-----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, cbB44LyAcyKjLjO5VeHXydM+MV2ERSogpT7NYGu5Hx0jWuVo4uwXz0bVRRp79fjN VOkdRIRL/91wszLb7CBX8Q== 0000313212-94-000063.txt : 19940825 0000313212-94-000063.hdr.sgml : 19940825 ACCESSION NUMBER: 0000313212-94-000063 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19940510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE T ROWE INTERNATIONAL FUNDS INC CENTRAL INDEX KEY: 0000313212 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 521175211 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-65539 FILM NUMBER: 94526892 BUSINESS ADDRESS: STREET 1: 100 E PRATT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 3015472000 FORMER COMPANY: FORMER CONFORMED NAME: PRICE T ROWE INTERNATIONAL TRUST DATE OF NAME CHANGE: 19900301 FORMER COMPANY: FORMER CONFORMED NAME: PRICE T ROWE INTERNATIONAL FUND INC DATE OF NAME CHANGE: 19890914 497 1 PAGE 1 Prospectus for the T. Rowe Price International Fixed Income Funds, dated May 1, 1994, should be inserted here. INTERNATIONAL FIXED INCOME FUNDS PROSPECTUS MAY 1, 1994 T. ROWE PRICE INTERNATIONAL FUNDS, INC. TABLE OF CONTENTS FUND INFORMATION Introduction......................... 2 Summary of Funds' Fees and Expenses.. 3 Financial Highlights................. 5 Investment Programs.................. 5 Risk Factors......................... 8 Investment Policies.................. 9 Performance Information.............. 13 Capital Stock........................ 14 Debt Securities...................... 15 Bond Characteristics................. 16 NAV, Pricing, and Effective Date..... 16 Receiving Your Proceeds.............. 16 Dividends and Distributions.......... 17 Taxes................................ 17 Management of the Funds.............. 18 Expenses and Management Fee.......... 19 HOW TO INVEST Shareholder Services................. 20 Conditions of Your Purchase.......... 21 Completing the New Account Form...... 23 Opening a New Account................ 23 Purchasing Additional Shares......... 24 Exchanging and Redeeming Shares...... 25
SHORT-TERM GLOBAL INCOME FUND seeks high current income consistent with modest price fluctuation by investing primarily in high-quality, short-term U.S. and foreign fixed-income securities. GLOBAL GOVERNMENT BOND FUND seeks high current income and, secondarily, capital appreciation and protection of principal by investing primarily in high quality U.S. and foreign government bonds. INTERNATIONAL BOND FUND seeks high current income by investing primarily in a diversified portfolio of nondollar-denominated, high-quality government and corporate bonds. The Fund also seeks capital appreciation and to moderate price fluctuation by actively managing its maturity structure and currency exposure. - -------------------------------------------------------------------------------- T. ROWE PRICE 100% No Load. The Funds have no sales charges, no redemption fees, and no 12b-1 fees. 100% of your investment is credited to your account. Services. T. Rowe Price provides easy access to your money through checkwriting, bank wires or telephone redemptions and offers easy exchange to other T. Rowe Price Funds. Rowe Price-Fleming International, Inc. (Price-Fleming), the Funds' manager, was founded in 1979 as a joint venture between T. Rowe Price Associates, Inc. (T. Rowe Price) and Robert Fleming Holdings Limited. Price-Fleming is one of America's largest international mutual fund asset managers with approximately $15.4 billion under management with offices in Baltimore, London, Tokyo, and Hong Kong. - -------------------------------------------------------------------------------- This prospectus contains information you should know about the Funds before you invest. PLEASE KEEP IT FOR FUTURE REFERENCE. A Statement of Additional Information for the Funds (dated May 1, 1994) has been filed with the Securities and Exchange Commission and is incorporated by reference in this prospectus. It is available at no charge by calling: 1-800-638-5660. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- INTRODUCTION Interest rates vary from country to country, depending on local economic conditions and government policies. By taking a global approach to bond investing, U.S. investors can access the highest yields available worldwide. Overseas investments can also help diversify a fixed income portfolio otherwise invested solely in U.S. securities. Since the performance of foreign bond markets is often different than the performance of U.S. markets, diversifying investments across several countries can help reduce portfolio volatility. Mutual Funds: A Sensible Way to Invest. For the individual investor, buying - --------------------------------------- foreign bonds can be difficult. Access to international markets is complicated. Few individuals have the time or resources to evaluate foreign markets, and transaction costs are generally high. The simplicity, professional management, and broad diversification offered by mutual funds -- at a relatively low cost -- make them an excellent alternative. Price-Fleming, the investment manager of all T. Rowe Price International Funds, makes use of a worldwide network of analysts to research opportunities in the U.S. and abroad. From its offices in Baltimore, London, Tokyo, and Hong Kong, Price-Fleming has access to the international research capabilities of London-based Robert Fleming Holdings Limited, a 100-year-old investment firm. Equally important, all T. Rowe Price International Funds have no sales charges of any kind, which means 100% of every dollar you invest goes to work for you. T. Rowe Price International Fixed Income Funds. The three T. Rowe Price - ----------------------------------------------- international fixed income funds described in this prospectus offer a range of objectives and strategies designed to meet a variety of investor needs. All invest primarily in high-quality securities, but differ in terms of average portfolio maturity and level of currency exposure to allow investors to pursue a more conservative or aggressive investment approach. . SHORT-TERM GLOBAL INCOME FUND is T. Rowe Price's most conservative international fixed income fund. It invests in short-term foreign and U.S. securities to provide a high level of income. The Fund seeks to reduce volatility stemming from currency exposure by hedging a substantial portion of its nondollar holdings back to the U.S. dollar. . GLOBAL GOVERNMENT BOND FUND invests in U.S. and foreign government bonds to provide a high level of income and, secondarily, capital appreciation. It is somewhat less conservative than the Short-Term Global Income Fund, and the average maturity of its portfolio is generally longer. The Fund has wide flexibility to hedge all or a part of its nondollar holdings. . INTERNATIONAL BOND FUND takes an aggressive approach to investing for income and capital appreciation. It invests outside the U.S. in longer- term bonds, and normally does not hedge its nondollar holdings back to the dollar to allow the Fund to benefit from currency fluctuations which could enhance total return. (See INVESTMENT PROGRAMS for further details.) Risk Factors. International fixed income investments involve more risk than - ------------- comparable domestic securities due to the risks unique to international investing, including fluctuating currency values. Currency movements can be large and unpredictable and can adversely affect the Funds. 2 In general, each Fund's share price will vary with market, economic and foreign exchange conditions, and investments may be worth more or less when redeemed than when purchased. The Funds should not be relied upon as a complete investment program, nor used to play short-term swings in foreign bond or exchange markets, and there is no assurance the Funds can achieve their investment objectives. For a more complete discussion of the risks of international fixed income investing, see the RISK FACTORS section, which begins on page 8. The following pages detail the expenses and investment programs for each T. Rowe Price international fixed income fund. If you have any questions, please call us at 1-800-638-5660. - -------------------------------------------------------------------------------- SUMMARY OF FUNDS' FEES AND EXPENSES THE FUNDS ARE 100% NO-LOAD ... you pay no fees to purchase, exchange or redeem shares, nor any ongoing marketing (12b-1) expenses. Lower expenses benefit you by increasing your investment return from a Fund. Shown below are ALL expenses and fees each Fund incurred during its fiscal year. Where applicable, expenses were restated to reflect current fees. Expenses are expressed as a percent of 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.
Global Short-Term Government International Global Income Bond Bond ------------- ---------- ------------- SHAREHOLDER TRANSACTION EXPENSES Sales load "charge" on purchases NONE NONE NONE Sales load "charge" on reinvested dividends NONE NONE NONE Redemption fees NONE NONE NONE Exchange fees NONE NONE NONE ANNUAL FUND EXPENSES Management fee (after reduction) 0.46%+ 0.51%++ 0.70% Total other (Shareholder servicing, custodial, 0.54% 0.69% 0.29% auditing, etc.)+++ Distribution fees (12b-1) NONE NONE NONE ----- ----- ----- TOTAL FUND EXPENSES 1.00% 1.20% 0.99%
+ The Short-Term Global Income Fund's management fee and its total expense ratio would have been 0.60% and 1.14%, respectively, had Price-Fleming not agreed to reduce management fees in accordance with the expense limitation. ++ The Global Government Bond Fund's management fee and its total expense ratio would have been 0.70% and 1.39%, respectively, had Price-Fleming not agreed to reduce management fees in accordance with the expense limitation. +++ The Funds charge a $5.00 fee for wire redemptions under $5,000, subject to change without notice. 3 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 Short-Term Global Income Fund would be $10. THIS IS AN ILLUSTRATION ONLY. Actual expenses and performance may be more or less than shown.
Fund 1 Year 3 Years 5 Years 10 Years ---- ------ ------- ------- -------- Short-Term Global Income $10 $32 $55 $122 Global Government Bond $12 $38 $66 $145 International Bond $10 $32 $55 $121
MANAGEMENT FEE. Each Fund pays Price-Fleming an investment management fee consisting of a flat Individual Fund Fee of each Fund's net assets, of 0.25% for the Short-Term Global Income Fund and 0.35% each for the Global Government Bond and International Bond Funds, and a Group Fee, defined on page 20 under EXPENSES AND MANAGEMENT FEE, of 0.35% as of December 31, 1993. Thus, the total combined management fee as of December 31, 1993, based on net assets would be 0.60% for the Short-Term Global Income Fund and 0.70% each for the Global Government Bond and International Bond Funds. The following chart sets forth expense ratio limitations and the periods for which they are effective. For each, Price-Fleming has agreed to bear any Fund expenses which would cause the Funds' ratio of expenses to average net assets to exceed the indicated percentage limitations. The expenses borne by Price-Fleming 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 Ratio Reimbursement Limitation Period Limitation Date ----------------- ---------- ------------- Short-Term Global Income+ January 1, 1994 - December 31, 1995 1.00% December 31, 1997 Global Government Bond++ January 1, 1993 - December 31, 1994 1.20% December 31, 1996
+ The Short-Term Global Income Fund previously operated under a 1.00% limitation that expired December 31, 1993. The reimbursement period for this limitation extends through December 31, 1995. ++ The Global Government Bond Fund previously operated under a 1.20% limitation that expired December 31, 1992. The reimbursement period for this limitation extends through December 31, 1994. TRANSFER AGENT, SHAREHOLDER SERVICING, AND ADMINISTRATIVE COSTS. The Funds 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 each Fund. The approximate fees paid are set forth in the following chart:
Transfer Subaccounting Agent Services Accounting -------- ------------- ---------- Short-Term Global Income $107,000 $ 0 $100,000 Global Government Bond $ 97,000 $ 3,000 $100,000 International Bond $626,000 $244,000 $112,000
4 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The following table provides information about each Fund's financial history. It is based on a single share outstanding throughout each fiscal year (which ends on the last day of December). The respective table is part of each Fund's financial statements which are included in each Fund's annual report and incorporated by reference into the Statement of Additional Information, which is available to shareholders. The financial statements in the annual report have been audited by the Funds' independent accountants whose respective unqualified reports cover the periods shown.
- -------------------------------------------------------------------------------------------------------------------------- Investment Activities Distributions - -------------------------------------------------------------------------------------------------------------------------- Net Realized Net and Total Asset Net Unrealized from Net Value, Invest- Gain (Loss) Invest- Invest- Net Total Year Ended, Beginning ment on ment ment Realized Distri- December 31 of Period Income Investments Activities Income Gain butions - -------------------------------------------------------------------------------------------------------------------------- SHORT-TERM GLOBAL INCOME 1992+ $5.00 $ .20++ $ (.21) $ (.01) $ (.20) $(.01) $ (.21) 1993 4.78 .32++ .04 .36 (.32) -- (.32) - -------------------------------------------------------------------------------------------------------------------------- GLOBAL GOVERNMENT BOND 1991* $10.00 $ .77** $ .30 $1 .07 $ (.77) -- $ (.77) 1992 10.30 .76** (.44) .32 (.76) $(.01) (.77) 1993 9.85 .56** .51 1.07 (.56) (.28) (.84) - -------------------------------------------------------------------------------------------------------------------------- INTERNATIONAL BOND 1986! $10.00 $ .28!! $ .01 $ .29 $ (.28) -- $ (.28) 1987 10.01 1.01!! 1.64 2.65 (1.01) $(.05) (1.06) 1988 11.60 .91 (1.09) (.18) (.91) (.26) (1.17) 1989 10.25 .75 (1.10) (.35) (.75) -- (.75) 1990 9.15 .83 .55 1.38 (.83) (.17) (1.00) 1991 9.53 .77 .82 1.59 (.77) -- (.77) 1992 10.35 .87 (.63) .24 (.83) (.15) (.98) 1993 9.61 .69 1.18 1.87 (.69) (.45) (1.14) - --------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------- End of Period - -------------------------------------------------------------------------------------------------------------------------- Ratio of Ratio of NET Total Expenses Net ASSET Return to Investment VALUE, (Includes Net Average Income Portfolio Year Ended, END OF Reinvested Assets($ Net to Average Turnover December 31 PERIOD Dividends) Thousands) Assets Net Assets Rate - -------------------------------------------------------------------------------------------------------------------------- SHORT-TERM GLOBAL INCOME 1992+ $ 4.78 (.22)% $ 66,297 1.00%++/o/ 7.92%/o/ 334.1%/o/ 1993 4.82 7.87% 97,118 1.00%++ 6.74% 92.9% - -------------------------------------------------------------------------------------------------------------------------- GLOBAL GOVERNMENT BOND 1991* $10.30 11.31% $ 39,775 1.20%** 8.07% 93.6% 1992 9.85 3.26% 53,546 1.20%** 7.51% 236.6% 1993 10.08 11.15% 48,758 1.20%** 5.57% 134.0% - -------------------------------------------------------------------------------------------------------------------------- INTERNATIONAL BOND 1986! $10.01 2.97% $ 70,022 1.25%!!/o/ 9.48%/o/ 217.7%/o/ 1987 11.60 27.57% 400,173 1.25%!! 9.47% 284.3% 1988 10.25 (1.27)% 407,021 1.20% 8.73% 368.1% 1989 9.15 (3.19)% 303,897 1.23% 8.11% 293.1% 1990 9.53 16.05% 430,386 1.15% 9.04% 211.4% 1991 10.35 17.75% 413,985 1.24% 8.11% 295.6% 1992 9.61 2.39% 513,927 1.08% 8.66% 357.7% 1993 10.34 20.00% 745,244 .99% 6.58% 395.7% - --------------------------------------------------------------------------------------------------------------------------
+ For the period June 30, 1992 (commencement of operations) to December 31, 1992. ++ Excludes expenses in excess of a 1.00% voluntary expense limitation in effect through December 31, 1993. * For the period December 28, 1990 (commencement of operations) to December 31, 1991. ** Excludes expenses in excess of a 1.20% voluntary expense limitation in effect through December 31, 1994. ! For the period September 10, 1986 (commencement of operations) to December 31, 1986. !! Excludes expenses in excess of a 1.25% voluntary expense limitation in effect through December 31, 1987. /o/ Annualized. - -------------------------------------------------------------------------------- INVESTMENT PROGRAMS Each T. Rowe Price international fixed income fund has a different investment program principally designed to deliver high current income and, in the case of International Bond Fund, capital appreciation. Portfolios vary in terms of average maturity and degree of currency exposure, providing each Fund with a unique balance of risk and return potential. AVERAGE MATURITY: Bond prices fluctuate with changes in overall interest rates. Since prices of longer-term bonds tend to be more volatile than those of shorter-term bonds, portfolios with longer average maturities generally involve greater risk and provide higher reward potential. Conversely, portfolios with shorter average maturities generally exhibit less share price fluctuation, but offer less return potential. By actively managing a portfolio's maturity (i.e., lengthening average maturity when 5 lower rates are anticipated and shortening average maturity when rates are expected to rise), Price-Fleming seeks to limit the effect of -- or benefit from - -- interest rate changes. CURRENCY EXPOSURE: Because of exchange rate movements, prices of international funds are likely to be more volatile than funds which invest only in U.S. dollar-denominated securities. As the U.S. dollar strengthens relative to a given foreign currency, the value of a portfolio security denominated in that currency will fall. Conversely, when the U.S. dollar weakens relative to a currency, the value of a portfolio security in that currency will rise. Therefore, the greater the level of a fund's currency exposure, the greater its risk and return potential. By actively managing currency exposure, Price- Fleming attempts to insulate portfolios from the effect of currency fluctuations, or profit from them. There is, of course, no guarantee Price- Fleming will be successful in this regard. As noted in the following chart, the Short-Term Global Bond and Global Government Bond Funds invest both in the United States and abroad, thereby limiting somewhat their overall currency exposure. Currency risk in these Funds may be further reduced by hedging through the use of foreign currency forward contracts ("forwards"). Of the two Funds, Short-Term Global Fund is the more conservative due to its shorter average maturity and more extensive use of hedging back to the U.S. dollar. International Bond Fund, our most aggressive foreign bond fund, invests nearly exclusively outside the U.S. and is normally heavily exposed to foreign currencies to provide maximum income and appreciation potential, although with greater price fluctuation. (See page 11 for an explanation of the types of foreign currency strategies the Funds use.) All T. Rowe Price international fixed income funds concentrate investments in high-quality securities to minimize credit risk. However, the Funds may also invest to a limited extent in below investment grade ("junk") bonds. Each Fund normally invests in the bonds of a minimum of three countries, however, each may invest in the bonds of only one country (including the U.S.) for temporary defensive purposes. Because of their concentration in foreign government securities, all Funds are considered "non-diversified" for purposes of the Investment Company Act of 1940. SUMMARY OF FUND CHARACTERISTICS:
Short-Term Global Government International Global Income Bond Bond - -------------------------------------------------------------------------------------------------------- Objective Income & principal Income Income & growth preservation Geographic Focus Worldwide** Worldwide** Outside U.S.*** Primary Credit Quality* Investment grade High quality Investment grade Weighted Average Maturity Short (no more Approximately Intermediate to than 3 years) 7 years long Normal Level of Currency Exposure Low Varies High Relative Risk Lowest Moderate Highest Total Return Potential Lowest Moderate Highest - --------------------------------------------------------------------------------------------------------
* As determined by at least one public rating agency (e.g., Standard & Poor's Corporation ("S&P"), or, if unrated, by Price-Fleming to be of equivalent quality. "Investment Grade" refers to the four highest credit categories (e.g., AAA, AA, A and BBB by S&P). "High Quality" refers to the two highest credit categories. ** Expects to invest primarily in the United States, the countries of Western Europe, Japan, Australia, New Zealand, and Canada. *** Expects to invest primarily in the countries of Western Europe, Japan, Australia, New Zealand, and Canada. 6 Investing for income in short-term U.S. and foreign debt securities. SHORT-TERM GLOBAL INCOME FUND. The Fund's investment objectives are to seek high current income consistent with modest price fluctuation by investing primarily in high-quality fixed-income securities. These include bonds, debentures, notes, mortgage or asset-backed securities, bank obligations such as certificates of deposit, and money market instruments of all types issued throughout the world. The Fund may also invest in securities which are convertible into equity securities or have attached warrants or rights to purchase equity securities. At least 65% of the Fund's assets will be invested in high quality securities. The Fund may also invest up to 10% of its total assets in below investment grade ("junk") bonds, including bonds which have received the lowest rating. To reduce the effect of interest rate changes on the Fund's share price, the dollar-weighted average maturity of the portfolio will not exceed three years, although the Fund may hold individual securities with longer maturities. To reduce the effect of currency exchange rate fluctuations on the Fund's share price, Price-Fleming will actively manage the Fund's foreign currency exposure. This may be done either through the use of currency hedging strategies or by investing in securities whose foreign currencies are expected to be highly correlated to the U.S. dollar. Normally, the foreign currency strategies will involve hedging a substantial portion of currency back to the dollar, either through direct or proxy hedging. Due to costs associated with hedging, Price-Fleming will not try to eliminate all currency risk from the Fund's portfolio. Rather, it will hedge currency exposure to the extent deemed necessary to preserve capital, while at the same time providing high current income. Investing for income and appreciation in U.S. and foreign government bonds. GLOBAL GOVERNMENT BOND FUND. The Fund's investment objectives are to seek high current income and, secondarily, capital appreciation and protection of principal by investing primarily in high-quality U.S. and foreign government bonds. The Fund will invest primarily in debt securities that are considered high quality at the time of purchase, and will normally have at least 65% of its assets in bonds issued or guaranteed by the U.S. or foreign governments, their agencies and instrumentalities, as well as foreign authorities, provinces and municipalities. The Fund may also invest up to 10% of its total assets in below investment grade ("junk") bonds, including bonds which have received the lowest rating. To reduce the effect of interest rate changes on the Fund's share price while seeking higher yields, the weighted average maturity of the portfolio is likely to average around seven years, although the Fund may adopt a longer maturity in anticipation of falling yields and a shorter maturity in anticipation of rising yields. The Fund may hold individual securities with maturities both longer and shorter than seven years. The Fund has wide flexibility to engage in a variety of hedging strategies to reduce the effect of currency exchange rate fluctuations on the Fund's share price. These may involve direct, cross and proxy hedges. Investing for income and appreciation in foreign bonds. INTERNATIONAL BOND FUND. The International Bond Fund's investment objective is to seek high current income by investing in a diversified portfolio of nondollar-denominated, high-quality government and corporate bonds. The Fund also seeks capital appreciation and to moderate price fluctuation by actively managing its maturity structure and currency exposure. The Fund will invest primarily (at least 65% of assets) in debt securities that are considered high quality at the time of purchase. The Fund may also invest up to 10% of its total assets in below investment grade ("junk") bonds, including bonds which have received the lowest rating. 7 Price-Fleming will base its investment decisions on fundamental market attractiveness, currency trends, local market factors and credit quality. The Fund will generally invest in countries where the combination of fixed income market returns and currency exchange rate movements is attractive, or, if the currency trend is unfavorable, where the currency risk can be minimized through hedging. The Fund will generally have greater interest rate and foreign currency exposure than the other T. Rowe Price international fixed income funds. It will normally not hedge its foreign currency exposure back to the dollar and will normally have no more than 50% of the value of its total assets involved in cross hedging transactions. Therefore, its total return and, in particular, the principal value of its foreign currency-denominated debt securities, is likely to be significantly affected by changes in foreign interest rate levels and foreign currency exchange rates. These changes provide greater opportunity for capital gains as well as greater risks of capital loss. Exchange rate movements can be large and endure for extended periods of time. Price-Fleming will attempt to reduce the risks associated with investments in international fixed income securities through portfolio diversification and active management of the Fund's maturity and currency exposure. Please see INVESTMENT POLICIES for a more complete discussion of each Fund's investments. - -------------------------------------------------------------------------------- RISK FACTORS Investors should understand and consider carefully the special risks involved in foreign investing. FOREIGN CURRENCY. Investments in foreign bonds will require the Funds to hold securities and funds denominated in foreign currencies. As a result, the value of the assets of the Funds as measured in U.S. dollars may be affected significantly, favorably or unfavorably, by changes in foreign currency exchange rates, currency restrictions, and exchange control regulations, and the Funds will incur costs in connection with conversions between various currencies. Exchange rate movements can be large and endure for extended periods of time. Generally, an increase in the value of a foreign currency versus the U.S. dollar will have a positive effect on the Fund's return; conversely, a decline in the value of a foreign currency versus the U.S. dollar would have a negative impact. COSTS. The expenses to individual investors of investing directly in foreign securities are higher than investing in U.S. securities. While the Funds offer a very efficient way for individual investors to participate in foreign markets, their expenses, including advisory and custodial fees, are also higher than the typical domestic fixed income mutual fund. ECONOMIC AND TRADE FACTORS. The economies of the countries in which the Funds may invest may differ favorably or unfavorably from the U.S. economy and may be less developed or diverse. Certain of these countries, for example Japan, are heavily dependent upon international trade. Accordingly, they have been, and may continue to be, adversely affected by trade barriers and other protectionist or retaliatory measures of, as well as economic conditions in, the U.S. and other countries with which they trade. Certain countries may be heavily dependent on a limited number of commodities and thus vulnerable to weaknesses in world prices for these commodities. Finally, there is no assurance that the pattern of growth exhibited by certain of the portfolio countries in the past will continue. POLITICAL FACTORS. The internal politics of certain of the portfolio countries are not as stable as in the United States. In addition, significant external political risks, including war, currently affect some of the countries. Finally, governments in certain of the countries continue to participate to a substantial degree, through ownership interests or regulation, in their respective economies and 8 securities markets. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of assets, or imposition of taxes. Any of these actions could have a significant effect on market prices of securities, the ability of the Funds to repatriate capital and income, and the value of the Funds' investments. MARKET CHARACTERISTICS. Many of the securities markets of the portfolio countries have substantially less volume than comparable U.S. markets, and the securities of some companies in these countries may be less liquid and more volatile than securities of comparable U.S. companies. Many of these markets may be subject to greater volatility, be more influenced by adverse events generally affecting the market, and by large investors trading significant blocks of securities, than is usual in the United States. The settlement practices in portfolio countries may include delays and subject the Funds to risks of loss not customary in U.S. markets. LEGAL AND REGULATORY. Certain of the portfolio countries lack uniform accounting, auditing, and financial reporting standards, may have less governmental supervision of securities markets, brokers, and issuers of securities, and less financial information available to investors than is usual in the United States. Finally, there may be difficulty in enforcing legal rights outside the United States. EMERGING MARKETS. Each of the Funds may invest in securities of companies located in various emerging markets, for example the countries of Eastern Europe and Latin America. Reforms away from centrally planned economies and state owned industries in Eastern Europe are still in their infancy. Latin America countries have histories of hyperinflation and political instability. As a result, investments in such countries would be highly speculative and could result in losses to the Funds. Although significant uncertainties for investment remain, Price-Fleming considers the current outlook for certain countries in these regions to be positive and expects the Funds to be in a position to take advantage of opportunities as they arise. FOREIGN EXCHANGES AND MARKETS. Each Fund's portfolio securities from time to time may be primarily listed on foreign exchanges or traded in foreign markets which are open on days (such as Saturday) when the Funds do not compute their prices or accept orders for the purchase, redemption or exchange of their shares. As a result, the net asset values of the Funds may be significantly affected by trading on days when shareholders cannot effect transactions. - -------------------------------------------------------------------------------- INVESTMENT POLICIES Fund managers have considerable leeway in choosing investment strategies and selecting securities they believe will help the Funds achieve their objectives. This section takes a detailed look at some of the types of securities each Fund may hold in its portfolio and the various kinds of investment practices that may be used in day-to-day portfolio management. Each Fund's investment program is subject to further restrictions and risks described in the Statement of Additional Information. Shareholder approval is required to substantively change each Fund's objective and certain investment restrictions noted in the following section as "fundamental policies." The managers also follow certain "operating policies" which can be changed without shareholder approval. However, significant changes are discussed with shareholders in each Fund's report. TYPES OF PORTFOLIO SECURITIES In seeking to meet their investment objectives, the Funds may invest in any type of security whose investment characteristics are consistent with each Fund's investment program. These and some of the other investment techniques the Funds may use are described in the following pages. 9 ALL FUNDS FIXED INCOME SECURITIES. The Funds' investments may include but shall not be limited to: (1) Debt obligations issued or guaranteed by: (a) a foreign sovereign government or one of its agencies, authorities, instrumentalities or political subdivisions including a foreign state, province or municipality, and (b) supranational organizations such as the World Bank, Asian Development Bank, European Investment Bank, and European Economic Community; (2) Debt obligations: (a) of foreign banks and bank holding companies, (b) of domestic banks and corporations issued in foreign currencies, and (c) denominated in the European Currency Unit (ECU); and (3) Foreign corporate debt securities and commercial paper. The Short-Term Global Income and Global Government Bond Funds may also invest in: (1) Debt obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities; (2) Domestic corporate debt securities; (3) Domestic commercial paper, including commercial paper indexed to certain specific foreign currency exchange rates; (4) Debt obligations of domestic banks and bank holding companies; and (5) Collateralized mortgage obligations or asset-backed bonds. The Funds may from time to time purchase securities on a when-issued basis and invest in repurchase agreements. NON-DIVERSIFIED INVESTMENT COMPANY. The Funds are able to invest more than 5% of their assets in the fixed-income securities of individual foreign governments; however, each will not invest more than 5% of its assets in any individual corporate issuer. This policy does not prohibit a Fund from maintaining more than 5% of its assets, including cash or currency, in custodial accounts of a Fund's custodian or subcustodian. In addition, each Fund intends to qualify as a regulated investment company for purposes of the Internal Revenue Code. Such qualification requires each Fund to limit its investments so that, with respect to at least 50% of its total assets, not more than 5% of such assets are invested in the securities of a single issuer. Since, as a non- diversified investment company, each Fund is permitted to invest a greater proportion of its assets in the securities of a smaller number of issuers, the Funds may be subject to greater credit risk with respect to their portfolio securities than an investment company which is more broadly diversified. 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. Another type of hybrid instrument is a cross currency linked bond whose coupon yield varies based on the relationship between two currencies. 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. Operating Policy. Each Fund may invest up to 10% of its total assets in hybrid instruments. PRIVATE PLACEMENTS (RESTRICTED SECURITIES). These securities are sold directly to a small number of investors, usually institutions. Unlike public offerings, such securities are not registered with the SEC. Although certain of these securities may be readily sold, for example under Rule 144A, the sale of others may involve substantial delays and additional costs. Operating Policy. Each Fund will not invest more than 15% of its net assets in illiquid securities. LOAN PARTICIPATIONS AND ASSIGNMENTS. Large loans to corporations or governments, including governments of less developed countries (LDCs), may be shared or syndicated among several lenders, usually banks. The Fund could participate in such syndicates, or could buy part of a loan, becoming a direct lender. Participations and assignments involve special types of risk, including those of being a 10 lender, but are not necessarily more risky than junk bonds. Operating Policy: Each Fund may not invest more than 5% of total assets in loan participations. HIGH YIELD/HIGH RISK INVESTING. The Funds may purchase bonds rated below investment grade. The total return and yield of lower quality (high yield/high risk) bonds, commonly referred to as "junk bonds," can be expected to fluctuate more than the total return and yield of higher quality, shorter-term bonds. Junk bonds are regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. Successful investment in low and lower-medium quality bonds involves greater investment risk and is highly dependent on Rowe Price-Fleming's credit analysis. A real or perceived economic downturn or higher interest rates could cause a decline in high yield bond prices, because such events could lessen the ability of issuers to make principal and interest payments. These bonds are thinly-traded and can be more difficult to sell and value accurately than high-quality bonds. Because objective pricing data may be less available, judgment may play a greater role in the valuation process. Operating Policy. Each Fund may invest up to 10% of its total assets in below investment grade or junk bonds. INTERNATIONAL BOND FUND CONCENTRATION IN BANKING INDUSTRY. When the Fund's position in issues maturing in one year or less equals 35% or more of the Fund's total assets, the Fund will, as a matter of fundamental policy, normally have 25% or more of its assets concentrated in securities in the banking industry. Investments in the banking industry may be affected by general economic conditions, exposure to credit losses arising from possible financial difficulties of borrowers, and the profitability of the banking industry is largely dependent on the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. ALL FUNDS Use of Forwards. TYPES OF MANAGEMENT PRACTICES FOREIGN CURRENCY TRANSACTIONS. Each Fund may engage in foreign currency transactions either on a spot (cash) basis at the rate prevailing in the currency exchange market at the time or through forward currency contracts ("forwards") with terms generally of less than one year. Forwards will be used primarily to adjust the foreign exchange exposure of each Fund with a view to protecting the portfolio from adverse currency movements, based on Price- Fleming's outlook, and the Funds might be expected to enter into such contracts under the following circumstances: LOCK IN. When management desires to lock in the U.S. dollar price on the purchase or sale of a security denominated in a foreign currency. CROSS HEDGE. If a particular currency is expected to decrease against another currency, a Fund may sell the currency expected to decrease and purchase a currency which is expected to increase against the currency sold in an amount approximately equal to some or all of the Fund's portfolio holdings denominated in the currency sold. DIRECT HEDGE. If Price-Fleming wants to eliminate substantially all of the risk of owning a particular currency, and/or if Price-Fleming expects the portfolio can benefit from price appreciation in a given country's bonds but does not want to hold the currency, it may employ a direct hedge back into the U.S. dollar. In either case, the Fund would enter into a forward contract to sell the currency in which a portfolio security is denominated and purchase U.S. dollars at an exchange rate established at the time it initiated the contract. The cost of the direct hedge transaction may offset most, if not all, of the yield advantage offered by the foreign security but a Fund would hope to benefit from an increase (if any) in value of the bond. Under normal conditions, the International Bond Fund will not engage in direct hedges of this sort. 11 PROXY HEDGE. Price-Fleming might choose to use a proxy hedge, which is less costly than a direct hedge. In this case, the Fund, having purchased a bond, will sell a currency whose value is believed to be closely linked to the currency in which the bond is denominated. Interest rates prevailing in the country whose currency was sold would be expected to be closer to those in the U.S. and lower than those of bonds denominated in the currency of the original holding. This type of hedging entails greater risk than a direct hedge because it is dependent on a stable relationship between the two currencies paired as proxies and the relationships can be very unstable at times. Forward contracts do involve other risks, including, but not limited to, significant volatility in currency markets. In addition, currency moves may not occur exactly as Price-Fleming expected, so use of forward contracts could adversely affect the Fund's total return. COSTS OF HEDGING. When the Fund purchases a foreign bond with a higher interest rate than is available on U.S. bonds of a similar maturity, the additional yield on the foreign bond could be substantially lost if the Fund were to enter into a direct hedge by selling the foreign currency and purchasing the U.S. dollar. This is what is known as the "cost" of hedging. Proxy hedging attempts to reduce this cost through an indirect hedge back to the U.S. dollar. It is important to note that hedging costs are treated as capital transactions and are not, therefore, deducted from the Fund's dividend distribution and are not reflected in its yield. Instead, such costs will, over time, be reflected in the Fund's net asset value per share. As a consequence, the Fund's yield may not be an accurate indicator of its total return. CASH POSITION. The Fund will hold a certain portion of its assets in money market securities, including repurchase agreements, in the two highest rating categories, maturing in one year or less. For temporary, defensive purposes, the Fund may invest without limitation in such securities. This reserve position provides flexibility in meeting redemptions, expenses, and the timing of new investments, and serves as a short-term defense during periods of unusual market volatility. BORROWING MONEY AND TRANSFERRING ASSETS. Each Fund can borrow money from banks as a temporary measure for emergency purposes, to facilitate redemption requests, or for other purposes consistent with a Fund's investment objective and program. Such borrowings may be collateralized with Fund assets, subject to restrictions. Fundamental Policy. Borrowings may not exceed 33 1/3% of total Fund assets. Operating Policies. The Funds may not transfer as collateral any portfolio securities except as necessary in connection with permissible borrowings or investments, and then such transfers may not exceed 33 1/3% of a Fund's total assets. Each Fund may not purchase additional securities when borrowings exceed 5% of total assets. FUTURES AND OPTIONS. Futures are often used to manage risk, because they enable the investor to buy or sell an asset in the future at an agreed upon price. Options give the investor the right, but not the obligation, to buy or sell an asset at a predetermined price in the future. The Funds may buy and sell futures contracts (and options on such contracts) to manage exposure to changes in interest rates, securities prices and foreign currencies, as an efficient means of adjusting overall exposure to certain markets, and to adjust a Fund's duration. The Funds may purchase, sell, or write call and put options on securities, financial indices, and foreign currencies. 12 Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower a Fund's total return; and the potential loss from the use of futures can exceed the Fund's initial investment in such contracts. Operating Policies. Futures: Initial margin deposits and premiums on options used for non-hedging purposes will not equal more than 5% of a Fund's net asset value. Options on securities: The total market value of securities against which the Fund has written call or put options may not exceed 25% of its total assets. A Fund will not commit more than 5% of its total assets to premiums when purchasing call or put options. LENDING OF PORTFOLIO SECURITIES. Like other mutual funds, the Funds may lend securities to broker-dealers, other institutions, or other persons to earn additional income. The principal risk is the potential insolvency of the broker- dealer or other borrower. In this event, the Fund could experience delays in recovering its securities and possibly capital losses. Fundamental Policy. The value of loaned securities may not exceed 33 1/3% of a Fund's total assets. PORTFOLIO TURNOVER. The Funds may purchase and sell securities without regard to the length of time held. As a result, short-term trading may cause the portfolio turnover of each Fund to be higher than that of other mutual funds with less aggressive trading strategies, which may, in turn, increase each Fund's transaction costs. To the extent that short-term trading results in the realization of short-term capital gains, shareholders will be taxed on such gains at ordinary income tax rates. The following chart sets forth each Fund's portfolio turnover rates for the last three years, if applicable.
1993 1992 1991 ---- ---- ---- Short-Term Global Income 92.9% 334.1% * Global Government Bond 134.0% 236.6% 93.6% International Bond 395.7% 357.7% 295.6%
*Prior to commencement of Fund operations. - -------------------------------------------------------------------------------- PERFORMANCE INFORMATION TOTAL RETURN. The Funds 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 capital gain distributions. The compound average annual total return indicates a yearly compound average of a Fund's performance, derived from the cumulative total return. The annual compound rate of return for a Fund may vary from any average. Further information about a Fund's performance is contained in its annual report which is available free of charge. YIELD. The Funds may advertise a yield figure derived by dividing each 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. 13 - -------------------------------------------------------------------------------- CAPITAL STOCK The T. Rowe Price International Funds, Inc. (the Corporation) was originally organized in 1979 as a Maryland corporation. Effective May 1, 1986, the Corporation converted from a Maryland corporation to a Massachusetts business trust known as the T. Rowe Price International Trust (Trust). On May 1, 1990, the Trust converted back to a Maryland corporation. The Corporation 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." Mutual funds, such as these, enable shareholders to: (1) obtain professional management of investments, including Price-Fleming'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. Currently, the Corporation consists of nine series, each representing a separate class of shares and having different objectives and investment policies. The nine series and the years in which each was established are as follows: International Stock Fund, 1979; International Bond Fund, 1986; International Discovery Fund, 1988; European Stock Fund, New Asia Fund, and Global Government Bond Fund, 1990; Japan Fund, 1991; Short-Term Global Income Fund, 1992; and Latin America Fund, 1993. The International Stock, International Discovery, European Stock, Japan, New Asia, and Latin America Funds are described in a separate prospectus. The Corporation's Charter provides that the Board of Directors may issue additional series of shares and/or additional classes of shares for each series. Although each Fund is offering only its own shares, it is possible that a Fund might become liable for any misstatement in the prospectus about another Fund. The Funds' Board has considered this factor in approving the use of a single combined prospectus. Each Fund has an investment advisory group that has day-to-day responsibility for managing the portfolio and developing and executing each Fund's investment program. The advisory group for each Fund consists of Peter Askew and Christopher Rothery. Peter Askew joined Price-Fleming in 1988 and has 19 years of experience managing multicurrency fixed income portfolios. Christopher Rothery joined Price-Fleming in 1994 and has seven years of experience managing multicurrency fixed income portfolios. SHAREHOLDER RIGHTS. All shares of the Corporation 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 a Fund's shares are issued, they are fully paid and nonassessable. All shares of the Corporation may be voted in the election or removal of directors and on other matters submitted to the vote of shareholders of the Corporation. On matters affecting an individual series of the Corporation, a separate vote of the particular series is required. The individual series of the Corporation do not routinely hold annual meetings of shareholders. However, if shareholders representing at least 10% of all votes of the Corporation entitled to be cast so desire, they may call a special meeting of shareholders of the Corporation for the purpose of voting on the question of the removal of any director(s). The total authorized capital stock of the Corporation consists of 2,000,000,000 shares, each having a par value of $.01. As of December 31, 1993, there were 4,836 shareholders in the Short-Term Global Income Fund, 3,673 shareholders in the Global Government Bond Fund, 33,879 14 shareholders in the International Bond Fund, and a total of 3,050,533 shareholders in the other 54 T. Rowe Price Funds. - -------------------------------------------------------------------------------- DEBT SECURITIES TOTAL RETURN COMPONENTS. Each Fund's total return consists of (1) the change in its net asset value per share and (2) the income it generates. The net asset value of the Funds will be affected primarily by changes in interest rate levels, the maturity of individual portfolio holdings, the quality of the securities held, and changes in values of foreign currencies. A general explanation. 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 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 an existing bond's yield to current interest rate levels. Therefore, bond prices generally move in the opposite direction of interest rates. MATURITY. The maturity of debt securities may be considered long (10 years or greater), intermediate (1 to 10 years), or short-term (12 months or less). Under normal circumstances, at least 65% of the Short-Term Global Income Fund's total assets will be invested in short-term debt securities. The proportion invested by the Global Government and International Bond Funds in each category can be expected to vary depending upon the evaluation of market patterns and trends by Price-Fleming. The dollar-weighted average maturity for the Short- Term Global Income Fund will not exceed three years, but the Fund may hold individual securities with longer maturities, and the dollar-weighted average maturity for the Global Government Bond Fund is expected to average around seven years, although it may vary with market conditions. 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 one percentage point change in interest rates on a $1,000 bond with a 7% coupon.
Principal value if rates: ------------------------- Increase Decrease -------- -------- Bond - Maturity 1% 1% - ----------------------------------------------------------------- Short-intermediate - 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. CREDIT QUALITY. 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 quality. FOREIGN CURRENCIES. See Foreign Currency under RISK FACTORS on page 8. 15 - -------------------------------------------------------------------------------- BOND CHARACTERISTICS YIELD. The yield on fixed-income securities may vary greatly from one country to another. Price-Fleming will attempt to concentrate its assets in countries where the combination of yield and potential price appreciation is most attractive. Consequently, Price-Fleming may, from time to time, invest in lower yielding fixed-income securities having a higher potential for capital appreciation in order to maximize the Fund's total return. - -------------------------------------------------------------------------------- NAV, PRICING, AND EFFECTIVE DATE If your order is received in good order before 4:00 pm ET, you will receive that day's NAV. NET ASSET VALUE PER SHARE (NAV). The NAV per share, or share price, for each Fund, is normally determined as of 4:00 pm Eastern Time (ET) each day the New York Stock Exchange (NYSE) is open. Each 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, each 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. PURCHASED SHARES are priced at that day's NAV if your request is received before 4:00 pm ET in good order. (See Completing the 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 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 Funds reserve the right to change the time at which purchases, redemptions, and exchanges are priced if the NYSE 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 Funds, 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 previously authorized) must have a signature guarantee. 16 - -------------------------------------------------------------------------------- DIVIDENDS AND DISTRIBUTIONS The Funds distribute all net investment income and capital gains to shareholders. Dividends are declared daily and paid monthly. Capital gains, if any, are normally declared in December and paid in January. Dividends and distributions declared by the Funds 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 each Fund declares a dividend to shareholders of record as of 4:00 pm ET on the previous day. 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 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 Form 1099-DIV will be mailed to you in January. DIVIDENDS AND DISTRIBUTIONS. In January, the Funds will mail you Form 1099-DIV indicating the federal tax status of your dividends and capital gain distributions. 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 a Fund has held the securities, not the length of time you have owned Fund shares. FOREIGN TRANSACTIONS. Distributions resulting from the sale of 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 that Fund's net income, a portion of the dividends may be classified as a return of capital (which lowers your tax base). If any Fund pays nonrefundable taxes to foreign governments during the year, the taxes will reduce that Fund's dividends but may still be included in your taxable income. However, you may be able to claim an offsetting credit or deduction on your tax return for your portion of foreign taxes paid by the Fund. SHARES SOLD. 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 Funds will mail you Form 1099-B indicating the date of and proceeds from all sales and exchanges. 17 UNDISTRIBUTED GAINS. At the time of purchase, the share price of each 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. TAX-QUALIFIED RETIREMENT PLANS. Tax-qualified retirement plans generally will not be subject to federal tax liability on either distributions from each Fund or redemption of shares of the Funds. Rather, participants in such plans will be taxed when they begin taking distributions from the plans. TAX CONSEQUENCES OF HEDGING. Under applicable tax law, each Fund may be required to limit its gains from hedging in foreign currency forwards, futures and options. Although it is anticipated the Funds will comply with such limits, each Fund's extensive use of these hedging techniques involves greater risk of unfavorable tax consequences than funds not engaging in such techniques. The extent to which these limits apply is subject to tax regulations which have not yet been issued. Hedging may also result in the application of the mark-to- market and straddle provisions of the Internal Revenue Code. These provisions could result in an increase (or decrease) in the amount of taxable dividends paid by the Funds as well as affect whether dividends paid by the Funds are classified as capital gain or ordinary income. - -------------------------------------------------------------------------------- MANAGEMENT OF THE FUNDS Price-Fleming has offices in Baltimore, London, Tokyo, and Hong Kong. INVESTMENT MANAGER. Price-Fleming is responsible for selection and management of each Fund's portfolio investments. Price-Fleming's U.S. office is located at 100 East Pratt Street, Baltimore, Maryland 21202. Price-Fleming was incorporated in Maryland in 1979 as a joint venture between T. Rowe Price and Robert Fleming Holdings Limited (Flemings). Flemings is a diversified investment organization which participates in a global network of regional investment offices in New York, London, Zurich, Geneva, Tokyo, Hong Kong, Manila, Kuala Lumpur, South Korea, and Taiwan. T. Rowe Price was incorporated in Maryland in 1947 as successor to the investment counseling business founded by the late Thomas Rowe Price, Jr. in 1937. Flemings was incorporated in 1974 in the United Kingdom as successor to the business founded by Robert Fleming in 1873. As of December 31, 1993, T. Rowe Price and its affiliates managed over $50 billion of assets and Flemings managed the U.S. equivalent of approximately $57 billion. BOARD OF DIRECTORS. The management of each Fund's business and affairs is the responsibility of the Funds' Board of Directors. T. ROWE PRICE, FLEMINGS, AND JARDINE FLEMING ARE OWNERS OF PRICE-FLEMING. The common stock of Price-Fleming is 50% owned by a wholly-owned subsidiary of T. Rowe Price, 25% by a subsidiary of Flemings and 25% by Jardine Fleming Group Limited (Jardine Fleming). (Half of Jardine Fleming is owned by Flemings and half by Jardine Matheson Holdings Limited.) T. Rowe Price has the right to elect a majority of the board of directors of Price-Fleming, and Flemings has the right to elect the remaining directors, one of whom will be nominated by Jardine Fleming. RESEARCH AND ADMINISTRATION. Certain administrative support is provided by T. Rowe Price which receives from Price-Fleming a fee of .15% of the market value of all assets in equity accounts, .15% of the market value of all assets in active fixed income accounts and .035% of the market value of all assets in passive fixed income accounts under Price-Fleming's management. Additional investment research and administrative support for equity investments is provided to Price-Fleming by Fleming Investment Management Limited (FIM) and Jardine Fleming Investment Holdings Limited (JFIH) for 18 which each receives from Price-Fleming a fee of .075% of the market value of all assets in equity accounts under Price-Fleming's management. FIM and JFIH are wholly-owned subsidiaries of Flemings and Jardine Fleming, respectively. JFIH receives a fee of .075% of the market value of all assets in active fixed income accounts and .0175% of such market value in passive fixed income accounts under Price-Fleming's management. PORTFOLIO TRANSACTIONS. Decisions with respect to the purchase and sale of a Fund's portfolio securities on behalf of each Fund are made by Price-Fleming. The Funds' Board of Directors has authorized Price-Fleming to utilize affiliates of Flemings and Jardine Fleming in the capacity of broker in connection with the execution of a Fund's portfolio transactions if Price-Fleming believes that doing so would result in an economic advantage (in the form of lower execution costs or otherwise) being obtained by the Fund. INVESTMENT SERVICES. T. Rowe Price Investment Services, Inc., a wholly-owned subsidiary of T. Rowe Price, is the distributor for these Funds as well as all other T. Rowe Price Funds. TRANSFER AND DIVIDEND DISBURSING AGENT. TRP Services, a wholly-owned subsidiary of T. Rowe Price, serves the Funds 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 each 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 FEE Each Fund bears all expenses of its operations other than those incurred by Price-Fleming under its Investment Management Agreement with Price-Fleming. 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' fees and expenses. MANAGEMENT FEE. Each Fund pays Price-Fleming an investment management fee consisting of an Individual Fund Fee and a Group Fee. See Summary of Funds' 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 Price-Fleming and T. Rowe Price, excluding T. Rowe Price Spectrum Fund, Inc., and any institutional or private label mutual funds, and distributed by T. Rowe Price Investment Services, Inc. 19 Each 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 $1 billion 0.350% Next $2 billion 0.450% Next $1 billion 0.340% Next $5 billion 0.420% Next $1 billion 0.330% Next $10 billion 0.390% Next $1 billion 0.320% Next $10 billion 0.370% Next $1 billion 0.310% Thereafter 0.360% Next $2 billion Based on combined Price Funds' assets of approximately $34.7 billion at December 31, 1993, the Group Fee was 0.35%. - -------------------------------------------------------------------------------- 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 more from your paycheck into any T. Rowe Price Fund. CHECKWRITING SERVICE. 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 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 should be given by calling Shareholder Services at 1-800-225-5132. Investor Services 1-800-638-5660 1-410-547-2308 DISCOUNT BROKERAGE SERVICE. You can trade stocks, bonds, options, CDs, Treasury 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 12 months, 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. Shareholder Services 1-800-225-5132 1-410-625-6500 TELEPHONE SERVICES. The following services are explained fully in the Services Guide, which is mailed to new T. Rowe Price investors. If you don't have a copy, please call Shareholder Services. (All telephone calls to Shareholder Services and Investor Services are recorded in order to protect you, each Fund, and its agents.) 20 24-HOUR ACCOUNT SERVICE. Tele*Access(R) 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*Access(R) 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-CONNECT(R)); -- By touch-tone phone any day, any time (TELE*ACESS); -- 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. ACH: (AUTOMATED CLEARING HOUSE) is an automated method of initiating payments from and receiving payments in your financial institution account. ACH is a payment system supported by over 20,000 credit unions, banks and savings banks which electronically exchange the transactions primarily through the Federal Reserve Banks. 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 Funds reserve the right to temporarily suspend wires under unusual circumstances. - -------------------------------------------------------------------------------- CONDITIONS OF YOUR PURCHASE ACCOUNT BALANCE. If your account drops below $1,000 for three months or more, each 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 Funds if shares are purchased or redeemed directly from the Funds. 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, each 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. 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 Funds or Investment Services incurs. If you are already a shareholder, each Fund can redeem shares from any identically registered account in each of these Funds 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. 21 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 Funds 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 or exchange 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 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 Funds use 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 Funds 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-day 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. EACH 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 22 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 ACCOUNT FORM You must provide your tax ID number and sign the New Account Form. TAX IDENTIFICATION NUMBER. We must have your correct social security or corporate tax identification number and a signed New Account Form or W-9 Form. Otherwise, federal law requires the Funds to withhold a percentage (currently 31%) of your dividends, capital gain distributions, and redemptions, and may subject you to an IRS fine. 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 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 Checks payable to T. Rowe Price Funds. 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, EXPRESS, REGISTERED, OR CERTIFIED MAIL T. Rowe Price Account Services T. Rowe Price Account Services P.O. Box 17300 10090 Red Run Boulevard Baltimore, MD 21298-9353 Owings Mills, MD 21117 - -------------------------------------------------------------------------------- Investor Services 1-800-638-5660 1-410-547-2308 By Wire Call Investor Services for an account number and use Wire Address 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 Trust Company of New York (to give to your bank): ABA #021000238 T. Rowe Price (fund name)/ AC-00153938 Account name(s) and account number - -------------------------------------------------------------------------------- Shareholder Services 1-800-225-5132 1-410-625-6500 By Exchange Call Shareholder Services. The new account will have the same registration as the account from which you are exchanging. Services for the new account may be carried over by telephone request if preauthorized on the existing account. See Excessive Trading and Exchange Limitations under Conditions of Your Purchase. 23 - -------------------------------------------------------------------------------- In Person Drop off your New Account Form and obtain a receipt at a T. Rowe Price Investor Center: 101 East Lombard Street T. Rowe Price Financial Center First Floor First Floor Baltimore, MD 10090 Red Run Boulevard Owings Mills, MD Farragut Square ARCO Tower First Floor 31st Floor 900 17th Street, NW 515 South Flower Street Washington, DC Los Angeles, CA - -------------------------------------------------------------------------------- PURCHASING ADDITIONAL SHARES Minimum: $100 ($50 for retirement plans and Automatic Asset Builder) By Wire Call Shareholder Services or use the Wire Address in Opening a New Account. - -------------------------------------------------------------------------------- Shareholder Services 1-800-225-5132 1-410-625-6500 By Mail Indicate your account number and the Fund name on your 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 Transfer Use Tele*Access, PC*Access or call Shareholder Services (if you have established Telephone Services) for ACH Transfers. - -------------------------------------------------------------------------------- By Automatic Asset Builder Fill out the Automatic Asset Builder section on the New Account or Shareholder Services Form. - -------------------------------------------------------------------------------- Minimum: $5,000 By Phone Call Shareholder Services. 24 - -------------------------------------------------------------------------------- EXCHANGING AND REDEEMING SHARES By Phone Call Shareholder Services. If you find our phones busy during unusually volatile markets, please consider placing your order by express mail, mailgram, Tele*Access or PC*Access. For exchange policy, see Excessive Trading and Exchange Limitations under Conditions of Your Purchase. Redemption proceeds can be mailed, sent by ACH transfer, or wired to your bank. The Funds charge 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 1-800-225-5132 1-410-625-6500 By Mail Indicate account name(s) and numbers, fund name(s), and 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). T. Rowe Price Trust Company 1-800-492-7670 1-410-625-6585 NOTE: Distributions from retirement accounts, including IRAs, must be in writing. Please call Shareholder 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, Non-Retirement REGISTERED, OR CERTIFIED MAIL and IRA Accounts All Accounts - ---------------- ------------ T. Rowe Price Account Services T. Rowe Price Account Services P.O. Box 89000 10090 Red Run Boulevard Baltimore, MD 21289-0220 Owings Mills, MD 21117 Employer-Sponsored Retirement Accounts - ------------------- T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300 25 TO OPEN AN ACCOUNT: Investor Services 1-800-638-5660 547-2308 in Baltimore YIELDS & PRICES: Tele* Access(R) 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 Confidence(R) IFI PROSPECTUS T. ROWE PRICE - ------------- INTERNATIONAL FIXED-INCOME FUNDS May 1, 1994 [ART OF T. ROWE PRICE APPEARS HERE] PAGE 2 STATEMENT OF ADDITIONAL INFORMATION T. Rowe Price International Funds, Inc. (the "Corporation") Short-Term Global Income Fund Global Government Bond Fund International Bond FundR (the "Funds") This Statement of Additional Information is not a prospectus but should be read in conjunction with the Fund's prospectus dated May 1, 1994, which may be obtained from T. Rowe Price Investment Services, Inc., 100 East Pratt Street, Baltimore, Maryland 21202. The date of this Statement of Additional Information is May 1, 1994. PAGE 3 TABLE OF CONTENTS Page Page Call and Put Options . . . . . .11 Investment Restrictions. . . . . . 25 Capital Stock. . . . . . . . . .54 Legal Counsel. . . . . . . . . . . 56 Custodian. . . . . . . . . . . .47 Lending of Portfolio Securities. . 99 Dealer Options . . . . . . . . .15 Management of Funds. . . . . . . . 40 Distributor for Funds. . . . . .46 Net Asset Value Per Share. . . . . 52 Dividends. . . . . . . . . . . .53 Portfolio Management Practices . . .9 Federal and State Registration Portfolio Transactions . . . . . . 47 of Shares. . . . . . . . . . .56 Pricing of Securities. . . . . . . 51 Foreign Currency Transactions. .22 Principal Holders of Securities. . 42 Foreign Futures and Options. . .21 Ratings of Corporate Debt Securities58 Futures Contracts. . . . . . . .16 Repurchase Agreements. . . . . . . 10 Hybrid Instruments . . . . . . . 7 Risk Factors of Foreign Investing. .3 Illiquid or Restricted Securities8 Risk Factors of Investing in Debt Independent Accountants. . . . .56 Obligations. . . . . . . . . . . .6 Investment Management Services .43 Tax Status . . . . . . . . . . . . 53 Investment Objectives and Taxation of Foreign Shareholder. . 54 Policies . . . . . . . . . . . 2 When-Issued Securities and Forward Investment Performance . . . . .29 Commitment Contracts . . . . . . 25 Investment Programs. . . . . . . 2 Yield Information. . . . . . . . . 40 INVESTMENT OBJECTIVES AND POLICIES The following information supplements the discussion of each Fund's investment objectives and policies discussed on pages 2, 9 through 13 of the prospectus. Unless otherwise specified, the investment program and restrictions of each Fund are not fundamental policies. The operating policies of each Fund are subject to change by its Board of Directors without shareholder approval. However, shareholders will be notified of a material change in an operating policy. The fundamental policies of each Fund may not be changed without the approval of at least a majority of the outstanding shares of each 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. INVESTMENT PROGRAMS All Funds The Funds' investment manager, Rowe Price-Fleming International, Inc. ("Price-Fleming"), one of America's largest managers of no-load international mutual fund assets, regularly analyzes a broad range of international equity and fixed income markets in order to assess the degree of risk and level of return that can be expected from each market. Based upon its current assessment, Price-Fleming believes a high level of current income may be achieved by investing in high quality international fixed income securities, high quality, short-term U.S. and foreign fixed income securities, or high quality U.S. and foreign government bonds. Of course, there can be no assurance that Price-Fleming's forecasts of expected return will be reflected in the actual returns achieved by the Funds. Each Fund's share price will fluctuate with market, economic and foreign exchange conditions, and your investment may be worth more or less when redeemed than when purchased. The Funds should not be relied upon as a PAGE 4 complete investment program, nor used to play short-term swings in the global bond or foreign exchange markets. The Funds are subject to risks unique to international investing. See discussion under "Risk Factors of Foreign Investing" beginning on page 3. Further, there is no assurance that the favorable trends discussed below will continue, and the Funds cannot guarantee they will achieve their objectives. Risk Factors of Foreign Investing There are special risks in investing in the Funds. 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. General. Investors should understand that all investments have a risk factor. There can be no guarantee against loss resulting from an investment in the Funds, and there can be no assurance that the Funds' investment policies will be successful, or that its investment objectives will be attained. The Funds are designed for individual and institutional investors seeking to diversify beyond the United States in actively researched and managed portfolios, and are intended for long-term investors who can accept the risks entailed in investment in foreign securities. Political and Economic Factors. Individual foreign economies of certain countries may differ favorably or unfavorably from the United States' economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. The internal politics of certain foreign countries are not as stable as in the United States. For example, in 1991, the existing government in Thailand was overthrown in a military coup. In 1992, there were two military coup attempts in Venezuela and in 1992 the President of Brazil was impeached. In addition, significant external political risks currently affect some foreign countries. Both Taiwan and China still claim sovereignty of one another and there is a demilitarized border between North and South Korea. Governments in certain foreign countries continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could have a significant effect on market prices of securities and payment of dividends. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by protective trade barriers and economic conditions of their trading partners. The enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. Currency Fluctuations. The 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 PAGE 5 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. It is contemplated that most foreign securities, other than Latin American securities, will be purchased in over-the-counter markets or on stock exchanges located in the countries in which the respective principal offices of the issuers of the various securities are located, if that is the best available market. Currently, it is anticipated that many Latin American investments will be made through ADRs traded in the United States. Foreign stock 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 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 page 28. 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 PAGE 6 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 53.) Costs. Investors should understand that the expense ratios of the Funds can be expected to be higher than investment companies investing in domestic securities since the cost of maintaining the custody of foreign securities and the rate of advisory fees paid by the Funds are higher. Small Companies. Small companies may have less experienced management and fewer management resources than larger firms. A smaller company may have greater difficulty obtaining access to capital markets, and may pay more for the capital it obtains. In addition, smaller companies are more likely to be involved in fewer market segments, making them more vulnerable to any downturn in a given segment. Some of these factors may also apply, to a lesser extent, to medium size companies. Some of the smaller companies in which the Funds will invest may be in major foreign markets; others may be leading companies in emerging countries outside the major foreign markets. Securities analysts generally do not follow such securities, which are seldom held outside of their respective countries and which may have prospects for long-term investment returns superior to the securities of well-established and well- known companies. Direct investment in such securities may be difficult for United States investors because, among other things, information relating to such securities is often not readily available. Of course, there are also risks associated with such investments, and there is no assurance that such prospects will be realized. 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 PAGE 7 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. Risk Factors of Investing in Debt Obligations Because of their investment policies, the Bond Funds may or may not be suitable or appropriate for all investors. The Funds are not money market funds and are not appropriate investments for those whose primary objective is principal stability. There is risk in all investment. The Short-Term Global Income Fund is designed for the investor, who is willing to accept the risks of international investing in seeking to participate in a diversified portfolio of U.S. and foreign government short-term high quality bonds and other debt securities which provide greater stability in the rate of income than a money market fund (average weighted maturity of less than 90 days) and less risk of capital fluctuation than a portfolio of long-term debt securities. The value of the portfolio securities of each Fund will fluctuate based upon market, economic and foreign exchange conditions. Although each 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 Funds will achieve these results. Yields on short, intermediate, and long-term securities are dependent on a variety of factors, including the general conditions of the money, bond and foreign exchange markets, the size of a particular offering,the maturity of the obligation, and the rating of the issue. Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market prices of 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 each Fund to achieve its investment objective is also dependent on the continuing ability of the issuers of the debt securities in which each Fund invests to meet their obligations for the payment of interest and principal when due. After purchase by a Fund, a security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event will require a sale of such security by a Fund. However, Price-Fleming will consider such event in its determination of whether a Fund should continue to hold the security. To the extent that the ratings given by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P") may change as a result of changes in such organizations or their rating systems, the Funds will attempt to use comparable ratings as standards for investments in accordance with the investment policies contained in the prospectus. Special Risks of High Yield ("Junk Bond") Investing Junk bonds are regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. Because investment in low and lower-medium quality bonds involves greater investment risk, to the extent the Fund invests in such bonds, achievement of its investment objective will be more dependent on Price-Fleming's credit analysis than would be the case if the Fund was investing in higher quality bonds. PAGE 8 High yield bonds may be more susceptible to real or perceived adverse economic conditions than investment grade bonds. A projection of an economic downturn, or higher interest rates, for example, could cause a decline in high yield bond prices because the advent of such events could lessen the ability of highly leverage issuers to make principal and interest payments on their debt securities. In addition, the secondary trading market for high yield bonds may be less liquid than the market for higher grade bonds, which can adversely affect the ability of a Fund to dispose of its portfolio securities. Bonds for which there is only a "thin" market can be more difficult to value inasmuch as objective pricing data may be less available and judgment may play a greater role in the valuation process. In addition to the investments described in the Funds' prospectus, the Funds may invest in the following: Types of Securities 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 from investing in securities, options, futures and currencies, including volatility and lack of 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 contra party to the transaction would be a risk factor which the Fund would have to consider. Hybrid Instruments also may not be subject to regulation of the Commodities Futures Trading Commission ("CFTC"), which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority. 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 PAGE 9 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 are invested in illiquid assets, including restricted securities, the Fund will take appropriate steps to protect liquidity. Notwithstanding the above, the Fund may purchase securities which, while privately placed, are eligible for purchase and sale under Rule 144A under the 1933 Act. This rule permits certain qualified institutional buyers, such as the Fund, to trade in privately placed securities even though such securities are not registered under the 1933 Act. Price-Fleming 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% 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, Price-Fleming will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, Price-Fleming 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% of its net assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of the Fund's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities. Short-Term Global Income and Global Government Bond Funds The securities of U.S. issuers in which both Funds may invest include, but are not limited to, the following: U.S. Government Obligations. Debt securities issued by the U.S. Treasury. These are direct obligations of the U.S. Government and differ mainly in the length of their maturities. U.S. Government Agency Securities. Issued or guaranteed by U.S. Government sponsored enterprises and federal agencies. These include securities issued by the Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home Administration, Banks for Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business Association, and the Tennessee Valley Authority. Some of these securities are supported by the full faith and credit of the U.S. Treasury, and the remainder are supported only by the credit of the instrumentality, which may or may not include the right of the issuer to borrow from the Treasury. Bank Obligations. Certificates of deposit, bankers' acceptances, and other short-term debt obligations. Certificates of deposit are short-term obligations of commercial banks. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with international commercial transactions. Certificates of deposit may have fixed or variable rates. PAGE 10 Savings and Loan Obligations. Negotiable certificates of deposit and other short-term debt obligations of savings and loan associations. 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 priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-related securities. Asset Backed Receivables. The asset-backed securities that may be purchased include, but are not limited to, Certificates for Automobile Receivables (CARSsm) and Credit Card Receivable Securities. CARSsm represent undivided fractional interests in a trust whose assets consist of a pool of motor vehicle retail installment sales contracts and security interests in the vehicles securing these contracts. In addition to the general risks pertaining to all asset-backed securities, CARSsm are subject to the risks of delayed payments or losses if the full amounts due on underlying sales contracts are not realized by the trust due to unanticipated legal or administrative costs of enforcing the contracts, or due to depreciation, damage or loss of the vehicles securing the contracts. Credit Card Receivable Securities are backed by receivables from revolving credit card accounts. Since balances on revolving credit card accounts are generally paid down more rapidly than CARSsm, issuers often lengthen the maturity of these securities by providing for a fixed period during which interest payments are passed through and principal payments are used to fund the transfer of additional receivables to the underlying pool. The failure of the underlying receivables to generate principal payments may therefore shorten the maturity of these securities. In addition, unlike most other asset-backed securities, Credit Card Receivable Securities are backed by obligations that are not secured by an interest in personal or real property. There are, of course, other types of securities that are, or may become available, which are similar to the foregoing and the Fund may invest in these securities. Portfolio Management Practices Lending of Portfolio Securities Securities loans are made to broker-dealers or institutional investors or other persons, pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the value of the securities lent marked to market on a daily basis. The collateral received will consist of cash, 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 PAGE 11 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 Price-Fleming to be of good standing and will not be made unless, in the judgment of Price-Fleming, 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 Price-Fleming (collectively, "Price Funds"). The Fund has no current intention of engaging in these practices at this time. Repurchase Agreements The Fund may enter into a repurchase agreement through which an investor (such as the Fund) purchases a security (known as the "underlying security") from a well-established securities dealer or a bank that is a member of the Federal Reserve System. Any such dealer or bank will be on Price-Fleming's approved list and have a credit rating with respect to its short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by Price-Fleming. At that time, the bank or securities dealer agrees to repurchase the underlying security at the same price, plus specified interest. Repurchase agreements are generally for a short period of time, often less than a week. Repurchase agreements which do not provide for payment within seven days will be treated as illiquid securities. The Fund will only enter into repurchase agreements where (i) the underlying securities are of the type (excluding maturity limitations) which the Fund's investment guidelines would allow it to purchase directly, (ii) the market value of the underlying security, including interest accrued, will be at all 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. 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 Price-Fleming'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 PAGE 12 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. 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, Price- Fleming, 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. PAGE 13 Closing transactions will be effected in order to realize a profit on an outstanding call option, to prevent an underlying security or currency from being called, or, to permit the sale of the underlying security or currency. Furthermore, effecting a closing transaction will permit the Fund to write another call option on the underlying security or currency with either a different exercise price or expiration date or both. If the Fund desires to sell a particular security or currency from its portfolio on which it has written a call option, or purchased a put option, it will seek to effect a closing transaction prior to, or concurrently with, the sale of the security or currency. There is, of course, no assurance that the Fund will be able to effect such closing transactions at favorable prices. If the Fund cannot enter into such a transaction, it may be required to hold a security or currency that it might otherwise have sold. When the Fund writes a covered call option, it runs the risk of not being able to participate in the appreciation of the underlying securities or currencies above the exercise price, as well as the risk of being required to hold on to securities or currencies that are depreciating in value. This could result in higher transaction costs. The Fund will pay transaction costs in connection with the writing of options to close out previously written options. Such transaction costs are normally higher than those applicable to purchases and sales of portfolio securities. Call options written by the Fund will normally have expiration dates of less than nine months from the date written. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities or currencies at the time the options are written. From time to time, the Fund may purchase an underlying security or currency for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering such security or currency from its portfolio. In such cases, additional costs may be incurred. The Fund will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from the writing of the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security or currency, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security or currency owned by the Fund. In order to comply with the requirements of several states, the Fund will not write a covered call option if, as a result, the aggregate market value of all portfolio securities or currencies covering call or put options exceeds 25% of the market value of the Fund's net assets. Should these state laws change or should the Fund obtain a waiver of its application, the Fund reserves the right to increase this percentage. In calculating the 25% limit, the Fund will offset, against the value of assets covering written calls and puts, the value of purchased calls and puts on identical securities or currencies with identical maturity dates. Writing Covered Put Options The Fund may write American or European style covered put options and purchase options to close out options previously written by the Fund. A put option gives the purchaser of the option the right to sell, and the writer (seller) has the obligation to buy, the underlying security or currency at the exercise price during the option period (American style) or at the expiration of the option (European style). So long as the obligation of the writer continues, he may be assigned an exercise notice by the broker-dealer through PAGE 14 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 Price-Fleming 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. 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 Price-Fleming deems it desirable to continue to hold the security or currency because of tax PAGE 15 considerations. The premium paid for the put option and any transaction costs would reduce any capital gain otherwise available for distribution when the security or currency is eventually sold. The Fund may also purchase put options at a time when the Fund does not own the underlying security or currency. By purchasing put options on a security or currency it does not own, the Fund seeks to benefit from a decline in the market price of the underlying security or currency. If the put option is not sold when it has remaining value, and if the market price of the underlying security or currency remains equal to or greater than the exercise price during the life of the put option, the Fund will lose its entire investment in the put option. In order for the purchase of a put option to be profitable, the market price of the underlying security or currency must decline sufficiently below the exercise price to cover the premium and transaction costs, unless the put option is sold in a closing sale transaction. 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 option to expire, incurring a loss only to the extent of the premium paid for the option. PAGE 16 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 security it writes, the Fund may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair a Fund's ability to sell portfolio securities or currencies at a time when such sale might be advantageous. The Staff of the SEC has taken the position that purchased dealer options and the assets used to secure the written dealer options are illiquid securities. The Fund may treat the cover used for written OTC options as liquid if the dealer agrees that the Fund may repurchase the OTC option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the OTC option would be considered illiquid only to the extent the maximum repurchase price under the formula exceeds the intrinsic value of the option. Accordingly, the Fund will treat dealer options as subject to the Fund's limitation on unmarketable securities. If the SEC changes its position on the liquidity of dealer options, the Fund will change its treatment of such instrument accordingly. PAGE 17 Futures Contracts Transactions in Futures Each Fund may enter into financial futures contracts, including stock index, interest rate and currency futures ("futures or futures contracts"); however, the Funds have no current intention of entering into stock index futures. The Funds, however, reserve the right to trade in financial futures of any kind. 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 Price-Fleming 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. 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 portions 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%. PAGE 18 In accordance with the rules of the State of California, the Fund will apply above 5% test without excluding the value of initial margin and premiums paid for bona fide hedging portions. 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 (such as owning an offsetting position) the position, or alternative cover 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 over current obligations. If the CFTC or other regulatory authorities adopt different (including less stringent) or additional restrictions, the Fund would comply with such new restrictions. Trading in Futures Contracts A futures contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument (e.g., units of a debt security) for a specified price, date, time and place designated at the time the contract is made. Brokerage fees are incurred when a futures contract is bought or sold and margin deposits must be maintained. Entering into a contract to buy is commonly referred to as buying or purchasing a contract or holding a long position. Entering into a contract to sell is commonly referred to as selling a contract or holding a short position. Unlike when the Fund purchases or sells a security, no price would be paid or received by the Fund upon the purchase or sale of a futures contract. Upon entering into a futures contract, and to maintain the Fund's open positions in futures contracts, the Fund would be required to deposit with its custodian in a segregated account in the name of the futures broker an amount of cash, U.S. government securities, suitable money market instruments, or liquid, high- grade debt securities, known as "initial margin." The margin required for a particular futures contract is set by the exchange on which the contract is traded, and may be significantly modified from time to time by the exchange during the term of the contract. Futures contracts are customarily purchased and sold on margins that may range upward from less than 5% of the value of the contract being traded. If the price of an open futures contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy margin requirements, the broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the Fund. 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. PAGE 19 Although certain futures contracts, by their terms, require actual future delivery of and payment for the underlying instruments, in practice most futures contracts are usually closed out before the delivery date. Closing out an open futures contract purchase or sale is effected by entering into an offsetting futures contract sale or purchase, respectively, for the same aggregate amount of the identical securities and the same delivery date. If the offsetting purchase price is less than the original sale price, the Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. The transaction costs must also be included in these calculations. There can be no assurance, however, that the Fund will be able to enter into an offsetting transaction with respect to a particular futures contract at a particular time. If the Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain the margin deposits on the futures contract. As an example of an offsetting transaction in which the underlying instrument is not delivered, the contractual obligations arising from the sale of one contract of September Treasury Bills on an exchange may be fulfilled at any time before delivery of the contract is required (i.e., on a specified date in September, the "delivery month") by the purchase of one contract of September Treasury Bills on the same exchange. In such instance, the difference between the price at which the futures contract was sold and the price paid for the offsetting purchase, after allowance for transaction costs, represents the profit or loss to the Fund. Special Risks of Transactions in Futures Contracts Volatility and Leverage. The prices of futures contracts are volatile and are influenced, among other things, by actual and anticipated changes in the market and interest rates, which in turn are affected by fiscal and monetary policies and national and international political and economic events. Most United States futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of futures contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses. Because of the low margin deposits required, futures trading involves an extremely high degree of leverage. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss, as well as gain, to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit, if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. However, the Fund would presumably have sustained comparable losses if, instead of the futures contract, it had PAGE 20 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 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. Price-Fleming 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 Price-Fleming'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, Price-Fleming 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 PAGE 21 offsetting losses in its futures positions. In addition, in such situations, if the Fund had insufficient cash, it might have to sell underlying instruments to meet daily variation margin requirements. Such sales of underlying instruments might be, but would not necessarily be, at increased prices (which would reflect the rising market). The Fund might have to sell underlying instruments at a time when it would be disadvantageous to do so. In addition to the possibility that there might be an imperfect correlation, or no correlation at all, between price movements in the futures contracts and the portion of the portfolio being hedged, the price movements of futures contracts might not correlate perfectly with price movements in the underlying instruments due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors might close futures contracts through offsetting transactions, which could distort the normal relationship between the underlying instruments and futures markets. Second, the margin requirements in the futures market are less onerous than margin requirements in the securities markets, and as a result the futures market might attract more speculators than the securities markets do. Increased participation by speculators in the futures market might also cause temporary price distortions. Due to the possibility of price distortion in the futures market and also because of the imperfect correlation between price movements in the underlying instruments and movements in the prices of futures contracts, even a correct forecast of general market trends by Price-Fleming 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 PAGE 22 futures. In addition, where the Fund seeks to close out an option position by writing or buying an offsetting option covering the same index, underlying instrument or contract and having the same exercise price and expiration date, its ability to establish and close out positions on such options will be subject to the maintenance of a liquid secondary market. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options, or underlying instruments; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in the class or series of options) would cease to exist, although outstanding options on the exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of any of the clearing corporations inadequate, and thereby result in the institution by an exchange of special procedures which may interfere with the timely execution of customers' orders. Additional Futures and Options Contracts Although the Fund has no current intention of engaging in futures or options transactions other than those described above, it reserves the right to do so. Such futures and options trading might involve risks which differ from those involved in the futures and options described above. Foreign Futures and Options Participation in foreign futures and foreign options transactions involves the execution and clearing of trades on or subject to the rules of a foreign board of trade. Neither the National Futures Association nor any domestic exchange regulates activities of any foreign boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign law. This is true even if the exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures or foreign options transaction occurs. For these reasons, when the Fund trades foreign futures or foreign options contracts, it may not be afforded certain of the protective measures provided by the Commodity Exchange Act, the CFTC's regulations and the rules of the National Futures Association and any domestic exchange, including the right to use reparations proceedings before the Commission and arbitration proceedings provided by the National Futures Association or any domestic futures exchange. In particular, funds received from the Fund for foreign futures or foreign options transactions may not be provided the same protections as funds received in respect of transactions on United States futures exchanges. In addition, the price of any foreign futures or foreign options contract and, therefore, the potential profit and loss thereon may be affected by any variance in the foreign exchange rate between the time the Fund's order is placed and the time it is liquidated, offset or exercised. PAGE 23 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 Price-Fleming believes that one currency may experience a substantial movement against another currency, including the U.S. dollar, it may enter into a forward contract to sell or buy the amount of the former foreign currency, approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. Alternatively, where appropriate, the Fund may hedge all or part of its foreign currency exposure through the use of a basket of currencies or a proxy currency where such currency or currencies act as an effective proxy for other currencies. In such a case, the Fund may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the securities denominated in such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in the Fund. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However, Price-Fleming believes that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of the Fund will be served. The Fund may enter into forward contacts for any other purpose consistent with the Fund's investment objective and program. However, the Fund will not enter into a forward contract, or maintain exposure to any such contract(s), if the amount of foreign currency required to be delivered thereunder would exceed the Fund's holdings of liquid, high-grade debt securities 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. PAGE 24 At the maturity of a forward contract, the Fund may sell the portfolio security and make delivery of the foreign currency, or it may retain the security and either extend the maturity of the forward contract (by "rolling" that contract forward) or may initiate a new forward contract. If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the Fund's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Fund will suffer a loss to the extent of the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. The Fund's dealing in forward foreign currency exchange contracts will generally be limited to the transactions described above. However, the Fund reserves the right to enter into forward foreign currency contracts for different purposes and under different circumstances. Of course, the Fund is not required to enter into forward contracts with regard to its foreign currency-denominated securities and will not do so unless deemed appropriate by Price-Fleming. 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. 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. PAGE 25 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 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. Under certain circumstances, each Fund, with the exception of International Bond Fund, may commit a substantial portion or the entire value of its assets to the consummation of these contracts. Price-Fleming will consider the effect a substantial commitment of its assets to forward contracts would have on the investment program of the Fund and the flexibility of the Fund to purchase additional securities. In regard to International Bond Fund, Price-Fleming does not intend to enter into such forward contracts if, as a result, the Fund will have more than 50% of the value of its total assets committed to the consummation of such contracts. 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"). The Fund may invest without limitation in 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 PAGE 26 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. To the extent the Fund remains fully or almost fully invested (in securities with a remaining maturity of more than one year) at the same time it purchases these securities, there will be greater fluctuations in the Fund's net asset value than if the Fund did not purchase them. INVESTMENT RESTRICTIONS The investment restrictions described below have been adopted by each Fund. Fundamental policies of each Fund may not be changed without the approval of the lesser of (1) 67% of a Fund's shares present at a meeting of shareholders if the holders of more than 50% of the outstanding shares are present in person or by proxy or (2) more than 50% of a Fund's outstanding shares. Other restrictions, in the form of operating policies, are subject to change by the Funds' Board of Directors without shareholder approval. Any investment restriction which involves a maximum percentage of securities or assets shall not be considered to be violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition of securities or assets of, or borrowings by, the Fund. Fundamental Policies As a matter of fundamental policy, the Fund may not: (1) Borrowing. Borrow money except that each 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 each Fund's investment objective and program, provided that the combination of (i) and (ii) shall not exceed 33 1/3% of the value of each 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. Each Fund may borrow from banks, other Price Funds or other persons to the extent permitted by applicable law. (2) Commodities. Purchase or sell physical commodities; except that it may enter into futures contracts and options thereon; (3) Industry Concentration (Global Government Bond and Short-Term Global Income Funds). Purchase the securities of any issuer if, as a result, more than 25% of the value of a Fund's total assets would be invested in the securities of issuers having their principal business activities in the same industry; PAGE 27 Industry Concentration (International Bond Fund). Purchase the securities of any issuer if, as a result, more than 25% of the value of a 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 concentrate 25% or more of its assets in securities of the banking industry when the Fund's position in issues maturing in one year or less equals 35% or more of the Fund's total assets; (4) Loans. Make loans, although each 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 a 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) Real Estate. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent a Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business; (6) Senior Securities. Issue senior securities except in compliance with the Investment Company Act of 1940; or (7) Underwriting. Underwrite securities issued by other persons, except to the extent that a 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), each 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. Each Fund has no current intention of engaging in any such activity and there is no assurance the SEC would grant any order requested by a Fund or promulgate any rules allowing the transactions. With respect to investment restriction (2), the Fund does not consider currency contracts or hybrid investments to be commodities. 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. PAGE 28 For purposes of investment restriction (4), the Fund will consider the acquisition of a debt security to include the execution of a note or other evidence of an extension of credit with a term of more than nine months. Operating Policies As a matter of operating policy, the Funds may not: (1) Borrowing. Each 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) 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 each Fund's net asset value. (4) Illiquid Securities. Purchase illiquid securities and securities of unseasoned issuers if, as a result, more than 15% of its net assets would be invested in such securities; (5) 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; (6) Margin. Purchase securities on margin, except (i) for use of short- term credit necessary for clearance of purchases of portfolio securities and (ii) it may make margin deposits in connection with futures contracts or other permissible investments; (7) Mortgaging. Mortgage, pledge, hypothecate or, in any manner, transfer any security owned by a 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 a Fund's total assets at the time of borrowing or investment; (8) 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; (9) Options, Etc. Invest in puts, calls, straddles, spreads, or any combination thereof, except to the extent permitted by the prospectus and Statement of Additional Information; (10) Ownership of Portfolio Securities by Officers and Directors. Purchase or retain the securities of any issuer if, to the knowledge of a Fund's management, those officers and directors of a 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; (11) Short Sales. Effect short sales of securities; PAGE 29 (12) Unseasoned Issuers. Purchase a security (other than obligations issued or guaranteed by the U.S., any state or local government, or any foreign government, their agencies or instrumentalities) if, as a result, more than 5% of the value of each 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 (13) Warrants. Invest in warrants if, as a result thereof, more than 2% of the value of the total assets of each 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 each 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 Funds in units or attached to securities may be deemed to be without value. In addition to the restrictions described above, some foreign countries limit, or prohibit, all direct foreign investment in the securities of their companies. However, the governments of some countries have authorized the organization of investment funds to permit indirect foreign investment in such securities. For tax purposes these funds may be known as Passive Foreign Investment Companies. Each Fund is subject to certain percentage limitations under the 1940 Act and certain states relating to the purchase of securities of investment companies, and may be subject to the limitation that no more than 10% of the value of the Fund's total assets may be invested in such securities. INVESTMENT PERFORMANCE Total Return Performance Each 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 each Fund. Total return is calculated as the percentage change between the beginning value of a static account in each 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 each Fund. Each average annual compound rate of return is derived from the cumulative performance of each Fund over the time period specified. The annual compound rate of return for each Fund over any other period of time will vary from the average. PAGE 30 International Bond Fund Cumulative Performance Percentage Change Since 1 Year 5 Years Inception Ended Ended 9/10/86- 12/31/93+ 12/31/93 12/31/93++ _________ __________ __________ International Bond Fund 20.00% 62.55% 110.82% International Stock Fund 40.11 76.63 137.57 Fidelity Global Bond Fund 21.88 73.92 N/A Massachusetts Financial World Wide Government Trust "A" 18.10 71.85 N/A Merrill Lynch Retirement Global Bond Fund "B" 12.39 69.53 128.47 Paine Webber Master Global Income Fund "B" 13.43 56.68 N/A J.P. Morgan Non-U.S. Dollar Gov't. Bond Index 14.53 52.04 N/A Salomon Brothers Non-U.S. Dollar World Gov't. Bond Index 15.12 56.09 122.15* Lipper General World Income Funds Avg. 17.03 64.86 102.91 *Since 9/30/86 Average Annual Compound Rates of Return Since 1 Year 5 Years Inception Ended Ended 9/10/86- 12/31/93+ 12/31/93 12/31/93++ _________ __________ _________ International Bond Fund 20.00% 10.20% 10.75% International Stock Fund 40.11 12.05 12.56 Fidelity Global Bond Fund 21.88 11.70 N/A Massachusetts Financial World Wide Government Trust "A" 18.10 11.43 N/A Merrill Lynch Retirement Global Bond Fund "B" 12.39 11.13 12.06 Paine Webber Master Global Income Fund "B" 13.43 9.39 N/A J.P. Morgan Non-U.S. Dollar Gov't. Bond Index 14.53 8.74 11.19* Salomon Brothers Non-U.S. Dollar World Gov't. Bond Index 15.12 9.31 11.63* Lipper General World Income Funds Avg. 17.03 10.51 10.24* + If you invested $1,000 at the beginning of 1993, the total return on December 31, 1993 would be $1,200 ($1,000 X .20). ++ Assumes purchase of one share of the International Bond Fund at the inception price of $10.00 on 9/10/86. +++ Since September 30, 1986 * Since 9/30/86 PAGE 31 Global Government Bond Fund Cumulative Performance Percentage Change Since 1 Year Inception Ended 12/28/90- 12/31/93+ 12/31/93++ _________ __________ Global Government Bond Fund 11.15% 27.48% International Bond Fund 20.00 44.68 International Stock Fund 40.11 56.71 Fidelity Global Bond Fund 21.88 43.52 Massachusetts Financial World Wide Government Trust "A" 18.10 35.75 Merrill Lynch Retirement Global Bond Fund "B" 12.39 38.79 Paine Webber Master Global Income Fund "B" 13.43 26.20 J.P. Morgan Global (50%) and Global Hedged (50%) Gov't. Bond Index 12.59 38.52 J.P. Morgan Global Gov't. Bond Index 12.27 35.50 J.P. Morgan Global Gov't. Bond Hedged Index 12.16 35.28 Lipper General World Income Funds Avg. 17.03 10.90 PAGE 32 Average Annual Compound Rates of Return Since 1 Year Inception Ended 12/28/90- 12/31/93+ 12/31/93++ _________ __________ Global Government Bond Fund 11.15% 8.51% International Bond Fund 20.00 13.10 International Stock Fund 40.11 16.15 Fidelity Global Bond Fund 21.88 12.79 Massachusetts Financial World Wide Government Trust "A" 18.10 10.71 Merrill Lynch Retirement Global Bond Fund "B" 12.39 11.53 Paine Webber Master Global Income Fund "B" 13.43 8.06 J.P. Morgan Global (50%) and Global Hedged (50%) Gov't. Bond Index 12.59 11.46 J.P. Morgan Global Gov't. Bond Index 12.27 10.65 J.P. Morgan Global Gov't. Bond Hedged Index 12.16 10.59 Lipper General World Income Funds Avg. 17.03 10.90 + If you invested $1,000 at the beginning of 1993, the total return on December 31, 1993 would be $1,111 ($1,000 X .111). ++ Assumes purchase of one share of the Global Government Bond Fund at the inception price of $10.00 on 12/28/90. Short-Term Global Income Fund Cumulative Performance Percentage Change Since 1 Year Inception Ended 06/30/92- 12/31/93+ 12/31/93++ _________ __________ Short-Term Global Income Fund 7.87% 7.63% Alliance Short-Term Multi-Market Trust "A" 7.79 4.95 Blanchard Short-Term Global Income Fund 8.53 9.47 Fidelity Short-Term World Income Fund 12.59 13.09 Scudder Short-Term Global Income Fund 6.74 8.18 Lipper Short World Multi-Market Income Funds Average 5.41 1.28 PAGE 33 Average Annual Compound Rates of Return Since 1 Year Inception Ended 06/30/92- 12/31/93+ 12/31/93++ _________ __________ Short-Term Global Income Fund 7.87% 5.01% Alliance Short-Term Multi-Market Trust "A" 7.79 3.26 Blanchard Short-Term Global Income Fund 8.53 6.20 Fidelity Short-Term World Income Fund 12.59 8.52 Scudder Short-Term Global Income Fund 6.74 5.37 Lipper Short World Multi-Market Income Funds Average 5.41 0.85 + If you invested $1,000 at the beginning of 1993, the total return on December 31, 1993 would be $1,079 ($1,000 X .07870). ++ Assumes purchase of one share of the Short-Term Global Income Fund at the inception price of $10.00 on 06/30/92. Short-Term Global Income, Global Government Bond, and International Bond Funds From time to time, in reports and promotional literature, one or more of the T. Rowe Price funds, including these Funds, 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 and unmanaged securities considered to be representative of or similar to Fund portfolio holdings (2) other mutual funds or (3) other measures of performance set forth in publications such as: Advertising News Service, Inc., "Bank Rate Monitor+ - The Weekly Financial Rate Reporter" is a weekly publication 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. Consumer Price Index - prepared monthly by the Department of Commerce, this index is based on the price of selected consumer goods and is widely accepted as an indicator of U.S. price levels in general. 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 shows statistics on the Composite Index and analytical data on new issues in the marketplace and low-grade issuers. International Bond Fund Major Competitors - the average of the following mutual funds: Massachusetts Financial Global Bond Fund, Merrill-Lynch Retirement Global Bond Fund, Prudential-Bache Global Yield Fund, or other similar mutual funds; PAGE 34 Lipper Analytical Services, Inc. Average of World Income Funds - a widely used independent research firm which ranks mutual funds by overall performance, investment objectives, and assets. 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. Merrill Lynch Global Government Bond Indices - provides detailed compound returns for individual countries and a market weighted index beginning in 1986. Returns are broken down into local market and currency components. 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 which Merrill Lynch tracks, 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. Reuters Reports. Reuters is a news and information organization which provides statistics and analytical data on yields available in various countries. Salomon Brothers Broad Investment Grade Index - a widely used index composed of U.S. domestic government, corporate, and mortgage-backed fixed income securities. 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. "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. Salomon Brothers World Bond Index and related subindices - provides detailed compound returns for individual countries and a market-weighted index beginning in 1978. Returns are broken down into local market and currency components. Salomon Brothers World Government Bond Index and related subindices - provides detailed compound returns for individual countries and a market weighted index beginning in 1985. Returns are broken down into local market and currency components. Shearson Lehman American Express Government/Corporate Bond Index - a widely used index composed of U.S. domestic government and corporate fixed income securities. Shearson Lehman Brothers, Inc. "The Bond Market Report" is a monthly publication which tracks principal, coupon and total return on the PAGE 35 Shearson Lehman Govt./Corp. Index and Shearson Lehman Aggregate Bond Index, as well as all the components of these Indices. Standard & Poor's "500" Index - a widely recognized index composed of the capitalization-weighted average of the price of 500 of the largest publicly traded stocks. Telerate Systems, Inc., a computer system to which we subscribe which tracks 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, a daily newspaper publication which lists the yields and current market values on money market instruments, public corporate debt obligations, public obligations of the U.S. Treasury and agencies of the U.S. Government as well as common stocks, preferred stocks, convertible preferred stocks, options and commodities; in addition to indices prepared by the research departments of such financial organizations as Shearson Lehman/American Express Inc. and Merrill Lynch, Pierce, Fenner and Smith, Inc., including information provided by the Federal Reserve Board. Indices prepared by the research departments of such financial organizations as Salomon Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Bear Stearns & Co., Inc., and Ibbotson Associates will be used, as well as information provided by the Federal Reserve Board. Performance rankings and ratings reported periodically in national financial publications such as MONEY, FORBES, BUSINESS WEEK, and BARRON'S, etc. may also be used. Benefits of Investing in High-Quality Bond Funds o Higher Income Bonds have generally provided a higher income than money market securities because yields have 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 36 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. 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. GOVERNMENT BOND YIELDS+ The Fund can invest in the world's highest yielding government bonds, wherever they are found. Chart 1 Global Government Bond Fund + Semiannual equivalent yields on 10-year government bonds, 1984 through 1994. Source: Datastream 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 Each 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. PAGE 37 Rowe Price Investment Services, Inc. may be made available. These currently include: the Asset Mix Worksheet which is designed to show shareholders how to reduce 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) which includes a detailed workbook to determine how much money you may need for retirement and suggests how you might invest to reach your goal; and the Retirees Financial Guide which includes a detailed workbook to determine how much money you can afford to spend and still preserve your purchasing power and suggest how you might invest to reach your goal. From time to time, other worksheets and guides may be made available as well. Of course, an investment in the Fund cannot guarantee that such goals will be met. 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 of, any T. Rowe Price Fund. Past performance does not guarantee future results. Also included will be various portfolios demonstrating how these historical indices would have performed in various combinations over a specified time period in terms of return. An example of this is shown below. PAGE 38 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 Portfolio Growth Income 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. From time to time, Insights, a T. Rowe Price publication of reports on specific investment topics and strategies, may be 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. YIELD INFORMATION From time to time, the Funds may advertise a yield figure calculated in the following manner: 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 market value at the beginning of the period and expected yield- to-maturity. 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 PAGE 39 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. Global Government Bond Fund The Fund's yield calculated as set forth above for the month ended March 31, 1994 was 5.11%. Short-Term Global Income Fund The Fund's yield calculated as set forth above for the month ended March 31, 1994 was 6.64%. International Bond Fund The Fund's yield calculated as set forth above for the month ended March 31, 1994 was 6.93%. Redemptions in Kind In the unlikely event a shareholder in any of the International Funds were to receive an in kind redemption of portfolio securities of a Fund, brokerage fees could be incurred by the shareholder in subsequent sale of such securities. Issuance of Fund Shares for Securities Transactions involving issuance of a fund's 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 objectives and policies of the Funds; (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. MANAGEMENT OF FUNDS The officers and directors of the Funds 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 Funds' directors who are considered "interested persons" of T. Rowe Price or the Fund as defined under Section 2(a)(19) of the Investment Company Act of 1940 are noted with an asterisk (*). These directors are referred to as inside directors by virtue of their officership, directorship, and/or employment with T. Rowe Price. *M. DAVID TESTA, Chairman of the Board--Chairman of the Board, Price-Fleming; Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company; Chartered Financial Analyst *MARTIN G. WADE, President and Director--President, Price-Fleming; Director, Robert Fleming Holdings Limited; Address: 25 Copthall Avenue, London, EC2R 7DR, England LEO C. BAILEY, Director--Retired; Address: 3396 South Placita Fabula, Green Valley, Arizona 85614 PAGE 40 ANTHONY W. DEERING, Director--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 DONALD W. DICK, JR., Director--Principal, Overseas Partners, Inc., a financial investment firm; Director, Waverly Press, Inc., Baltimore, Maryland; Address: 375 Park Avenue, Suite 2201, New York, New York 10152 ADDISON LANIER, Director--Financial management; President and Director, Thomas Emery's Sons, Inc., and Emery Group, Inc.; Director, Scinet Development and Holdings, Inc.; Address: 441 Vine Street, #2310, Cincinnati, Ohio 45202-2913 CHRISTOPHER D. ALDERSON, Vice President--Vice President, Price-Fleming PETER B. ASKEW, Vice President--Executive Vice President, Price-Fleming RICHARD J. BRUCE, Vice President--Vice President of Price-Fleming; formerly (1985-1990) Investment Manager, Jardine Fleming Investment Advisers, Tokyo 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 MARK J. T. EDWARDS, Vice President--Vice President, Price-Fleming JOHN R. FORD, Vice President--Executive Vice President, Price-Fleming HENRY H. HOPKINS, Vice President--Vice President, Price-Fleming and T. Rowe Price Retirement Plan Services, Inc.; Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc. and T. Rowe Price Trust Company ROBERT C. HOWE, Vice President--Vice President, Price-Fleming and T. Rowe Price STEPHEN ILOTT, Vice President--Employee, Price-Fleming; formerly (1988-1991) portfolio management, Fixed Income Portfolios Group, Robert Fleming Holdings Limited, London GEORGE A. MURNAGHAN, Vice President--Vice President, Price-Fleming, T. Rowe Price, T. Rowe Price Trust Company, and T. Rowe Price Investment Services, Inc. JAMES S. RIEPE, Vice President--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. CHRISTOPHER ROTHERY, Vice President--Vice President, Price-Fleming; formerly (1987-1989) employee of Robert Fleming Holdings Limited, London JAMES B. M. SEDDON, Vice President--Vice President, Price-Fleming CHARLES P. SMITH, Vice President--Managing Director, T. Rowe Price; Vice President, Rowe Price-Fleming International, Inc. BENEDICT R. F. THOMAS, Vice President--Vice President, Price-Fleming PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price; Vice President, Rowe Price-Fleming International, Inc. DAVID J. L. WARREN, Vice President--Executive Vice President, Price-Fleming WILLIAM F. WENDLER, II, Vice President--Vice President, Price-Fleming, T. Rowe Price and T. Rowe Price Investment Services, Inc. EDWARD A. WIESE, Vice President--Vice President, T. Rowe Price, Rowe Price- Fleming International, Inc. and T. Rowe Price Trust Company 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 ANN B. CRANMER, Assistant Vice President--Vice President, Price-Fleming ROGER L. FIERY, III, Assistant Vice President--Vice President, Price-Fleming and T. Rowe Price LEAH P. HOLMES, Assistant Vice President--Vice President, Price-Fleming and Assistant Vice President, T. Rowe Price EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice President, T. Rowe Price and Vice President, T. Rowe Price Services, Inc. PAGE 41 INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price The Funds' Executive Committee, comprised of Messrs. Testa and Wade, has been authorized by the Board of Directors to exercise all of the powers of the Board to manage the Funds in the intervals between meetings of the Board, except the powers prohibited by statute from being delegated. PRINCIPAL HOLDERS OF SECURITIES As of the date of the prospectus, the officers and directors of the Funds, as a group, owned less than 1% of the outstanding shares of each Fund. As of December 31, 1993, the following shareholders beneficially owned more than 5% of the outstanding shares of the Short-Term Global Income Fund: The Challenge Fund, 11 Magnolia Parkway, Chevy Chase, Maryland 20815-4206; and the International Bond Fund: Charles Scwab & Co. Inc., Reinvest Account, Attn.: Mutual Fund Dept., 101 West Montgomery Street, San Francisco, California 94104-4122; and Yachtcrew & Co., FDO Spectrum Income Fund Account, Attn.: Mark White, State Street Bank and Trust Co., 1776 Heritage Drive - 4W, North Quincy, Massachusetts 02171-2101. INVESTMENT MANAGEMENT SERVICES Services Under the Management Agreement, Price-Fleming provides each Fund with discretionary investment services. Specifically, Price-Fleming is responsible for supervising and directing the investments of each Fund in accordance with the Fund's investment objective, program, and restrictions as provided in its prospectus and this Statement of Additional Information. Price-Fleming is also responsible for effecting all security transactions on behalf of each Fund, including the negotiation of commissions and the allocation of principal business and portfolio brokerage. In addition to these services, Price- Fleming provides the Funds with certain corporate administrative services, including: maintaining the Funds' corporate existence, corporate records, and registering and qualifying Fund shares under federal and state laws; monitoring the financial, accounting, and administrative functions of each Fund; maintaining liaison with the agents employed by each Fund such as the Fund's custodian and transfer agent; assisting each Fund in the coordination of such agents' activities; and permitting Price-Fleming's employees to serve as officers, directors, and committee members of each Fund without cost to the Fund. The Management Agreement also provides that Price-Fleming, its directors, officers, employees, and certain other persons performing specific functions for each Fund will only be liable to the Fund for losses resulting from willful misfeasance, bad faith, gross negligence, or reckless disregard of duty. Under the Management Agreement, Price-Fleming is permitted to utilize the services or facilities of others to provide it or the Funds with statistical and other factual information, advice regarding economic factors and trends, advice as to occasional transactions in specific securities, and such other information, advice or assistance as Price-Fleming may deem necessary, appropriate, or convenient for the discharge of its obligations under the Management Agreement or otherwise helpful to the Funds. PAGE 42 Certain administrative support is provided by T. Rowe Price which receives from Price-Fleming a fee of .15% of the market value of all assets in equity accounts, .15% of the market value of all assets in active fixed income accounts and .035% of the market value of all assets in passive fixed income accounts under Price-Fleming's management. Price-Fleming has entered into separate letters of agreement with Fleming Investment Management Limited ("FIM") and Jardine Fleming Investment Holdings Limited ("JFIH"), wherein FIM and JFIH have agreed to render investment research and administrative support to Price-Fleming. FIM is a wholly-owned subsidiary of Robert Fleming Asset Management Limited which is a wholly-owned subsidiary of Robert Fleming Holdings Limited ("Robert Fleming Holdings"). JFIH is an indirect wholly-owned subsidiary of Jardine Fleming Group Limited. Under the letters of agreement, these companies will provide Price-Fleming with research material containing statistical and other factual information, advice regarding economic factors and trends, advice on the allocation of investments among countries and as between debt and equity classes of securities, and research and occasional advice with respect to specific companies. For these services, FIM and JFIH each receives a fee of .075% of the market value of all assets in equity accounts under Price-Fleming's management. JFIH receives a fee of .075% of the market value of all assets in active fixed income accounts and .0175% of such market value in passive fixed income accounts under Price-Fleming's management. Robert Fleming personnel have extensive research resources throughout the world. A strong emphasis is placed on direct contact with companies in the research universe. Robert Fleming personnel, who frequently speak the local language, have access to the full range of research products available in the market place and are encouraged to produce independent work dedicated solely to portfolio investment management, which adds value to that generally available. Management Fee Each Fund pays Price-Fleming 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 Price-Fleming 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 each 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: PAGE 43 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 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 Funds' 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 Fund Fee Rate of 0.25% for the Short-Term Global Income Fund and 0.35% each for the Global Government Bond and International Bond Funds, and multiplying this product by the net assets of the Fund for that day, as determined in accordance with the Funds' prospectus as of the close of business on the previous business day on which the Fund was open for business. The Short-Term Global Income Fund paid management fees for the year 1993, $341,000 and did not pay any management fees to Price-Fleming for the fiscal year ended 1992, Global Government Bond Fund paid management fees for the years 1993, and 1992, $269,000, $253,000 and did not pay any management fees to Price-Fleming for the fiscal year ended 1991. The management fees paid by the International Bond Fund for the years 1993, 1992, and 1991, were $4,363,000, $3,567,000, and $2,502,000, respectively. Limitation on Fund Expenses The Management Agreement between each Fund and Price-Fleming provides that each Fund will bear all expenses of its operations not specifically assumed by Price-Fleming. However, in compliance with certain state regulations, Price- Fleming will reimburse each 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 a Fund's average daily net assets, 2% of the next $70 million of the average daily net assets, and 1.5% of net assets in excess of $100 million. For the purpose of determining whether a Fund is entitled to reimbursement, the expenses of each Fund are calculated on a monthly basis. If the Fund is entitled to reimbursement, that month's management fee will be reduced or postponed, with any adjustment made after the end of the year. PAGE 44 Short-Term Global Income Fund In the interest of limiting the expenses of the Fund during its initial period of operations, Price-Fleming agreed to bear any expenses through December 31, 1993, which would cause the Fund's ratio of expenses to average net assets to exceed 1.00%. Expenses paid or assumed under this agreement are subject to reimbursement to Price-Fleming by the Fund whenever the Fund's expense ratio is below 1.00%; however no reimbursement will be made to Price- Fleming after December 31, 1995, or if it would result in the expense ratio exceeding 1.00%. The Management Agreement also provides that one or more additional expense limitation periods (of the same or different levels and time periods) may be implemented after the expiration of the current one on December 31, 1993, and that with respect to any such additional limitation period, the Fund may reimburse Price-Fleming, provided the reimbursement does not result in the Fund's aggregate expenses exceeding the additional expense limitation. Pursuant to this agreement, $149,000 of management fees were not accrued by the Fund for the period ended December 31, 1992, and $37,000 of other expenses were borne by Price-Fleming. Pursuant to the Fund's expense limitations, management fees aggregating $109,000, were not accrued for the year ended December 31, 1993. In addition, pursuant to past expense limitations, $186,000 of unaccrued fees and other expenses are subject to reimbursement through December 31, 1995. Global Government Bond Fund In the interest of limiting the expenses of the Fund during its initial period of operations, Price-Fleming agreed to bear any expenses through December 31, 1992, which would cause the Fund's ratio of expenses to average net assets to exceed 1.20%. Effective January 1, 1993 Price-Fleming agreed to extend the Fund's existing expense limitation of 1.20% for a period of two years through December 31, 1994. The 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 one on December 31, 1992, and that with respect to any such additional limitation period, the Fund may reimburse Price-Fleming, provided the reimbursement does not result in the Fund's aggregate expenses exceeding the additional expense limitation or any applicable state expense limitation. Expenses paid or assumed under each agreement are subject to reimbursement to Price-Fleming by the Fund whenever the Fund's expense ratio is below 1.20%; however, no reimbursement will be made after December 31, 1994 (for the initial agreement) or December 31, 1996 (for the second agreement), or if it would result in the expense ratio exceeding 1.50%. Pursuant to the Fund's expense limitations, management fees aggregating $98,000, were not accrued for the year ended December 31, 1993. In addition, pursuant to past expense limitations, $388,000 of unaccrued fees and other expenses are subject to reimbursement through December 31, 1995. International Bond Fund 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 Funds, 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 PAGE 45 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. DISTRIBUTOR FOR FUNDS 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 Funds' 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 each Fund's shares is continuous. Investment Services is located at the same address as the Funds and T. Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202. Investment Services serves as distributor to the Funds pursuant to an Underwriting Agreement ("Underwriting Agreement"), which provides that each 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 each Fund. Investment Services' expenses are paid by T. Rowe Price. Investment Services acts as the agent of each 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 Funds. CUSTODIAN State Street Bank and Trust Company (the "Bank") is the custodian for the Funds' U.S. securities and cash, but it does not participate in the Funds' investment decisions. Portfolio securities purchased in the U.S. are maintained in the custody of the Bank and may be entered into the Federal Reserve Book Entry System, or the security depository system of the Depository Trust Corporation. The Funds have entered into a Custodian Agreement with The Chase Manhattan Bank, N.A., London, pursuant to which portfolio securities which are purchased outside the United States are maintained in the custody of various foreign branches of The Chase Manhattan Bank and such other custodians, including foreign banks and foreign securities depositories in accordance with regulations under the Investment Company Act of 1940. The PAGE 46 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 Price-Fleming. Price-Fleming is also responsible for implementing these decisions, including the negotiation of commissions and the allocation of portfolio brokerage and principal business. The Fund's purchases and sales of fixed-income portfolio securities are normally done on a principal basis and do not involve the payment of a commission although they may involve the designation of selling concessions. That part of the discussion below relating solely to brokerage commissions would not normally apply to the Fund. However, it is included because Price- Fleming 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 each Fund's portfolio securities, it is Price- Fleming's policy to obtain quality execution at the most favorable prices through responsible broker-dealers and, in the case of agency transactions, at competitive commission rates where such rates are negotiable. However, under certain conditions, a Fund may pay higher brokerage commissions in return for brokerage and research services. In selecting broker-dealers to execute a Fund's portfolio transactions, consideration is given to such factors as the price of the security, the rate of the commission, the size and difficulty of the order, the reliability, integrity, financial condition, general execution and operational capabilities of competing brokers and dealers, their expertise in particular markets and the brokerage and research services they provide to Price-Fleming or the Funds. It is not the policy of Price-Fleming 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. Transactions on stock exchanges involve the payment of brokerage commissions. In transactions on stock exchanges in the United States, these commissions are negotiated. Traditionally, commission rates have generally not been negotiated on stock markets outside the United States. In recent years, however, an increasing number of overseas stock markets have adopted a system of negotiated rates, although a number of markets continue to be subject to an established schedule of minimum commission rates. It is expected that equity securities will ordinarily be purchased in the primary markets, whether over-the-counter or listed, and that listed securities may be purchased in the over-the-counter market if such market is deemed the primary market. In the case of securities traded on the over-the-counter markets, there is generally no stated commission, but the price usually includes an undisclosed commission or markup. In underwritten offerings, the price includes a disclosed, fixed commission or discount. PAGE 47 Fixed Income Securities For fixed income securities, it is expected that purchases and sales will ordinarily be transacted with the issuer, the issuer's underwriter, or with a primary market maker acting as principal on a net basis, with no brokerage commission being paid by the Fund. However, the price of the securities generally includes compensation which is not disclosed separately. Transactions placed though dealers who are serving as primary market makers reflect the spread between the bid and asked prices. With respect to equity and fixed income securities, Price-Fleming may effect principal transactions on behalf of the Funds with a broker or dealer who furnishes brokerage and/or research services, designate any such broker or dealer to receive selling concessions, discounts or other allowances or otherwise deal with any such broker or dealer in connection with the acquisition of securities in underwritings. The prices the Fund pays to underwriters of newly-issued securities usually include a concession paid by the issuer to the underwriter. Price-Fleming may receive research services in connection with brokerage transactions, including designations in fixed price offerings Price-Fleming may cause a Fund to pay a broker-dealer who furnishes brokerage and/or research services a commission for executing a transaction that is in excess of the commission another broker-dealer would have received for executing the transaction if it is determined that such commission is reasonable in relation to the value of the brokerage and/or research services which have been provided. In some cases, research services are generated by third parties but are provided to Price-Fleming by or through broker-dealers. Descriptions of Research Services Received from Brokers and Dealers Price-Fleming receives a wide range of research services from brokers and dealers covering investment opportunities throughout the world, including information on the economies, industries, groups of securities, individual companies, statistics, political developments, technical market action, pricing and appraisal services, and performance analyses of all the countries in which a Fund's portfolio is likely to be invested. Price-Fleming cannot readily determine the extent to which commissions charged by brokers reflect the value of their research services, but brokers occasionally suggest a level of business they would like to receive in return for the brokerage and research services they provide. To the extent that research services of value are provided by brokers, Price-Fleming may be relieved of expenses which it might otherwise bear. In some cases, research services are generated by third parties but are provided to Price-Fleming by or through brokers. Commissions to Brokers who Furnish Research Services Certain broker-dealers which provide quality execution services also furnish research services to Price-Fleming. Price-Fleming 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 its clients to pay a broker which furnishes brokerage or research services a higher commission than that which might be charged by another broker 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, viewed in terms of either that particular transaction or the overall responsibilities of the adviser with respect to the accounts as to which it exercises investment discretion. Accordingly, Price-Fleming may PAGE 48 assess the reasonableness of commissions in light of the total brokerage and research services provided by each particular broker. Miscellaneous Research services furnished by brokers through which Price-Fleming effects securities transactions may be used in servicing all accounts managed by Price-Fleming, Conversely, research services received from brokers which execute transactions for a particular Fund will not necessarily be used by Price-Fleming exclusively in connection with the management of that Fund. Some of Price-Fleming's other clients have investment objectives and programs similar to those of the Funds. Price-Fleming may occasionally make recommendations to other clients which result in their purchasing or selling securities simultaneously with the Funds. 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 Price-Fleming's policy not to favor one client over another in making recommendations or in placing orders. Price-Fleming 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. Price-Fleming 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. None of the Funds allocates 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. Transactions with Related Brokers and Dealers As provided in the Investment Management Agreement between each Fund and Price-Fleming, Price-Fleming 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 Price-Fleming will often place orders for a Fund's portfolio transactions with broker-dealers through the trading desks of certain affiliates of Robert Fleming Holdings Limited ("Robert Fleming"), an affiliate of Price-Fleming. Robert Fleming, through Copthall Overseas Limited, a wholly-owned subsidiary, owns 25% of the common stock of Price- Fleming. Fifty percent of the common stock of Price-Fleming is owned by TRP Finance, Inc., a wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by Jardine Fleming Holdings Limited, a subsidiary of Jardine Fleming Group Limited ("JFG"). JFG is 50% owned by Robert Fleming and 50% owned by Jardine Matheson Holdings Limited. The affiliates through whose trading desks such orders may be placed include Fleming Investment Management Limited ("FIM"), and Robert Fleming & Co. Limited ("RF&Co."). FIM and RF&Co. are wholly-owned subsidiaries of Robert Fleming. These trading desks will operate under strict instructions from the Fund's portfolio manager with respect to the terms of such transactions. Neither Robert Fleming, JFG, nor their affiliates will receive any commission, fee, or other remuneration for the use of their trading desks, although orders for a Fund's portfolio PAGE 49 transactions may be placed with affiliates of Robert Fleming and JFG who may receive a commission. The Board of Directors of the Funds has authorized Price-Fleming to utilize certain affiliates of Robert Fleming and JFG in the capacity of broker in connection with the execution of each Fund's portfolio transactions, provided that Price-Fleming believes that doing so will result in an economic advantage (in the form of lower execution costs or otherwise) being obtained for each Fund. These affiliates include Jardine Fleming Securities Limited ("JFS"), a wholly-owned subsidiary of JFG, RF&Co., Jardine Fleming Australia Securities Limited, and Robert Fleming, Inc. (a New York brokerage firm). The above-referenced authorization was made in accordance with Section 17(e) of the Investment Company Act of 1940 (the "1940 Act") and Rule 17e-1 thereunder which require the Funds' independent directors to approve the procedures under which brokerage allocation to affiliates is to be made and to monitor such allocations on a continuing basis. Except with respect to tender offers, it is not expected that any portion of the commissions, fees, brokerage, or similar payments received by the affiliates of Robert Fleming in such transactions will be recaptured by the Funds. The directors have reviewed and from time to time may continue to review whether other recapture opportunities are legally permissible and available and, if they appear to be, determine whether it would be advisable for a Fund to seek to take advantage of them. Other For the fiscal years ended December 31, 1993, December 31, 1992 and December 31, 1991, the Global Government Bond Fund engaged in portfolio transactions involving broker-dealers totaling $144,423,000, $129,060,000 and $174,169,000, respectively. The entire amounts for each year represented principal transactions as to which the Global Government Bond Fund has no knowledge of the profits or losses realized by the respective broker-dealers. For the fiscal years ended December 31, 1993, December 31, 1992 and December 31, 1991, approximately 0%, 0% and 30%, respectively, were placed with firms which provided research, statistical, or other services to Price-Fleming in connection with the management of the Global Government Bond Fund or, in some cases, to the Global Government Bond Fund. For the fiscal year ended December 31, 1993 and fiscal period ended December 31, 1992, the Short-Term Global Income Fund engaged in portfolio transactions involving broker-dealers totaling $4,780,555,000 and $582,425,000, respectively. The entire amount for the period represented principal transactions as to which the Short-Term Global Income Fund had no knowledge of the profits or losses realized by the respective dealers. Of these portfolio transactions, approximately 0%, was paid to firms which provided research, statistical, or other services to Price-Fleming in connection with the management of the Short-Term Global Income Fund or, in some cases, to the Short-Term Global Income Fund. For the fiscal years ended December 31, 1993, December 31, 1992 and December 31, 1991, the International Bond Fund engaged in portfolio transactions involving broker-dealers totaling $157,373,000, $6,813,188,000 and $5,874,607,000, respectively. The entire amounts for each year represented principal transactions as to which the International Bond Fund has no knowledge of the profits or losses realized by the respective broker- dealers. Of all such portfolio transactions, 0%, 0% and 33%, respectively, were placed with firms which provided research, statistical, or other services to Price-Fleming in connection with the management of the International Bond Fund or, in some cases, to the International Bond Fund. PAGE 50 PRICING OF SECURITIES Fixed income securities are generally traded in the over-the-counter market and are valued at a price deemed best to reflect a fair value as quoted by dealers who make markets in these securities or by an independent pricing service. For purposes of determining each 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. If such quotations are not available, the rate of exchange will be determined in accordance with policies established in good faith by the Board of Directors. Securities or other assets for which the above valuation procedures are deemed not to reflect fair value will be appraised at prices deemed best to reflect their fair value. Such determinations will be made in good faith by or under the supervision of the officers of the Fund, as authorized by the Board of Directors. Trading in the portfolio securities of each Fund may take place in various foreign markets on certain days (such as Saturday) when the Funds are not open for business and do not calculate their net asset values. In addition, trading in a Fund's portfolio securities may not occur on days when the Fund is open. The calculation of each Fund's net asset value normally will not take place contemporaneously with the determination of the value of the Fund's portfolio securities. Events affecting the values of portfolio securities that occur between the time their prices are determined and the time each Fund's net asset value is calculated will not be reflected in the Fund's net asset value unless Price-Fleming, under the supervision of the Fund's Board of Directors, determines that the particular event should be taken into account in computing the Fund's net asset value. NET ASSET VALUE PER SHARE The purchase and redemption price of each Fund's shares is equal to that Fund's net asset value per share or share price. Each Fund determines its net asset value per share by subtracting its liabilities (including accrued expenses and dividends payable) from its total assets (the market value of the securities the Fund holds plus cash and other assets, including income accrued but not yet received) and dividing the result by the total number of shares outstanding. The net asset value per share of each Fund is calculated as of the close of trading on the New York Stock Exchange ("NYSE") every day the NYSE is open for trading. The NYSE is closed on the following days: New Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Determination of net asset value (and the offering, sale, redemption and repurchase of shares) for a Fund may be suspended at times (a) during which the NYSE is closed, other than customary weekend and holiday closings, (b) during which trading on any of such Exchanges is restricted (c) during which an emergency exists as a result of which disposal by a Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or (d) during which a governmental body having jurisdiction over the Fund may by order permit such a suspension for the protection of the Fund's shareholders; provided that applicable rules and regulations of the Securities and Exchange Commission (or any succeeding governmental authority) shall govern as to whether the conditions prescribed in (b), (c) or (d) exist. PAGE 51 DIVIDENDS Unless you elect otherwise, the Fund's annual capital gain distributions, if any, will be reinvested on the reinvestment date using the NAV per share of that date. The reinvestment date normally precedes the payment date by about 10 days although the exact timing is subject to change. TAX STATUS Each Fund intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended ("Code"). Dividends and distributions paid by the Funds are not eligible for the dividends-received deduction for corporate shareholders, if as expected, none of the Fund's income consists of dividends paid by United States corporations. Capital gain distributions paid from these Funds are never eligible for this deduction. For tax purposes, it does not make any difference whether dividends and capital gain distributions are paid in cash or in additional shares. Each Fund must declare dividends equal to at least 98% of ordinary income (as of December 31) and capital gains (as of October 31) in order to avoid a federal excise tax and distribute 100% of ordinary income and capital gains as of December 31 to avoid federal income tax. 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, for the Funds, a portion of the income dividends paid could be classified as a return of capital. Adjustments, to reflect these gains and losses will be made at the end of each Fund's taxable year. At the time of your purchase, each Bond 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 either as dividends or capital gain distributions. For federal income tax purposes, each 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 March 31, 1994, the books of each Fund indicated that each Fund's aggregate net assets included undistributed net income, net realized capital gains or losses, and unrealized appreciation or depreciation which are listed below. Net Realized Unrealized Fund Capital Losses Depreciation Short-Term Global Income $ 3,324,000 $ 2,554,000 Global Government Bond 781,000 721,000 International Bond 10,099,000 15,121,000 Income received by each Fund from sources within various foreign countries may be subject to foreign income taxes withheld at the source. Under the Code, if more than 50% of the value of a Fund's total assets at the close of its taxable year comprise securities issued by foreign corporations, the Fund may file an election with the Internal Revenue Service to "pass through" to the Fund's shareholders the amount of any foreign income taxes paid by the Fund. Pursuant to this election, shareholders will be required to: (i) include in gross income, even though not actually received, their PAGE 52 respective pro rata share of foreign taxes paid by the Fund; (ii) treat their pro rata share of foreign taxes as paid by them; and (iii) either deduct their pro rata share of foreign taxes in computing their taxable income, or use it as a foreign tax credit against U.S. income taxes (but not both). No deduction for foreign taxes may be claimed by a shareholder who does not itemize deductions. Each Fund intends to meet the requirements of the Code to "pass through" to its shareholders foreign income taxes paid, but there can be no assurance that a Fund will be able to do so. Each shareholder will be notified within 60 days after the close of each taxable year of a Fund, that Fund will "pass through" foreign taxes paid for that year, and, if so, the amount of each shareholder's pro rata share (by country) of (i) the foreign taxes paid, and (ii) the Fund's gross income from foreign sources. Of course, shareholders who are not liable for federal income taxes, such as retirement plans qualified under Section 401 of the Code, will not be affected by any such "pass through" of foreign tax credits. If, in any taxable year, a 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 without deduction for dividends or other distributions to shareholders; (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), and the Funds would qualify for the 70% deduction for dividends received by corporations; and (iii) foreign tax credits would not "pass through" to shareholders. Taxation of Foreign Shareholders The Code provides that dividends from net income (which are deemed to include for this purpose each shareholder's pro rata share of foreign taxes paid by each Fund - see discussion of "pass through" of the foreign tax credit to U.S. shareholders), 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 dividend 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 each 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. CAPITAL STOCK The T. Rowe Price International Funds, Inc. (the "Corporation") was originally organized in 1979 as a Maryland corporation under the name T. Rowe Price International Fund, Inc. ("the Old Corporation"). Pursuant to the Annual Meeting of Shareholders held on April 22, 1986, an Agreement and Plan of Reorganization and Liquidation was adopted in order to convert the Old Corporation from a Maryland corporation to a Massachusetts Business Trust, named the T. Rowe Price International Trust ("the Trust"). This conversion became effective on May 1, 1986. Pursuant to the Annual Meeting of Shareholders held on April 19, 1990, an Agreement and Plan of Reorganization and Liquidation was adopted in order to convert the Trust from a Massachusetts Business Trust to a Maryland corporation. This conversion become effective May 1, 1990. The Corporation is registered with the Securities and Exchange Commission under the 1940 Act as a diversified, open-end investment company, commonly known as a "mutual fund." PAGE 53 Currently, the Corporation consists of nine series, each of which represents a separate class of the Corporation's shares and has different objectives and investment policies. The International Bond Fund was added as a separate series of the Trust in 1986, and the designation of the existing series of the Trust was, at that time, changed to the International Stock Fund. In 1988 and 1990, respectively, the International Discovery and European Stock Funds were added as separate series of the Trust. Effective May 1, 1990, all series of the Trust became series of the Corporation. In the same year, after the May 1, 1990 reorganization, the New Asia and Global Government Bond Funds were added as separate series of the Corporation. The Japan, Short-Term Global Income and Latin America Funds were added as separate series of the Corporation in 1991, 1992, and 1993, respectively. The International Stock, International Discovery, European Stock, Japan and New Asia Funds are described in a separate Statement of Additional Information. The Charter also provides that the Board of Directors may issue additional series of shares. The Funds' Charter authorizes the Board of Directors to classify and reclassify any and all shares which are then unissued, including unissued shares of capital stock into any number of classes or series, each class or series consisting of such number of shares and having such designations, such powers, preferences, rights, qualifications, limitations, and restrictions, as shall be determined by the Board subject to the Investment Company Act and other applicable law. The shares of any such additional classes or series might therefore differ from the shares of the present class and series of capital stock and from each other as to preferences, conversion 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 each Fund has authorized to issue without shareholder approval. Each share of each series has equal voting rights with every other share of every other series, and all shares of all series vote as a single group except where a separate vote of any class or series is required by the 1940 Act, the laws of the State of Maryland, the Corporation's Articles of Incorporation, the By-Laws of the Corporation, or as the Board of Directors may determine in its sole discretion. Where a separate vote is required with respect to one or more classes or series, then the shares of all other classes or series vote as a single class or series, provided that, as to any matter which does not affect the interest of a particular class or series, only the holders of shares of the one or more affected classes or series is entitled to vote. The preferences, rights, and other characteristics attaching to any series of shares, including the present series of capital stock, might be altered or eliminated, or the series might be combined with another series, by action approved by the vote of the holders of a majority of all the shares of all series entitled to be voted on the proposal, without any additional right to vote as a series by the holders of the capital stock or of another affected series. 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 PAGE 54 forth above, the directors shall continue to hold office and may appoint successor directors. Voting rights are not cumulative, so that the holders of more than 50% of the shares voting in the election of directors can, if they choose to do so, elect all the directors of the Fund, in which event the holders of the remaining shares will be unable to elect any person as a director. As set forth in the By-Laws of the Corporation, a special meeting of shareholders of the Corporation shall be called by the Secretary of the Corporation on the written request of shareholders entitled to cast at least 10% of all the votes of the Corporation, entitled to be cast at such meeting. Shareholders requesting such a meeting must pay to the Corporation the reasonably estimated costs of preparing and mailing the notice of the meeting. The Corporation, however, will otherwise assist the shareholders seeking to hold the special meeting in communicating to the other shareholders of the Corporation to the extent required by Section 16(c) of the 1940 Act. FEDERAL AND STATE REGISTRATION OF SHARES Each Fund's shares are registered for sale under the Securities Act of 1933, and the Funds or their 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 Funds. INDEPENDENT ACCOUNTANTS International Bond Fund Price Waterhouse, 7 St. Paul Street, Suite 1700, Baltimore, Maryland 21202, are independent accountants to the Fund. The financial statements of the International Bond Fund for the year ended December 31, 1993, and the report of independent accountants are included in the Fund's Annual Report for the year ended December 31, 1993, on pages 6-15. A copy of the Annual Report accompanies this Statement of Additional Information. The following financial statements and the report of independent accountants appearing in the Annual Report for the year ended December 31, 1993, are incorporated into this Statement of Additional Information by reference: International Bond Fund Annual Report Page ___________ Report of Independent Accountants 15 Statement of Assets and Liabilities, December 31, 1993 6-8 Statement of Operations, year ended December 31, 1993 9 Statement of Changes in Net Assets, years ended December 31, 1993 and December 31, 1992 10 Notes to Financial Statements, December 31, 1993 11-13 Financial Highlights 14 PAGE 55 Short-Term Global Income and Global Government Bond Funds Coopers & Lybrand, 217 East Redwood Street, Baltimore, Maryland 21202, are independent accountants to each Fund. The financial statements of the Short- Term Global Income and Global Government Bond Funds for the year ended December 31, 1993, and the report of independent accountants are included in each Fund's Annual Report for the year ended December 31, 1993, on pages 8-19 and 10-19, respectively. A copy of each Annual Report accompanies this Statement of Additional Information. The following financial statements and the report of independent accountants appearing in each Annual Report for the year ended December 31, 1993, are incorporated into this Statement of Additional Information by reference: Short-Term Global Income Fund Annual Report Page ___________ Report of Independent Accountants 19 Portfolio of Investments, December 31, 1993 8-9 Statement of Assets and Liabilities, December 31, 1993 12 Statement of Operations, December 31, 1993 13 Statement of Changes in Net Assets, year ended December 31, 1993 and June 30, 1992 (Commencement of Operations) to December 31, 1992 14 Notes to Financial Statements, December 31, 1993 15-17 Financial Highlights, year ended December 31, 1993 and June 30, 1992 (Commencement of Operations) to December 31, 1992 18 Global Government Bond Fund Annual Report Page ___________ Report of Independent Accountants 19 Statement of Net Assets, December 31, 1993 10-11 Statement of Operations, year ended December 31, 1993 13 Statement of Changes in Net Assets, year ended December 31, 1993 and December 28, 1992 14 Notes to Financial Statements, December 31, 1993 15-17 Financial Highlights 18 RATINGS OF CORPORATE DEBT SECURITIES Moody's Investors Services, Inc. Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." 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. PAGE 56 A - Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Baa - Bonds rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba-Bonds rated Ba are judged to have speculative elements: their futures cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterize bonds in this class. B-Bonds rated B generally lack the characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa-Bonds rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca-Bonds rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked short- comings. Standard & Poor's Corporation AAA - This is the highest rating assigned by Standard & Poor's to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong. A - Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB - Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BB, 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 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. PAGE 57 APPENDIX A Chart 1 A line graph follows which plots semiannual equivalent yields on 10-year government bonds from 1984 through 1994. The yields for the United Kingdom, Germany, United States and Japan, during this time period, are graphed on a scale of 4 to 14. -----END PRIVACY-ENHANCED MESSAGE-----