 ($0.072268493 x 3.456005290) / 8.73 = 0.028609427 3.484614717 X 8.73 - 30.42069 12/31/85 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ 1986 ($0.073643248 x 3.484614717) / 8.68 = 0.029564326 3.514179043 X 8.68 = 30.50307 01/31/86 ($0.066794354 x 3.514179043) / 8.95 = 0.026226516 3.540405559 X 8.95 = 31.68663 02/28/86 ($0.064052024 x 3.540405559) / 9.13 = 0.024837913 3.565243472 X 9.13 = 32.55067 03/31/86 ($0.066622863 x 3.565243472) / 9.13 = 0.024059193 3.591259543 X 9.13 = 32.78820 04/30/86 ($0.067879164 x 3.591259543) / 8.97 = 0.027176332 3.618435875 X 8.97 = 32.45737 05/31/86 ($0.063136306 x 3.618435875) / 9.06 = 0.025215748 3.643651623 X 9.06 = 33.01148 06/30/86 ($0.065039401 x 3.643651623) / 9.04 = 0.026214703 3.669866326 X 9.04 = 33.17559 07/31/86 ($0.064776983 x 3.69866326) / 9.21 = 0.025811386 3.695677712 X 9.21 = 34.03719 08/31/86 ($0.058241705 x 3.695677712) / 9.03 = 0.023836387 3.719514099 X 9.03 = 33.58721 09/30/86 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.064l81831 x 3.719514099) / 9.08 = 0.026291324 3.745805423 x 9.08 = 34.01191 10/31/86 ($0.054758877 x 3.745805423) / 9.15 = 0.022417060 3.768222483 X 9.15 = 34.47924 11/30/86 ($0.061169552 x 3.768222483) / 9.13 = 0.025246493 3.793468976 x 9.13 = 34.63437 12/31/86 PAGE 9 1987 ($0.05960l533 x 3.793468976) / 9.19 = 0.024602456 3.818071432 x 9.19 = 35.68808 01/31/87 ($0.055956514 x 3.818071432) / 9.17 = 0.023298361 3.841369793 x 9.17 = 35.22536 02/28/87 ($0.056619153 x 3.841369793) / 9.04 = 0.024059193 3.865428986 x 9.04 = 34.94348 03/31/87 ($0.057123070 x 3.865428986) / 8.70 = 0.025379905 3.890808891 x 8.70 = 33.85004 04/30/87 ($0.059606941 x 3.890808891) / 8.62 = 0.026904781 3.917713672 x 8.62 = 33.77069 05/31/87 Distri- butions Reinvest- Cumulat- Per Share ment tive Reported Index Valu- (Div. & Share Price Share N.A.V. Total ation Cap. Gains) Holding Per Share Holding Per Share Value Date __________ _______ _________ _______ _________ _____ _____ ($0.059495533 x 3.917713672) / 8.65 = 0.026946412 3.944660084 x 8.65 = 34.12131 06/30/87 ($0.067720028 x 3.944660084) / 8.55 = 0.031243566 3.975903650 x 8.55 = 33.99398 07/31/87 ($0.061144030 x 3.975903650) / 8.46 = 0.028735552 4.004639202 x 8.46 = 33.87925 08/31/87 ($0.064989584 x 4.004639202) / 8.29 = 0.031394431 4.036033633 x 8.29 = 33.45872 09/30/87 ($0.068658676 x 4.036033633) / 8.44 = 0.032832787 4.068866420 x 8.44 = 34.34123 10/31/87 ($0.062983510 x 4.068866420) / 8.49 = 0.030185099 4.099051519 x 8.49 = 34.80095 11/30/87 ($0.973266267 x 4.099051519) / 8.55 = 0.035125404 4.134176923 x 8.55 = 35.34721 12/31/87 1988 ($0.059685127 x 4.134176923) / 8.70 = 0.028361940 4.162538863 x 8.70 = 36.21409 01/31/88 ($0.063642087 x 4.162538863) / 8.76 = 0.030241171 4.192780034 x 8.76 = 36.72875 02/29/88 Cumulative performance for any investment period is calculated as the percentage difference between a beginning index value and an ending index value. The ten year performance from 2/28/78 to 2/29/88 for the New Income Fund would be calculated as: (36.72875 X 100 = [68.82% _________ (13.66284) PAGE 10 The five year performance from 2/28/83 to 2/29/88 would be calculated as: (36.72875 -1) X 100 = 68.88% __________ (21.74844) The one year performance from 2/28/87 to 2/29/88 would be calculated as: (36.72875 - l) X 100 = 4.27% __________ (35.22536) Average annual compound rates of return are calculated for specific periods of the Fund's history. Each return is the cumulative total return performance expressed as a constant rate of growth for each year involved. For example: the T. Rowe Price New Income Fund averaged a 10.39% compound annual growth rate for ten years to achieve the 168.82% cumulative total return performance for the period ended February 29, 1988. This can be illustrated with a $1,000 hypothetical investment made in the New Income Fund on February 28, 1978 which is completely redeemed ten years later on February 29, 1988. All fund distributions were reinvested at the reinvestment price during the period. There are no loads or fees charged to shareholders. Previously, it was determined (by using the total return performance index for the New Income Fund) that the fund appreciated 168.82% for this ten year period. This represents an increase of $1,688.22 for a $1,000 investment or a total redemption value of $2,688.22. To determine the average annual rate required to achieve these results the following compounding formula is used to solve for T. P(1 + T)n = ERV where P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of of the investment period. The ten year average annual return from 2/28/78 to 2/29/88 would be calculated as: $1000 (1 + T)10 = $2,688.22 T= (2,688.22)1/10 - 1 ( 1,000) T= 1.1039 - l T= 0.1039 or 10.39% The five year average annual return from 2/28/83 to 2/29/88 would be calculated as: PAGE 11 $1000 (l + T)5 = $1,688.80 T= (1,688.80)1/5 - l (1,000) T= 1.1105 - 1 T= 0.1105 or 11.05% The one year average annual return from 2/28/87 to 2/29/88 would be calculated as: $1000(1 + T)1 = $1,042.68 T= (1,042.68)1 - l ( 1,000) T= 1.0427 - l T= 0.0427 or 4.27% -----END PRIVACY-ENHANCED MESSAGE-----