-----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, ZVO775XZyJq2vcMAmpmC5f0GPRt40BYD17pwgAPP82EGCZYIFRX+Elp4Y4uJBHtk IkZu9Us25MLP3sXuRzbc9A== 0000852254-94-000009.txt : 19940517 0000852254-94-000009.hdr.sgml : 19940517 ACCESSION NUMBER: 0000852254-94-000009 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19940516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSTITUTIONAL INTERNATIONAL FUNDS INC CENTRAL INDEX KEY: 0000852254 STANDARD INDUSTRIAL CLASSIFICATION: FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-29697 FILM NUMBER: 94528569 BUSINESS ADDRESS: STREET 1: 100 E PRATT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 3015472000 497 1 FEF 94 497 FILING PROSPECTUS FOREIGN EQUITY FUND MAY 1, 1994 FOREIGN EQUITY FUND PROSPECTUS MAY 1, 1994 INSTITUTIONAL INTERNATIONAL FUNDS, INC. TABLE OF CONTENTS INVESTMENT OBJECTIVE AND PROGRAM. . . . . . . . . . 2 SUMMARY OF FUND FEES AND EXPENSES. .. . . . . . . . 3 FINANCIAL HIGHLIGHTS. . . . . . . . . . . . . . . . 3 RISK FACTORS. . . . . . . . . . . . . . . . . . . . 4 INVESTING IN INTERNATIONAL STOCKS . . . . . . . . . 5 INVESTMENT POLICIES . . . . . . . . . . . . . . . . 5 PERFORMANCE INFORMATION . . . . . . . . . . . . . . 7 CAPITAL STOCK . . . . . . . . . . . . . . . . . . . 8 HOW TO PURCHASE, EXCHANGE, AND REDEEM SHARES. . . . . . . . . . . . . . . . . 9 COMPLETING THE NEW ACCOUNT FORM . . . . . . . . . . 10 NAV, PRICING, AND EFFECTIVE DATE. . . . . . . . . . 10 RECEIVING YOUR PROCEEDS . . . . . . . . . . . . . . 11 DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . 11 CONDITIONS OF YOUR PURCHASE . . . . . . . . . . . . 11 SERVICES. . . . . . . . . . . . . . . . . . . . . . 12 TAXES . . . . . . . . . . . . . . . . . . . . . . . 12 EXPENSES AND MANAGEMENT FEE . . . . . . . . . . . . 13 MANAGEMENT OF THE FUND. . . . . . . . . . . . . . . 14 Investment Summary The Fund seeks long-term growth of capital by investing primarily in the common stocks of established non-U.S. companies. _____________________________________________________________________________ Rowe Price-Fleming International, Inc. (Price-Fleming), the Fund's 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 in its offices in Baltimore, London, Tokyo, and Hong Kong. _____________________________________________________________________________ This prospectus contains information you should know about the Fund before you invest. Please keep it for future reference. A Statement of Additional Information for the Fund (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: 1-800-638-7890, extension 6515. 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. INVESTMENT OBJECTIVE AND PROGRAM The Foreign Equity Fund's (the Fund) investment objective is to seek long-term growth of capital through investments primarily in common stocks of established non-U.S. companies. Total return consists of capital appreciation or depreciation, dividend income, and currency gains or losses. The 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 Fund should not be relied upon as a complete investment program, nor used to play short-term swings in the stock or foreign exchange markets. The Fund is subject to risks unique to international investing. See extensive discussion under Risk Factors on page 4. Further, there is no assurance that the favorable trends discussed below will continue, and the Fund cannot guarantee it will achieve its investment objective. Over the last 30 years, many foreign economies have grown faster than the Unites States economy, and the return from equity investments in these countries has often exceeded the return on similar investments in the Unites States. Moreover, there has normally been a wide and largely unrelated variation in performance between international equity markets over this period. Although there can be no assurance that these conditions will continue, the Fund's investment manager, Rowe Price-Fleming International, Inc. (Price-Fleming), within the framework of diversification, seeks to identify and invest in companies participating in the faster growing foreign economies and markets. Price-Fleming believes that investment in foreign securities offers significant potential for long-term capital appreciation and an opportunity to achieve investment diversification. The Fund intends to diversify investments broadly among countries and to normally have at least three different countries represented in the portfolio. The Fund may invest in countries of the Far East and Europe as well as South Africa, Australia, Canada, and other areas (including developing countries). Under unusual circumstances, however, the Fund may invest substantially all its assets in one or two countries. Portfolio Diversification. Today, more than one-half of the world's stock market value is traded abroad. Investing overseas can help diversify a portfolio otherwise invested solely in U.S. securities. Foreign stock markets often do not parallel the performance of U.S. markets, which means that, over time, diversifying investments across several countries can help reduce portfolio volatility. In seeking its objective, the Fund invests primarily in common stocks of established foreign companies which have the potential for growth of capital. However, the Fund may also invest in a variety of other equity related securities such as preferred stocks, warrants and convertible securities, as well as corporate and governmental debt securities, when considered consistent with the Fund's investment objective and program. The Fund may also engage in a variety of investment management practices, such as buying and selling futures and options. Also, the Fund may enter into forward foreign currency exchange contracts in order to protect against uncertainty in the level of future foreign exchange rates. Under normal conditions, the Fund's investments in securities other than common stocks is limited to no more than 35% of total assets. Under exceptional economic or market conditions abroad, however, the Fund may temporarily invest all or a major portion of its assets in U.S. government obligations or debt obligations of U.S. companies. _____________________________________________________________________________ SUMMARY OF FUND FEES AND EXPENSES Shown below are all expenses and fees the Fund incurred during its fiscal year. Where applicable, expenses were restated to reflect current fees. These 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 Limitation on Fund Expenses. Shareholder Transaction Expenses Annual Fund Expenses Sales load "charge" on purchases None Management fee 0.70% Sales load "charge" on reinvested None Total other (Shareholder dividends servicing, custodial 0.16% auditing, etc.)! Redemption fees None Exchange fees None Distribution fees (12b-1)None ____ Total Fund Expenses 0.86% ! The Fund charges a $5.00 fee for wire redemptions under $5,000, subject to change without notice. EXAMPLE OF FUND EXPENSES. The following example illustrates the expenses you would incur on a $1,000 investment, assuming a 5% annual rate of return and redemption at the end of each period shown. For example, expenses for the first year in the Fund would be $9. This is an illustration only. Actual expenses and performance may be more or less than shown. 1 Year-$9 3 Years-$27 5 Years-$48 10 Years-$106 _____________________________________________________________________________ FINANCIAL HIGHLIGHTS The following table provides information about the Fund's financial history. It is based on a single share outstanding throughout each fiscal period (which ends on the last day of December for the periods 1989-1992 and the last day of October for 1993). The table is part of the Fund's financial statements which are included in the Fund's annual report and incorporated by reference into the Statement of Additional Information, which is available to shareholders. The financial statements in the annual report have been audited by Coopers & Lybrand, independent accountants, whose unqualified report covers the periods shown.
Investment Activities Distributions Net Realized and Net Asset Unrealized Total Value, Net Gain from Net Net Total Year Ended, Beginning Investment (Loss) on Investment Investment Realized Distri- December 31 of Year Income Investments Activities Income Gain butions 1989! $10.00 $.05!! $.61 $.66 $(.04) - $(.04) 1990 10.62 .23!!! (1.10) (.87) (.21) - (.21) 1991 9.54 .18! 1.28 1.46 (.18) $(.09) (.27) 1992 10.73 .17 (.57) (.40) (.18) (.10) (.28) 1993!!! 10.05 .13 3.14 3.27 - - - End of Period Ratio Total of Net Return Ratio of Investment Net Asset (Includes Net Expenses Income to Portfolio Value, End Reinvested Assets to Average Average Turnover of Year Dividends) ($ Thousands) Net Assets Net Assets Rate $10.62 6.6% $50,252 1.10%** 1.43%** 13.8%** 9.54 (8.2)% 83,645 1.01%!!! 2.23% 44.6% 10.73 15.4% 143,822 1.00%* 1.64% 46.7% 10.05 (3.7)% 238,979 0.99% 1.49% 35.1% 13.32 32.5% 489,389 0.86%** 1.65%** 27.4%** ! For the period September 7, 1989 (commencement of operations) to December 31, 1989. !! Excludes expenses in excess of a 1.10% voluntary expense limitation in effect through February 28, 1990. !!!The Fund's fiscal year-end was changed to October 31. * Excludes expenses in excess of a 1.00% voluntary expense limitation in effect from March 1, 1990 through December 31, 1991. ** Annualized.
_____________________________________________________________________________ RISK FACTORS Foreign stock prices are subject to many of the same influences as U.S. stocks, such as general economic conditions, company and industry earnings prospects, and investor psychology. International investing also involves additional risks which can increase the potential for the losses in the Fund. Currency Fluctuations. Transactions in foreign securities are conducted in local currencies, so dollars must be exchanged for another currency each time a stock is bought or sold or a dividend is paid. Likewise, share-price quotations and total return information reflect conversion into dollars. Fluctuations in foreign exchange rates can significantly increase or decrease the dollar value of a foreign investment, boosting or offsetting its local market return. For example, if a French stock rose 10% in price during a year, but the U. S. dollar gained 5% against the French franc during that time, the U.S. investor's return would be reduced to 5%. This is because the franc would "buy" fewer dollars at the end of the year than at the beginning, or, conversely, a dollar would buy more francs. Exchange rate movements can be large and endure for extended periods of time. Costs. It is more expensive for U.S. investors to trade in foreign markets than in the U.S. Mutual funds offer a very efficient way for individuals to invest abroad, but the overall expense ratios of international funds are usually somewhat higher than those of typical domestic stock funds. Political and Economic Factors. The economies, markets and political structures of a number of the countries in which the Fund can invest do not compare favorably with the United States and other mature economies in terms of wealth and stability. Therefore, investments in these countries will be riskier, and may be subject to erratic and abrupt price movements. Some economies are less well developed and less diverse (for example, Latin America, Eastern Europe and certain Asian countries), and more vulnerable to the ebb and flow of international trade, trade barriers and other protectionist or retaliatory measures (for example, Japan, Southeast Asia, and Latin America). Some countries, particularly in Latin America, are grappling with severe inflation and high levels of national debt. Investments in countries that have recently begun moving away from central planning and state-owned industries toward free markets, such as the Eastern European or Chinese economies, should be regarded as speculative. Certain portfolio countries have histories of instability and upheaval (Latin America) and internal politics that could cause their governments to act in a detrimental or hostile manner toward private enterprise or foreign investment. Any such actions, for example nationalizing an industry or company, could have a severe and adverse affect on security prices and impair the Fund's ability to repatriate capital or income. While certain portfolio countries have made progress in economic growth, liberalization, fiscal discipline, and political and social stability, there is no assurance these trends will continue. Legal, Regulatory and Operational. Certain portfolio countries lack uniform accounting, auditing, and financial reporting standards, have less governmental supervision of financial markets than in the U.S., do not honor legal rights enjoyed in the U.S. and have settlement practices which include delays and subject the Fund to risks of loss not customary in U.S. markets. Pricing. Portfolio securities may be listed on foreign exchanges that are open on days (such as Saturdays) when the Fund does not compute its prices. As a result, the Fund's net asset value may be significantly affected by trading on days when shareholders cannot make transactions. _____________________________________________________________________________ INVESTING IN INTERNATIONAL STOCKS Common stocks of foreign companies offer a way to invest for long-term growth of capital. As an economy expands, corporate profits generally grow, and share values rise. The long-term rise of foreign stock prices as a group has been punctuated by periodic declines. As in the U.S., share prices of even the best managed, most profitable corporations are subject to market risk, which means they can fluctuate widely. In less liquid and well developed stock markets, such those in some Asian and Latin American countries, volatility may be heightened by actions of a few major investors. For example, substantial increases or decreases in cash flows of mutual funds investing in these markets could significantly affect stock prices and, therefore, share prices. For this reason, investors in either foreign or domestic stocks should have a long-term investment horizon and be willing to wait out bear markets. _____________________________________________________________________________ INVESTMENT POLICIES FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVE. This section takes a detailed look at some of the types of securities the Fund may hold in its portfolio and the various kinds of investment practices that may be used in day-to-day portfolio management. The Fund's investment program is subject to further restrictions and risks described in the Statement of Additional Information. Shareholder approval is required to substantively change the Fund's objective and certain investment restrictions noted in the following section as "fundamental policies." The managers also follow certain "operating policies" which can be changed without shareholder approval. However, significant changes are discussed with shareholders in Fund reports. Types of Portfolio Securities In seeking to meet its investment objective, the Fund may invest in any type of security whose investment characteristics are consistent with the Fund's investment program. These and some of the other investment techniques the Fund may use are described in the following pages. Fundamental Policy. The Fund will not purchase a security if, as a result, with respect to 75% of the Fund's total assets, more than 5% of its total assets would be invested in securities of the issuer or more than 10% of the voting securities of the issuer would be held by the Fund. Common and Preferred Stocks. Stocks represent shares of ownership in a company. Generally, preferred stock has a specified dividend and ranks after bonds and before common stocks in its claim on income for dividend payments and on assets should the company be liquidated. After other claims are satisfied, common stockholders participate in company profits on a pro rata basis; profits may be paid out in dividends or reinvested in the company to help it grow. Increases and decreases in earnings are usually reflected in a company's stock price, so common stocks generally have the greatest appreciation and depreciation potential of all corporate securities. While most preferred stocks pay a dividend, the Fund may purchase preferred stock where the issuer has omitted, or is in danger of omitting, payment of its dividend. Such investments would be made primarily for their capital appreciation potential. Convertible Securities and Warrants. The Fund may invest in debt or preferred equity securities convertible into or exchangeable for equity securities. Traditionally, convertible securities have paid dividends or interest at rates higher than common stocks but lower than non-convertible securities. They generally participate in the appreciation or depreciation of the underlying stock into which they are convertible, but to a lesser degree. In recent years, convertibles have been developed which combine higher or lower current income with options and other features. Warrants are options to buy a stated number of shares of common stock at a specified price any time during the life of the warrants (generally, two or more years). Fixed Income Securities. The Fund may invest in debt securities. Such securities would be purchased in companies which meet the investment criteria for the Fund. The price of a bond fluctuates with changes in interest rates, rising when interest rates fall and falling when interest rates rise. The Fund will not purchase any debt security which at the time of purchase is rated below investment grade. This would not prevent the Fund from retaining a security downgraded to below investment grade after purchase. Hybrid Instruments. These instruments can combine the characteristics of securities, futures and options. For example, the principal amount, redemption or conversion terms of a security could be related to the market price of some commodity, currency or securities index. Such securities may bear interest or pay dividends at below market (or even relatively nominal) rates. Under certain conditions, the redemption value of such an investment could be zero. Hybrids can have volatile prices and limited liquidity and their use by the Fund may not be successful. Operating Policy. The 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. The Fund will not invest more than 15% of its net assets in illiquid securities, but not more than 5% in restricted securities (other than Rule 144A securities). Types of Management Practices 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. The Fund can borrow money from banks as a temporary measure for emergency purposes, to facilitate redemption requests, or for other purposes consistent with the Fund's investment objective and program. Such borrowings may be collateralized with Fund assets, subject to restrictions. Fundamental Policy. Borrowings may not exceed 331_3% of the Fund's total assets. Operating Policies. The Fund may not transfer as collateral any portfolio securities except as necessary in connection with permissible borrowings or investments, and then such transfers may not exceed 331_3% of the Fund's total assets. The Fund may not purchase additional securities when borrowings exceed 5% of total assets. Foreign Currency Transactions. The Fund will normally conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. The Fund will generally not enter into a forward with a term of greater than one year. The Fund will generally enter into forward foreign currency exchange contracts only under two circumstances. First, when the Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. Second, when Price-Fleming believes that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, it may enter into a forward contract to sell or buy the former foreign currency (or another currency which acts as a proxy for that currency) approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. Under certain circumstances, the Fund may commit a substantial portion or the entire value of its portfolio to the consummation of these contracts. Price-Fleming will consider the effect such a commitment of its portfolio to forward contracts would have on the investment program of the Fund and the flexibility of the Fund to purchase additional securities. Although forward contracts will be used primarily to protect the Fund from adverse currency movements, they also involve the risk that anticipated currency movements will not be accurately predicted and the Fund's total return could be adversely affected as a result. There are certain markets where it is not possible to engage in effective foreign currency hedging. This may be true, for example, for the currencies of various countries where the foreign exchange markets are not sufficiently developed to permit hedging activity to take place. 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 Fund may buy and sell futures contracts (and options on such contracts) to manage its exposure to changes in securities prices and foreign currencies and as an efficient means of adjusting overall exposure to certain markets. The Fund may purchase, sell, or write call and put options on securities, financial indices, and foreign currencies. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower the Fund's total return; and the potential loss from the use of futures can exceed the Fund's initial investment in such contracts. Operating Policies. Futures: Initial margin deposits and premiums on options used for non-hedging purposes will not equal more than 5% of the Fund's net asset value. Options on securities: The total market value of securities against which the Fund has written call or put options may not exceed 25% of its total assets. The Fund will not commit more than 5% of its total assets to premiums when purchasing call or put options. Portfolio Turnover. The Fund will generally not trade in securities for short-term profits but, when circumstances warrant, securities may be purchased and sold without regard to the length of time held. The Fund's annualized portfolio turnover rates for the period ended October 31, 1993, and the years 1992 and 1991, were 27.4%, 35.1%, and 46.7%, respectively. _____________________________________________________________________________ PERFORMANCE INFORMATION The Fund may advertise total return figures on both a cumulative and compound average annual basis and compare them to various indices (e.g., the S&P 500), other mutual funds or other performance measures. (The total return of the Fund consists of the change in its net asset value per share and the net income it earns.) 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 the Fund's performance, derived from the cumulative total return figure. The annual compound rate of return for the Fund may vary from any average. Further information about the Fund's performance is contained in its annual report which is available free of charge. _____________________________________________________________________________ CAPITAL STOCK Institutional International Funds, Inc. (Institutional International) is a Maryland corporation organized in 1989 and registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as a diversified, open-end investment company, commonly known as a "mutual fund." A mutual fund, such as the Fund, enables shareholders to: (1) obtain professional management of investments, including 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. Institutional International is a series fund and has the authority to issue other series in addition to the Foreign Equity Fund, currently in existence. The Fund has an investment advisory group that has day-to-day responsibility for managing the portfolio and developing and executing the Fund's investment program. The Fund's advisory group is composed of the following members: Martin G. Wade, Christopher D. Alderson, Peter B. Askew, Richard J. Bruce, Mark J.T. Edwards, John R. Ford, Robert C. Howe, James B.M. Seddon, Benedict R.F. Thomas, and David J.L. Warren. Martin Wade joined Price-Fleming in 1979 and has 25 years of experience with the Fleming Group in research, client service and investment management. (Fleming Group includes Robert Fleming and/or Jardine Fleming Group Limited.) Christopher Alderson joined Price-Fleming in 1988 and has eight years of experience with the Fleming Group in research and portfolio management. Peter Askew joined Price-Fleming in 1988 and has 19 years of experience managing multi-currency fixed income portfolios. Richard Bruce joined Price-Fleming in 1991 and has six years of experience in investment management with the Fleming Group in Tokyo. Mark Edwards joined Price-Fleming in 1986 and has 13 years of experience in financial analysis. John Ford joined Price-Fleming in 1982 and has 14 years of experience with Fleming Group in research and portfolio management. Robert Howe joined Price-Fleming in 1986 and has 13 years of experience in economic research, company research and portfolio management. James Seddon joined Price-Fleming in 1987 and has seven years of experience in investment management. Benedict Thomas joined Price-Fleming in 1988 and has five years of portfolio management experience. David Warren joined Price-Fleming in 1984 and has 14 years of experience in equity research, fixed income research and portfolio management. Shareholder Rights. Institutional International issues one class of capital stock, all shares of which have equal rights with regard to voting, redemptions, dividends, distributions, and liquidations. Fractional shares have voting rights and participate in any distributions and dividends. Shareholders have no preemptive or conversion rights; nor do they have cumulative voting rights. When the Fund's shares are issued, they are fully paid and nonassessable. Institutional International does not routinely hold annual meetings of shareholders. However, if shareholders representing at least 10% of all votes of Institutional International entitled to be cast so desire, they may call a special meeting of shareholders of Institutional International for the purpose of voting on the question of the removal of any director(s). The total authorized capital stock of the Fund consists of 1,000,000,000 shares, each having a par value of $.01. _____________________________________________________________________________ HOW TO PURCHASE, EXCHANGE, AND REDEEM SHARES Open a New Account: Minimum initial investment: $100,000 Financial Institutions Division: 1-800-638-7780 (in Baltimore, 581-7290) Payable to Foreign Equity Fund. The minimum investment for an institutional investor may be satisfied by combining up to four accounts with the Fund. (See Redemptions in Kind in the Fund's Statement of Additional Information for further information on the issuance of Fund shares for securities or assets other than cash.) FINANCIAL INSTITUTIONS DIVISION: 1-800-638-7780 (IN BALTIMORE, 581-7290) All initial and subsequent investments must be made by bank wire. By Mail Regular, Mailgram, Express, Registered, or Certified Mail T. Rowe Price Special Account Services 100 East Pratt Street Baltimore, MD 21202 _____________________________________________________________________________ By Wire Wire Address Morgan Guaranty Trust Company of New York (to give to your bank):ABA #021000238 T. Rowe Price Foreign Equity Fund/AC-00153938 Account name(s) and account number _____________________________________________________________________________ Purchase Additional Shares: Minimum: $25,000 By Phone Call Financial Institutions Division at 1-800-638-7780 (in Baltimore, 581-7290). By Wire See Wire Instructions in previous section. _____________________________________________________________________________ Exchange and Redeem Shares: By Phone Call Financial Institutions Division at 1-800-638-7780 (in Baltimore, 581-7290). If you find our phones busy during unusually volatile markets, please consider placing your order by express mail or mailgram. For exchange policy, see Excessive Trading and Exchange Limitations, page 11. Redemption proceeds can be mailed, sent by Bank-Fund Transfer, or wired to your bank. By Mail Indicate account name(s) and numbers, fund names, and exchange or redemption amount. We require the signature of all owners exactly as registered, and possibly a signature guarantee (see Signature Guarantees on next page). _____________________________________________________________________________ COMPLETING THE NEW ACCOUNT FORM The Fund is designed to meet the needs of institutional investors, particularly trust companies, acting for themselves, or in a fiduciary, advisory, agency, custodial or similar capacity. Fund shares may not be purchased directly by individual investors, although institutions may purchase shares on behalf of individuals. Tax Identification Number. We must have your correct corporate tax identification number and a signed New Account Form or W-9 Form. Otherwise, federal law requires the Fund to withhold 31% (or such other amount required by applicable IRS regulations) 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 the redemption. Signature Guarantees. A signature guarantee is designed to protect you and the Fund by verifying your signature. You will need one to: (1) Redeem over $50,000 by written request (unless you have authorized telephone services). (2) 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. (3) Transfer shares to another owner. (4) Send us written instructions asking us to wire redemption proceeds (unless previously authorized). 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. _____________________________________________________________________________ NAV, PRICING, AND EFFECTIVE DATE Net Asset Value Per Share (NAV). The NAV per share, or share price, for the Fund is normally determined as of 4:00 pm Eastern Time (ET) each day the New York Stock Exchange is open. The Fund's share price is calculated by subtracting its liabilities from its total assets and dividing the result by the total number of shares outstanding. Among other things, the Fund's liabilities include accrued expenses and dividends payable, and its total assets include portfolio securities valued at market as well as income accrued but not yet received. Purchased shares are priced at that day's NAV if your request is received before 4:00 pm ET in good order. (See How to Purchase, Exchange, and Redeem Shares and Completing the New Account Form.) 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. We cannot accept requests which specify a particular date for purchase or redemption or which specify any special conditions. If your redemption request cannot be accepted, you will be notified and given further instructions. 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. Banks. Purchases or redemptions through banks, trust companies, and other institutions may be subject to service fees imposed by those entities. The Fund reserves the right to change the time at which purchases and redemptions are priced if the New York Stock Exchange closes at a time other than 4:00 pm ET or an emergency exists. _____________________________________________________________________________ RECEIVING YOUR PROCEEDS Redemption proceeds are mailed to the address, or sent by wire or ACH transfer to the bank account, designated on your New Account Form. They are generally sent the next business day after your redemption request is received in good order. Proceeds sent by bank wire should be credited to your bank account the next business day and proceeds sent by ACH transfer should be credited the second day after the sale. In addition, under certain conditions and when deemed to be in the best interests of the Fund, redemption proceeds may not be sent for up to five business days after your request is received to allow for the orderly liquidation of securities. Requests by mail for wire redemptions (unless previously authorized) must have a signature guarantee. _____________________________________________________________________________ DIVIDENDS AND DISTRIBUTIONS The Fund distributes all net investment income and capital gains to shareholders. Dividends from net investment income and distributions from capital gains, if any, are normally declared in December and paid in January. Dividends and distributions declared by the Fund will be reinvested unless you choose an alternative payment option on the New Account Form. Dividends not reinvested are paid by check. 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 convert your election to automatic reinvestment in shares of the Fund. _____________________________________________________________________________ CONDITIONS OF YOUR PURCHASE Account Balance. If your account drops below $100,000 for three months or more, the Fund has the right to close your account(s), after giving 60 days' notice, unless you make additional investments to bring your account value to $100,000 or more. Excessive Trading and Exchange Limitations. To protect Fund shareholders against disruptions in portfolio management which might occur as a result of too frequent buy and sell activity and to minimize Fund expenses associated with such transaction activity, the Fund prohibits excessive trading in any account (or group of accounts managed by the same person). Within any 120 consecutive-day period, investors may not exchange between Price Funds more than twice or buy and sell the Price Funds more than once, if the transactions involve substantial assets or a substantial portion of the assets in the account or accounts. This policy is applied on a multi-fund basis. Any transactions above and beyond these guidelines will be considered to be excessive trading, and the investor may be prohibited from making additional purchases or exercising the exchange privilege. This policy does not apply to exchanges solely between, or purchases and sales solely of, the Price Money Funds, nor does it apply to simple redemptions from any Fund. The Fund and its agents reserve the right to: (1) reject any purchase or exchange, cancel any purchase due to nonpayment, or reject any exchange or redemption where the Fund has not received payment; (2) waive or lower the investment minimums; (3) accept initial purchases by telephone or mailgram; (4) waive the limit on subsequent purchases by telephone; (5) reject any purchase or exchange prior to receipt of the confirmation statement; (6) redeem your account (see Tax Identification Number); (7) modify the conditions of purchase at any time; and (8) reject any check not made directly payable to the Fund or T. Rowe Price (call Financial Institutions Division for more information). _____________________________________________________________________________ SERVICES 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. Some of the T. Rowe Price Funds may impose a redemption fee of .50-2%, payable to such Funds, on shares held for less than one year, or in some funds, six months. PC*Access. All purchases, redemptions and exchanges of Fund shares may be handled by you on your PC. You can also view account histories, the previous business day's transactions, various summary information, Fund performance data, and economic information. For more information about this service, please call 1-800-638-7780. Sub-Accounting Services. An institution may arrange for sub-accounting services. Such services provide a master account record which links together individual accounts and provides the following information: account number, trade date, transaction, previous share balance, dollar amount of the current transaction, share price, number of shares purchased, new share balance, and the current market value of your group. The sub-accounting agent reserves the right to charge a fee for such services or other shareholder services. Telephone Exchange and Redemption. Telephone exchange and redemption are established automatically when you sign the New Account Form unless you check the box which states that you do not want these services. The Fund uses reasonable procedures (including shareholder identity verification) to confirm that instructions given by telephone are genuine. If these procedures are not followed, it is the opinion of certain regulatory agencies that the Fund may be liable for any losses that may result from acting on the instructions given. All conversations are recorded, and a confirmation is sent within five business days after the telephone transactions. Wire Service. Wiring is usually the quickest method to purchase shares and receive redemption proceeds (a $5 charge applies to redemption amounts under $5,000, and your bank may charge you for receiving wires). Under unusual circumstances, the Fund reserves the right to temporarily suspend wires to allow for the orderly liquidation of securities. All transaction-related calls to the Financial Institutions Division are recorded in order to protect you, the Fund, and its agents. _____________________________________________________________________________ TAXES Dividends and Distributions. In January, the Fund 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 the 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 the Fund pays nonrefundable taxes to foreign governments during the year, the taxes will reduce the Fund's dividends but will 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 Fund will mail you Form 1099-B indicating the date of and proceeds from all sales and exchanges. Undistributed Income and Gains. At the time of purchase, the share price of the Fund may reflect undistributed income, capital gains or unrealized appreciation of securities. Any income or capital gains from these amounts which are later distributed to you are fully taxable. Corporations. The Fund's dividends will not be eligible for the 70% deduction for dividends received by corporations if, as expected, none of the Fund's income consists of dividends paid by U.S. corporations. Passive Foreign Investment Companies. The Fund may purchase the securities of certain foreign investment funds or trusts called passive foreign investment companies. Although the situation could change at any time, such funds are the only or primary means by which the Fund may invest in certain countries. In addition to bearing the proportionate share of the Fund's expenses (management fees and operating expenses) shareholders will also indirectly bear similar expenses of such funds. Capital gains on the sale of such holdings will be deemed to be ordinary income regardless of how long the Fund holds its investment. In addition, the Fund may be subject to corporate income tax and an interest charge on certain dividends and capital gains earned from these investments, regardless of whether such income and gains are distributed to shareholders. In accordance with tax regulations, the Fund intends to treat these securities as sold on the last day of the Fund's fiscal year and recognize any gains for tax purposes at that time; losses will not be recognized. Such gains will be considered ordinary income which the Fund will be required to distribute even though it has not sold the security and received cash to pay such distributions. Tax Consequences of Hedging. Under applicable tax law, the Fund may be required to limit its gains from hedging in foreign currency forwards, futures and options. Although it is anticipated the Fund will comply with such limits, 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 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 Fund as well as affect whether dividends paid by the Fund are classified as capital gains or ordinary income. _____________________________________________________________________________ EXPENSES AND MANAGEMENT FEE The Fund bears all expenses of its operations other than those incurred by the Fund Manager under its Investment Management Agreement with the Fund Manager. 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. Organizational expenses will be charged to the Fund over a period not to exceed 60 months. Effective January 1, 1992, Price-Fleming agreed to extend the Fund's 1.00% expense limitation for a period of two years through December 31, 1993. 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 after December 31, 1995, or if it would result in the expense ratio exceeding 1.00%. Management Fee. The Fund pays the Fund Manager an annual investment management fee of 0.70% of the average daily net asset value of the Fund. The Fund calculates and accrues the fee daily. _____________________________________________________________________________ MANAGEMENT OF THE FUND Investment Manager. Price-Fleming is responsible for selection and management of the Fund's portfolio investments. Price-Fleming has offices in Baltimore, London, Tokyo, and Hong Kong. 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 the Fund's business and affairs is the responsibility of the Fund's 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. 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 consulting for equity investments is provided to Price-Fleming by Fleming Investment Management Limited (FIM) and Jardine Fleming Investment Holdings Limited (JFIH) for 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 the Fund's portfolio securities are made by Price-Fleming. The Fund's 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 the 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 this Fund as well as all other T. Rowe Price Funds. Transfer Agent, Shareholder Servicing and Administrative Costs. TRP Services, a wholly-owned subsidiary of T. Rowe Price, serves the Fund as transfer and dividend disbursing agent. T. Rowe Price Retirement Plan Services, Inc., a wholly-owned subsidiary of T. Rowe Price, performs subaccounting and recordkeeping services for shareholder accounts in certain retirement plans investing in the Price Funds. T. Rowe Price calculates the daily share price and maintains the portfolio and general accounting records of the Fund. The address for TRP Services and T. Rowe Price Retirement Plan Services, Inc. is 100 East Pratt Street, Baltimore, Maryland 21202. The Fund paid fees to (i) TRP Services for transfer and dividend disbursing agent functions and shareholder services for all accounts and (ii) T. Rowe Price for calculating the daily share price and maintaining the portfolio and general accounting records of the Fund. These fees totaled approximately $55,000 and $83,000, respectively, for the ten months ended October 31, 1993. _____________________________________________________________________________ DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING AND PRINTED COPY Information appearing in all capital letters before a paragraph in the Edgar filing will appear, in the printed copy, as call-outs in the left margin. PAGE 1 STATEMENT OF ADDITIONAL INFORMATION T. Rowe Price International Funds, Inc. International Stock Fund International Discovery Fund European Stock Fund Japan Fund New Asia Fund Latin America Fund and Institutional International Funds, Inc. Foreign Equity Fund (the "Funds") This Statement of Additional Information is not a prospectus but should be read in conjunction with the Funds' 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 2 TABLE OF CONTENTS Page Page Call and Put Options . . . . . .15 Investment Performance . . . . . 33 Capital Stock. . . . . . . . . .64 Investment Programs. . . . . . . .2 Custodian. . . . . . . . . . . .55 Investment Restrictions. . . . . 29 Dealer Options . . . . . . . . .20 Legal Counsel. . . . . . . . . . 66 Distributor for Funds. . . . . .54 Lending of Portfolio Securities. 14 Dividends. . . . . . . . . . . .62 Management of Funds. . . . . . . 47 Federal and State Net Asset Value Per Share. . . . 61 Registration of Shares. . . . .65 Portfolio Management Practices . 14 Foreign Currency Transactions. .27 Portfolio Transactions . . . . . 55 Foreign Futures and Options. . .26 Pricing of Securities. . . . . . 60 Futures Contracts. . . . . . . .21 Principal Holders of Securities. 49 Hybrid Instruments . . . . . . .12 Repurchase Agreements. . . . . . 15 Illiquid or Restricted . . . . . . Risk Factors of Securities. . . . . . . . . . .13 Foreign Investing . . . . . . . .8 Independent Accountants. . . . .66 Tax Status . . . . . . . . . . . 62 Investment Management Services .49 Taxation of Foreign Investment Objectives and Shareholders. . . . . . . . . . 64 Policies. . . . . . . . . . . . 2 Warrants . . . . . . . . . . . . 14 INVESTMENT OBJECTIVES AND POLICIES The following information supplements the discussion of each Fund's investment objectives and policies discussed in 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. Throughout this Statement of Additional Information, "the Fund" is intended to refer to each Fund listed on the cover page, unless otherwise indicated. 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 long-term growth of capital may be achieved by investing in marketable securities of non-United States companies which have the potential for growth of capital. 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 3 complete investment program, nor used to play short-term swings in the stock 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 8. Further, there is no assurance that the favorable trends discussed below will continue, and the Funds cannot guarantee they will achieve their objectives. International Stock Fund It is the present intention of Price-Fleming to invest in companies based in (or governments of or within) the Far East (for example, Japan, Hong Kong, Singapore, and Malaysia), Europe (for example, United Kingdom, Germany, Hungary, Poland, Netherlands, France, Spain, and Switzerland), South Africa, Australia, Canada, Latin America, and such other areas and countries as Price- Fleming may determine from time to time. In determining the appropriate distribution of investments among various countries and geographic regions, Price-Fleming ordinarily considers the following factors: prospects for relative economic growth between foreign countries; expected levels of inflation; government policies influencing business conditions; the outlook for currency relationships; and the range of individual investment opportunities available to international investors. In analyzing companies for investment, Price-Fleming ordinarily looks for one or more of the following characteristics: an above-average earnings growth per share; high return on invested capital; healthy balance sheet; sound financial and accounting policies and overall financial strength; strong competitive advantages; effective research and product development and marketing; efficient service; pricing flexibility; strength of management; and general operating characteristics which will enable the companies to compete successfully in their market place. While current dividend income is not a prerequisite in the selection of portfolio companies, the companies in which the Fund invests normally will have a record of paying dividends, and will generally be expected to increase the amounts of such dividends in future years as earnings increase. It is expected that the Fund's investments will ordinarily be traded on exchanges located at least in the respective countries in which the various issuers of such securities are principally based. International Discovery Fund It is the present intention of Price-Fleming to invest primarily in smaller (i.e. small to medium size) companies based in developed and selected emerging countries located in the Pacific Basin, Western Europe, Latin America and such other areas and countries as Price-Fleming may determine from time to time. Price-Fleming believes that such smaller companies may have the potential for greater, more dynamic growth than larger firms, which may have reached a period of maturity and more gradual growth. It is generally easier for a company to grow from a smaller base. In addition, smaller companies are often more flexible and responsive to customers, and to changes in competitive conditions. Medium size companies also display such characteristics to a certain extent. However, there are also special risks associated with investing in smaller companies. In selecting portfolio investments, Price-Fleming will consider: a company's growth prospects, including the potential for superior appreciation due to growth in earnings, relative valuation of its securities, and any risk PAGE 4 associated with investment; the industry in which the company operates, with a view to identification of global developments within industries, international investment trends, and social, economic or political movements affecting a particular industry; the country in which the company is based, as well as historical and anticipated foreign currency exchange rate fluctuations; and the feasibility of gaining access to the securities market in a country and of implementing the necessary custodial arrangements. The investment program of the Fund has been developed in the belief that research-based investment in a diversified portfolio of equity securities of companies in a number of foreign countries will give shareholders a chance to participate on a global basis in the opportunities available in the growing foreign securities markets. The countries in which the Fund will seek investments include those listed below. The Fund may not invest in all the countries listed, and it may invest in other countries as well, when such investments are consistent with the Fund's investment objective and policies. Countries designated with a number sign (#) are emerging, or less developed, countries which for purposes of this prospectus are defined as countries with a low or middle-income economy as determined by the World Bank. Pacific Basin Western Europe Other Australia Austria Argentina# Hong Kong Belgium Brazil# Korea+ Denmark Canada Japan Finland Chile#+ Malaysia# France Hungary# Philippines# Germany India#+ New Zealand Greece# Mexico# Singapore# Ireland Turkey# Taiwan#+ Italy Colombia#+ Thailand# Luxembourg Venezuela# Indonesia# Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom ______________________________________________________________________________ + Indicates countries in which the Fund effectively may invest only or primarily through investment funds subject to the provisions of the Investment Company Act of 1940 relating to the purchase of securities of investment companies. See "Investment Restrictions Operating Policy No. 3." The Fund also will seek to invest in leading companies in other emerging countries as their securities markets and banking systems develop, including People's Republic of China, the Czech Republic, Slovakia, Israel, Jordan, Morocco, Nigeria, Pakistan, Poland, Peru and Vietnam, at such time as investment in these countries becomes feasible. It may not be feasible for the Fund currently to invest in all of these countries due to restricted access to their securities markets or inability to implement satisfactory custodial arrangements. PAGE 5 European Stock Fund Market deregulation, privatization, and lowered barriers to foreign investment have led to greater investment opportunities in Western Europe and the potential for greater investment in Eastern Europe. Economic and political reforms in Eastern Europe may increase the investment and growth possibilities for all of Europe. The Fund intends to invest in companies based in any Western or Eastern European country, as well as Russia and the countries of the former Soviet Union. European markets for investment include: Primary Secondary Developing France Austria Czech Republic Germany Belgium Greece Holland Denmark Hungary Italy Finland Poland Spain Ireland Russia Sweden Luxembourg Slovakia Switzerland Norway Turkey United Kingdom Portugal ______________________________________________________________________________ Other Eastern European markets may become available at any time. In seeking its objectives, the Fund will invest primarily in established European companies participating in markets and sectors which have superior long-term growth potential. Individual stocks will be evaluated on various criteria, including earnings history and prospects, book value, degree of price leverage, and price/earnings ratio. Both large and small capitalization companies will be candidates for the portfolio. Japan Fund The Japan Fund invests primarily in common stocks of Japanese companies participating in markets and sectors which are believed to have attractive long-term growth potential. These may include the export sector, where many Japanese companies are world leaders in their industries. They may also include the consumer sector--the fastest-growing segment of Japan's economy--where companies are working to meet growing domestic demand for consumer goods and services. The Fund has the flexibility to invest in both large and small companies, as deemed appropriate by Price-Fleming. This allows the Fund to benefit from the proven growth potential of established companies, as well as the enhanced growth potential of smaller companies. In making specific stock selections, Price-Fleming takes into account, among other factors, a company's size, financial condition, marketing and technical strengths, and competitive position within its industry. The Fund's portfolio will normally be broadly diversified across industries and companies. Such broad diversification should help reduce volatility. PAGE 6 New Asia Fund Price-Fleming believes the rapidly growing economies in Asia and the Pacific Basin, including Australia and New Zealand, offer attractive opportunities for investment. In contrast to Japan's more developed economy, the newly industrialized nations of this region are in an earlier, more dynamic growth stage of their development. Price-Fleming believes that the continued growth opportunities exist due to structural changes taking place throughout the region. o The relaxation of trade barriers and the freer movement of capital are increasing the flow of commerce within the region and fostering economic independence. At the same time, growing trade with Japan, the United States and Europe is fueling rapid economic development. o Rising labor costs in more developed countries are making the large, lower-cost work force of Asia and the Pacific Basin increasingly attractive, resulting in the dramatic growth of manufacturing industries. o As capital investment increases, many of the Asian and Pacific Basin countries are developing more efficient capital markets, for investment. The Fund may invest in the countries listed below, as well as other Asian and Pacific Basin countries and regions, such as China, Sri Lanka, Pakistan and Indochina, as their markets become more accessible. Australia Philippines# Hong Kong Singapore# India+# South Korea Indonesia# Taiwan+# Malaysia# Thailand# New Zealand ______________________________________________________________________________ + Indicates countries in which the Fund effectively may invest only or primarily through investment funds subject to the provisions of the Investment Company Act of 1940 relating to the purchase of securities of investment companies. See "Investment Restrictions Operating Policy No. 3." # Countries designated with a number sign (#) are emerging or less developed countries. Other Asian and Pacific Basin markets may become available at any time. Latin America Fund Price-Fleming believes that the economic revitalization of the Latin American region will provide attractive investment opportunities. After the "lost years" of the 1970's and early 80's when economic stagnation and hyperinflation became commonplace, the governments of the region have embarked on a process of transformation: PAGE 7 o rolling back the dominance of the state in favor of the private sector, encouraging privatizations of state owned companies, removing price controls and controlling public expenditure; and o lowering tariff barriers, promoting trade and encouraging both free trade blocks and investment by foreigners. As economies have been stabilized, capital flows into the country have picked up leading to increased investment and a revival of growth. Although countries such as Chile, Mexico and Argentina have made considerable progress, this economic catch-up is still at an early stage, while in countries such as Brazil and Peru the process is just beginning. The Fund may invest in the countries listed below, together with other countries in the region as their markets become accessible. The Latin America region includes Mexico, Central America, South America and the islands of the Caribbean. Argentina# Mexico# Brazil# Peru# Chile+# Venezuela# Colombia+# ______________________________________________________________________________ + Indicates countries in which the Fund effectively may invest only or primarily through investment funds subject to the provisions of the Investment Company Act of 1940 relating to the purchase of securities of investment companies. See "Investment Restrictions Operating Policy No. 3." # Countries designated with a number sign (#) are emerging or less developed countries. Foreign Equity Fund In determining the appropriate distribution of investments among various countries and geographic regions, Price-Fleming ordinarily considers the following factors: prospects for relative economic growth between foreign countries; expected levels of inflation; government policies influencing business conditions; the outlook for currency relationships; and the range of individual investment opportunities available to international investors. In analyzing companies for investment, Price-Fleming ordinarily looks for one or more of the following characteristics: an above-average earnings growth per share; high return on invested capital; healthy balance sheet; sound financial and accounting policies and overall financial strength; strong competitive advantages; effective research and product development and marketing; efficient service; pricing flexibility; strength of management; and general operating characteristics which will enable the companies to compete successfully in their market place. While current dividend income is not a prerequisite in the selection of portfolio companies, the companies in which the Fund invests normally will have a record of paying dividends, and will generally be expected to increase the amounts of such dividends in future years as earnings increase. It is expected that the Fund's investments will ordinarily be traded on exchanges located at least in the respective countries in which the various issuers of such securities are principally based. PAGE 8 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 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 PAGE 9 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 33. If the Funds invest in such investment funds, the Funds' shareholders will bear not only their proportionate share of the expenses of the Funds (including operating expenses and the fees of the investment manager), but also will bear indirectly similar expenses of the underlying investment funds. In addition, the securities of these investment funds may trade at a premium over their net asset value. Information and Supervision. There is generally less publicly available information about foreign companies comparable to reports and ratings that are published about companies in the United States. Foreign companies are also generally not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to United States companies. It also may be more difficult to keep currently informed of corporate actions which affect the prices of portfolio securities. Taxes. The dividends and interest payable on certain of the Funds' foreign portfolio securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Funds' PAGE 10 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 62.) 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. International Stock, International Discovery, European Stock and Foreign Equity Funds Eastern Europe and Russia. Changes occurring in Eastern Europe and Russia today could have long-term potential consequences. As restrictions fall, this could result in rising standards of living, lower manufacturing costs, growing consumer spending, and substantial economic growth. However, investment in the countries of Eastern Europe and Russia is highly speculative at this time. Political and economic reforms are too recent to establish a definite trend away from centrally-planned economies and state owned industries. In many of the countries of Eastern Europe and Russia, there is no stock exchange or formal market for securities. Such countries may also have government exchange controls, currencies with no recognizable market value relative to the established currencies of western market economies, little or no experience in trading in securities, no financial reporting standards, a lack of a banking and securities infrastructure to handle such trading, and a legal tradition which does not recognize rights in private property. In addition, these countries may have national policies which restrict investments in companies deemed sensitive to the country's national interest. Further, the governments in such countries may require governmental or quasi-governmental authorities to act as custodian of a Fund's assets invested in such countries and these authorities may not qualify as a foreign custodian under the Investment Company Act of 1940 and exemptive relief from such Act may be required. All of these considerations are among the factors PAGE 11 which could cause significant risks and uncertainties to investment in Eastern Europe and Russia. Each Fund will only invest in a company located in, or a government of, Eastern Europe and Russia, if it believes the potential return justifies the risk. To the extent any securities issued by companies in Eastern Europe and Russia are considered illiquid, each Fund will be required to include such securities within its 10% restriction on investing in illiquid securities. Japan Fund The Fund's concentration of its investments in Japan means the Fund will be more dependent on the investment considerations discussed above and may be more volatile than a fund which is broadly diversified geographically. Additional factors relating to Japan include the following: In the past, Japan has experienced earthquakes and tidal waves of varying degrees of severity, and the risks of such phenomena, and damage resulting therefrom, continue to exist. Japan also has one of the world's highest population densities. A significant percentage of the total population of Japan is concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya. Energy. Japan has historically depended on oil for most of its energy requirements. Almost all of its oil is imported, the majority from the Middle East. In the past, oil prices have had a major impact on the domestic economy, but more recently Japan has worked to reduce its dependence on oil by encouraging energy conservation and use of alternative fuels. In addition, a restructuring of industry, with emphasis shifting from basic industries to processing and assembly type industries, has contributed to the reduction of oil consumption. However, there is no guarantee this favorable trend will continue. Foreign Trade. Overseas trade is important to Japan's economy. Japan has few natural resources and must export to pay for its imports of these basic requirements. Japan's principal export markets are the U.S., Canada, the United Kingdom, the Federal Republic of Germany, Australia, Korea, Taiwan, Hong Kong and the People's Republic of China. The principal sources of its imports are the U.S., South East Asia and the Middle East. Because of the concentration of Japanese exports in highly visible products such as automobiles, machine tools and semiconductors and the large trade surpluses ensuing therefrom, Japan has had difficult relations with its trading partners, particularly the U.S., where the trade imbalance is the greatest. It is possible trade sanctions or other protectionist measures could impact Japan adversely in both the short- and long-term. Latin America Fund The Fund's concentration of its investments in Latin America means the Fund will be more dependent on the investment considerations described above and can be expected to be more volatile than a fund which is more broadly diversified geographically. Additional factors relating to Latin America include the following: Inflation. Most Latin American countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check and a generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. PAGE 12 Political Instability. The political history of certain Latin American countries has been characterized by political uncertainty, intervention by the military in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization and removal of trade barriers and result in significant disruption in securities markets. Foreign Currency. Certain Latin American countries may have managed currencies which are maintained at artificial levels to the U.S. dollar rather than at levels determined by the market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. Certain Latin American countries also may restrict the free conversion of their currency into foreign currencies, including the U.S. dollar. There is no significant foreign exchange market for certain currencies and it would, as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the value of the Fund's interests in securities denominated in such currencies. Sovereign Debt. A number of Latin American countries are among the largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in the imposition of onerous conditions on their economies. In addition to the investments described in the Fund's prospectus, the Fund 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. PAGE 13 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 favorable price than prevailed when it decided to sell. Restricted securities will be priced at fair value as determined in accordance with procedures prescribed by the Fund's Board of Directors. If through the appreciation of illiquid securities or the depreciation of liquid securities, the Fund should be in a position where more than 15% of the value of its net assets 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, 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. Warrants The Fund may invest in warrants. Warrants are pure speculation in that they have no voting rights, pay no dividends and have no rights with respect to the assets of the corporation issuing them. Warrants basically are options to purchase equity securities at a specific price valid for a specific period of time. They do not represent ownership of the securities, but only the right to buy them. Warrants differ from call options in that warrants are issued by the issuer of the security which may be purchased on their exercise, whereas call options may be written or issued by anyone. The prices of warrants do not necessarily move parallel to the prices of the underlying securities. PAGE 14 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 All Funds, except Foreign Equity Fund 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 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. Foreign Equity Fund InterFund Borrowing Subject to approval by the Securities and Exchange Commission, the Fund may borrow funds from other mutual funds sponsored or advised by Price-Fleming or T. Rowe Price Associates, Inc. (collectively, "Price Funds"). The Fund has no current intention of engaging in this practice at this time. Repurchase Agreements The Fund may enter into a repurchase agreement through which an investor (such as the Fund) purchases a security (known as the "underlying security") from a well-established securities dealer or a bank that is a member of the Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's approved list and have a credit rating with respect to its short- term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by T. Rowe Price. At that time, the bank or securities dealer agrees to repurchase the underlying PAGE 15 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 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 PAGE 16 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. 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. PAGE 17 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 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 PAGE 18 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 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 PAGE 19 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. 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. PAGE 20 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. Futures Contracts Transactions in Futures The Fund may enter into futures contracts, including stock index, interest rate and currency futures ("futures or futures contracts"). Stock index futures contracts may be used to provide a hedge for a portion of the Fund's portfolio, as a cash management tool, or as an efficient way for 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 PAGE 21 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 without a shareholder vote and does not limit the percentage of the Fund's assets at risk to 5%. In accordance with the rules of the State of California, the Fund will apply the above 5% test without excluding the value of initial margin and premiums paid for bona fide hedging positions. The Fund's use of futures contracts will not result in leverage. Therefore, to the extent necessary, in instances involving the purchase of futures contracts or the writing of call or put options thereon by the Fund, an amount of cash, U.S. government securities or other liquid, high-grade debt obligations, equal to the market value of the futures contracts and options thereon (less any related margin deposits), will be identified in an account with the Fund's custodian to cover (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 PAGE 22 instrument (e.g., units of a stock index) for a specified price, date, time and place designated at the time the contract is made. Brokerage fees are incurred when a futures contract is bought or sold and margin deposits must be maintained. Entering into a contract to buy is commonly referred to as buying or purchasing a contract or holding a long position. Entering into a contract to sell is commonly referred to as selling a contract or holding a short position. Unlike when the Fund purchases or sells a security, no price would be paid or received by the Fund upon the purchase or sale of a futures contract. Upon entering into a futures contract, and to maintain the Fund's open positions in futures contracts, the Fund would be required to deposit with its custodian in a segregated account in the name of the futures broker an amount of cash, U.S. government securities, suitable money market instruments, or liquid, high-grade debt securities, known as "initial margin." The margin required for a particular futures contract is set by the exchange on which the contract is traded, and may be significantly modified from time to time by the exchange during the term of the contract. Futures contracts are customarily purchased and sold on margins that may range upward from less than 5% of the value of the contract being traded. If the price of an open futures contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy margin requirements, the broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the Fund. These subsequent payments, called "variation margin," to and from the futures broker, are made on a daily basis as the price of the underlying assets fluctuate making the long and short positions in the futures contract more or less valuable, a process known as "marking to the market." The Fund expects to earn interest income on its margin deposits. Although certain futures contracts, by their terms, require actual future delivery of and payment for the underlying instruments, in practice most futures contracts are usually closed out before the delivery date. Closing out an open futures contract purchase or sale is effected by entering into an offsetting futures contract sale or purchase, respectively, for the same aggregate amount of the identical securities and the same delivery date. If the offsetting purchase price is less than the original sale price, the Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. The transaction costs must also be included in these calculations. There can be no assurance, however, that the Fund will be able to enter into an offsetting transaction with respect to a particular futures contract at a particular time. If the Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain the margin deposits on the futures contract. For example, one contract in the Financial Times Stock Exchange 100 Index future is a contract to buy 25 pounds sterling multiplied by the level of the UK Financial Times 100 Share Index on a given future date. Settlement of a stock index futures contract may or may not be in the underlying security. If not in the underlying security, then settlement will be made in cash, equivalent over time to the difference between the contract price and the actual price of the underlying asset at the time the stock index futures contract expires. PAGE 23 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 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 PAGE 24 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 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 PAGE 25 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 stock index futures, the Fund may write or purchase call and put options on stock indices. Such options would be used in a manner similar to the use of options on futures contracts. From time to time, a single order to purchase or sell futures contracts (or options thereon) may be made on behalf of the Fund and other T. Rowe Price Funds. Such aggregated orders would be allocated among the Funds and the other T. Rowe Price Funds in a fair and non- discriminatory manner. Special Risks of Transactions in Options on Futures Contracts The risks described under "Special Risks of Transactions on Futures Contracts" are substantially the same as the risks of using options on futures. In addition, where the Fund seeks to close out an option position by writing or buying an offsetting option covering the same index, underlying instrument or contract and having the same exercise price and expiration date, its ability to establish and close out positions on such options will be subject to the maintenance of a liquid secondary market. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options, or underlying instruments; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in the class or series of options) would cease to exist, although outstanding options on the exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of any of the clearing corporations inadequate, and thereby result in the institution by an PAGE 26 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, customers who trade foreign futures or foreign options contracts, it may not be afforded certain of the protective measures provided by the Commodity Exchange Act, the CFTC's regulations and the rules of the National Futures Association and any domestic exchange, including the right to use reparations proceedings before the Commission and arbitration proceedings provided by the National Futures Association or any domestic futures exchange. In particular, funds received from the Fund for foreign futures or foreign options transactions may not be provided the same protections as funds received in respect of transactions on United States futures exchanges. In addition, the price of any foreign futures or foreign options contract and, therefore, the potential profit and loss thereon may be affected by any variance in the foreign exchange rate between the time the Fund's order is placed and the time it is liquidated, offset or exercised. Foreign Currency Transactions A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are principally traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. 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 PAGE 27 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. 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 PAGE 28 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. 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 PAGE 29 securities or currencies. Pending tax regulations could limit the extent that net gain realized from option, futures or foreign forward exchange contracts on currencies is qualifying income for purposes of the 90% requirement. In addition, gains realized on the sale or other disposition of securities, including option, futures or foreign forward exchange contracts on securities or securities indexes and, in some cases, currencies, held for less than three months, must be limited to less than 30% of the Fund's annual gross income. In order to avoid realizing excessive gains on securities or currencies held less than three months, the Fund may be required to defer the closing out of option, futures or foreign forward exchange contracts beyond the time when it would otherwise be advantageous to do so. It is anticipated that unrealized gains on Section 1256 option, futures and foreign forward exchange contracts, which have been open for less than three months as of the end of the Fund's fiscal year and which are recognized for tax purposes, will not be considered gains on securities or currencies held less than three months for purposes of the 30% test. INVESTMENT RESTRICTIONS Fundamental policies of each Fund other than Latin America 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 the Fund may (i) borrow for non-leveraging, temporary or emergency purposes and (ii) engage in reverse repurchase agreements and make other investments or engage in other transactions, which may involve a borrowing, in a manner consistent with the Fund's investment objective and program, provided that the combination of (i) and (ii) shall not exceed 33 1/3% of the value of the Fund's total assets (including the amount borrowed) less liabilities (other than borrowings) or such other percentage permitted by law. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law. The Fund may borrow from banks, other Price Funds or other persons to the extent permitted by applicable law. (2) Commodities. Purchase or sell physical commodities; except that it may enter into futures contracts and options thereon; (3) Industry Concentration. Purchase the securities of any issuer if, as a result, more than 25% of the value of the Fund's total assets would be invested in the securities of issuers having their principal business activities in the same industry; (4) Loans. Make loans, although the Fund may (i) lend portfolio securities and participate in an interfund lending program PAGE 30 with other Price Funds provided that no such loan may be made if, as a result, the aggregate of such loans would exceed 33 1/3% of the value of the Fund's total assets; (ii) purchase money market securities and enter into repurchase agreements; and (iii) acquire publicly- distributed or privately-placed debt securities and purchase debt; Foreign Equity Fund Loans. Make loans, although the Fund may (i) participate in an interfund lending program with other Price Funds provided that no such loan may be made if, as a result, the aggregate of such loans would exceed 33 1/3% of the value of the Fund's total assets; (ii) purchase money market securities and enter into repurchase agreements; and (iii) acquire publicly- distributed or privately-placed debt securities and purchase debt; All Funds (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 the 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 the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment program. For All Funds, Except Latin America Fund (8) Percent Limit on Assets Invested in Any One Issuer. Purchase a security if, as a result, with respect to 75% of the value of a Fund's total assets, more than 5% of the value of its total assets would be invested in the securities of any one issuer (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities); and (9) Percent Limit on Share Ownership of Any One Issuer. Purchase a security if, as a result, with respect to 75% of the value of a Fund's total assets, more than 10% of the outstanding voting securities of any issuer would be held by the Fund (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities). NOTES The following notes should be read in connection with the above-described fundamental policies. The notes are not fundamental policies. With respect to investment restrictions (1) and (4), the Fund will not borrow from or lend to any other T. Rowe Price PAGE 31 Fund (defined as any other mutual fund managed be for which T. Rowe Price acts as adviser) unless each Fund applies for and receives an exemptive order from the SEC or the SEC issues rules permitting such transactions. The Fund has no current intention of engaging in any such activity and there is no assurance the SEC would grant any order requested by the Fund or promulgate any rules allowing the transactions. With respect to investment restriction (2), the Fund does not consider currency contracts or hybrid investments to be commodities. For purposes of investment restriction (3), U.S., state or local governments, or related agencies or instrumentalities, are not considered an industry. Industries are determined by reference to the classifications of industries set forth in the Fund's semi-annual and annual reports. For purposes of investment restriction (4), the Fund will consider the acquisition of a debt security to include the execution of a note or other evidence of an extension of credit with a term of more than nine months. Operating Policies As a matter of operating policy, the Fund may not: (1) Borrowing. The Fund will not purchase additional securities when money borrowed exceeds 5% of its total assets; (2) Control of Portfolio Companies. Invest in companies for the purpose of exercising management or control; (3) Futures Contracts. Purchase a futures contract or an option thereon if, with respect to positions in futures or options on futures which do not represent bona fide hedging, the aggregate initial margin and premiums on such positions would exceed 5% of the Fund's net asset value. (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, provided that the Fund will not invest more than 5% of its total assets in restricted securities and not more than 5% in securities of unseasoned issuers. Securities eligible for resale under Rule 144A of the Securities Act of 1933 are not included in the 5% limitation but are subject to the 15% limitation; (4) 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; (5) Margin. Purchase securities on margin, except (i) for use of short-term credit necessary for clearance of purchases of portfolio securities and (ii) it may make margin deposits in connection with futures contracts or other permissible investments; PAGE 32 (6) Mortgaging. Mortgage, pledge, hypothecate or, in any manner, transfer any security owned by the Fund as security for indebtedness except as may be necessary in connection with permissible borrowings or investments and then such mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Fund's total assets at the time of borrowing or investment; (7) 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; (8) 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; (9) Ownership of Portfolio Securities by Officers and Directors. Purchase or retain the securities of any issuer if, to the knowledge of the Fund's management, those officers and directors of the Fund, and of its investment manager, who each own beneficially more than .5% of the outstanding securities of such issuer, together own beneficially more than 5% of such securities; (10) Short Sales. Effect short sales of securities; (11) 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 the Fund's total assets would be invested in the securities issuers which at the time of purchase had been in operation for less than three years (for this purpose, the period of operation of any issuer shall include the period of operation of any predecessor or unconditional guarantor of such issuer). This restriction does not apply to securities of pooled investment vehicles or mortgage or asset-backed securities; or (12) Warrants. Invest in warrants if, as a result thereof, more than 2% of the value of the total assets of the Fund would be invested in warrants which are not listed on the New York Stock Exchange, the American Stock Exchange, or a recognized foreign exchange, or more than 5% of the value of the total assets of the Fund would be invested in warrants whether or not so listed. For purposes of these percentage limitations, the warrants will be valued at the lower of cost or market and warrants acquired by the 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. PAGE 33 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. International Stock Fund Cumulative Performance Percentage Change Since 1 Year 5 Years 10 Years Inception Ended Ended Ended 5/9/80 to 12/31/93+ 12/31/93 12/31/93 12/31/93++ _________ ________ ___________ __________ International Stock 40.11% 76.63% 396.21% 678.83% Fund S&P 500 10.07 97.34 301.77 661.50 Dow Jones Industrial Average 16.99 105.25 333.86 732.91 Lipper International Funds Average 39.40 62.48 303.71 480.69+++ EAFE Index 32.94 12.19 417.77 592.40+++ CPI 2.75 21.00 43.93 80.00 Financial Times Actuaries World Index++++ 22.60 35.85 N/A N/A PAGE 34 Average Annual Compound Rates of Return Since 1 Year 5 Years 10 Years Inception Ended Ended Ended 5/9/80 to 12/31/93+ 12/31/93 12/31/93 12/31/93++ _________ ________ ____________ __________ International Stock 40.11% 12.05% 17.37% 16.23% Fund S&P 500 10.07 14.56 14.92 16.04 Dow Jones Industrial Average 16.99 15.47 15.81 16.80 Lipper International Funds Average 39.40 9.85 14.84 13.66+++ EAFE Index 32.94 2.33 17.87 15.40+++ CPI 2.75 3.89 3.71 4.40 Financial Times Actuaries World Index++++ 22.60 6.32 N/A N/A + If you invested $1,000 at the beginning of 1993, the total return on December 31, 1993 would be $1,401.10 ($1,000 x 1.4011). ++ Assumes purchase of one share of International Stock Fund at the public offering price of $5.00 on May 9, 1980. Over this time, stock prices in general have risen. +++ 06/30/80-12/31/93 ++++ The inception date of this index is 12/31/85. International Discovery Fund Cumulative Performance Percentage Change Since 1 Year 5 Years Inception Ended Ended 12/30/88 to 12/31/93+ 12/31/93 12/31/93++ __________ __________ ____________ International Discovery Fund 49.85% 87.99% 87.99% S&P 500 10.07 97.34 97.34+++ Dow Jones Industrial Average 16.99 105.25 105.25+++ Lipper International Funds Average 39.40 62.48 62.48+++ EAFE Index 32.94 12.19 12.19+++ CPI 2.75 21.00 21.00+++ PAGE 35 Average Annual Compound Rates of Return Since 1 Year 5 Years Inception Ended Ended 12/30/88 to 12/31/93+ 12/31/93 12/31/93++ __________ __________ ____________ International Discovery Fund 49.85% 13.46% 13.45% S&P 500 10.07 14.56 14.56+++ Dow Jones Industrial Average 16.99 15.47 15.47+++ Lipper International Funds Average 39.40 9.85 9.85+++ EAFE Index 32.94 2.33 2.33+++ CPI 2.75 3.89 3.89+++ Morgan Stanley Capital International World Index 23.13 6.44 6.44+++ + If you invested $1,000 at the beginning of 1993, the total return on December 31, 1993 would be $1,498.50 ($1,000 x 1.4985). ++ Assumes purchase of one share of International Discovery Fund at the public offering price of $10.00 on December 30, 1988. Over this time, stock prices in general have risen. +++ 12/31/88 - 12/31/93 Small company stocks achieved higher total annualized returns than large-cap stocks and long-term bonds for the 25 and 50-year periods ending December 31, 1993. The table below shows recent trends during the past ten years. SMALL COMPANIES VS. LARGE COMPANIES AVERAGE ANNUAL RETURNS 1983 - 1993 Chart 1 Sources: Japan Large - Tokyo Stock Exchange Section; Japan Small - Tokyo Stock Exchange Section 2; Datastream; United Kingdom Large - MSCI U.K. Index; United Kingdom Small - Hoarve Govette Small Cap. Index; Datastream; United States Large - S&P 500 Index; Standard & Poor's, United State Small - Wilshire Small Growth Index, Wilshire Associates. PAGE 36 European Stock Fund Cumulative Performance Percentage Change Since 1 Year 3 Years Inception Ended Ended 2/28/90+ to 12/31/93 12/31/93 12/31/93++ __________ __________ ____________ European Stock Fund 27.24% 28.95% 24.86% S&P 500 10.07 54.48 58.93 Dow Jones Industrial Average 16.99 56.11 61.68 Lipper European Region Funds Average 25.96 23.28 19.81 EAFE Index 32.94 31.84 13.01 CPI 2.75 8.97 13.91 Average Annual Compound Rates of Return Since 1 Year 3 Years Inception Ended Ended 2/28/90+ to 12/31/93 12/31/93 12/31/93++ __________ __________ ____________ European Stock Fund 27.24% 8.84% 5.95% S&P 500 10.07 15.60 12.83 Dow Jones Industrial Average 16.99 16.01 13.33 Lipper European Region Funds Average 25.96 6.85 4.66 EAFE Index 32.94 9.65 3.24 CPI 2.75 2.90 3.45 Morgan Stanley Capital International Europe Index 29.79 12.209.18 + If you invested $1,000 at the beginning of 1993, the total return on December 31, 1993 would be $1,272.40 ($1,000 x 1.2724). ++ Assumes purchase of one share of European Stock Fund at the public offering price of $10.00 on February 28, 1990. Over this time, stock prices in general have risen. +++ 03/01/90-12/31/93 PAGE 37 Japan Fund Cumulative Performance Percentage Change Since 1 Year Inception Ended 12/27/91+ to 12/31/93 12/31/93++ __________ ____________ Japan Fund 20.61% 4.45% Morgan Stanley Pacific Basin Index 35.97 11.23+++ Morgan Stanley Capital International World Index 23.13 17.39+++ EAFE Index 32.94 17.19+++ S&P 500 10.07 21.59 Topix Index 23.10 -6.12+++ Nikkei Average 14.88 -14.82+++ Morgan Stanley Japan Index 25.70 -1.06+++ Lipper Japanese Funds Average 22.94-2.89+++ Average Annual Compound Rates of Return Since 1 Year Inception Ended 12/27/91+ to 12/31/93 12/31/93++ __________ ____________ Japan Fund 20.61% 2.19% Morgan Stanley Pacific Basin Index 35.97 5.46+++ Morgan Stanley Capital International World Index23.13 8.35+++ EAFE Index 32.94 8.26+++ S&P 500 10.07 10.21 Topix Index 23.10 -3.11+++ Nikkei Average 14.88 -7.71+++ Morgan Stanley Japan Index 25.70 -0.53+++ Lipper Japanese Funds Average 22.94-1.55+++ + If you invested $1,000 at the beginning of 1993, the total return on December 31, 1993 would be $1,206.10 ($1,000 x 1.2061). ++ Assumes purchase of one share of Japan Fund at the public offering price of $10.00 on December 27, 1991. Over this time, stock prices in general have risen. +++ 12/31/91-12/31/93 One reason investors may find the Japanese market attractive is the proven competitiveness of Japanese companies within their industries. Due to a commitment to capital investment, technological expertise, and a highly productive workforce, Japanese companies dominate many of the world's key industries. Shown below are the number of Japanese companies within the top ten largest companies of the world+ for the industries indicated: --- 9 of the top 10 banks --- 7 of the top 10 appliance/household durable companies --- 8 of the top 10 financial service companies --- 7 of the top 10 steel companies --- 4 of the top 10 automobile companies PAGE 38 + Based on total market capitalization in U.S. dollars. Source: Morgan Stanley Capital International U.S. S&P 500 VS. JAPAN TOPIX 1981 -- 1993 Chart 2 Sources: Bloomberg Returns are measured in U.S. currency. Topix Index reflects the first section of the Tokyo Stock Exchange. The chart is for illustrative purposes only and should not be considered representative of an investment in the Fund or of the Fund's performance. Returns are measured in U.S. currency. Topix Index reflects the first section of the Tokyo Stock Exchange. Sources: Nikkei Needs; Bridge Information Systems Growth of Real GNP in the OECD area! Annual Percentage Change Average 1975-84 1985 1986 1987 1988 1989 1990 19911992 _______ ____ ____ ____ ____ ____ ____ ________ United States 2.5 3.2 2.9 3.1 3.9 2.5 0.8 -1.2 2.1 Japan 4.0 5.0 2.6 4.1 6.2 4.7 4.8 4.0 1.3 Source: World Economic Outlook, IMF, May 1993 PAGE 39 Latin America Fund The following is a line graph depicting the following plot points: January 1989 - January 1993 Chart 3 IFCI Composite 100 in January, 1989 and climbs steadily to 200 in June, 1990 then declines to 150 in January, 1991 then increases to 250 by May, 1992, then drops to 220 in September, 1992, and climbs steadily to 240 in January, 1993. IFCI Latin America 100 drops to 98 in January, 1989 and climbs steadily to 575 in June, 1992 then declines to 425 in November, 1992 then increases to 500 by March, 1993. IFCI Asia 100 climbs to 170 in July, 1990 then declines to 130 in September, 1991 then climbs steadily to 170 by March, 1993. IFCI Europe/Mideast 100 steadily climbs to 330 in July, 1990 then declines to 200 in December, 1990 then climbs to 240 in February, 1991 and slowly declines to 99 in October, 1992 and slowly climbs to 130 in January, 1993 and then drops to 120 in March, 1993. S&P 500 fluctuates between 130 to 150 up to December, 1992 then steadily climbs to 190 in March, 1993. EAFE 100 climbs to 110 in January, 1990, then drops to 90 in March, 1990 and climbs to 100 in June, 1990 and then declines 80 to 90 through March, 1993. *IFCI represents International Finance Corp. Index The chart is intended to represent an investment of $100 in each of the indices at the beginning on 1989 and the investments ending value as of March, 1993. PAGE 40 New Asia Fund Cumulative Performance Percentage Change Since 1 Year 3 Years Inception Ended Ended 9/28/90+ to 12/31/93 12/31/93 12/31/93++ __________ __________ ____________ New Asia Fund 78.76% 137.25% 141.05% S&P 500 10.07 54.48 68.65+++ Dow Jones Industrial Average 16.99 56.11 69.35+++ Lipper Pacific Region Funds Average 63.81 88.88 91.74+++ EAFE Index 32.94 31.84 45.85+++ CPI 2.75 8.97 9.87+++ Average Annual Compound Rates of Return Since 1 Year 3 Years Inception Ended Ended 9/28/90+ to 12/31/93 12/31/93 12/31/93++ __________ __________ ____________ New Asia Fund 78.76% 33.37% 31.02% S&P 500 10.07 15.60 17.43+++ Dow Jones Industrial Average 16.99 16.01 17.59+++ Lipper Pacific Region Funds Average 63.91 22.63 21.33+++ EAFE Index 32.94 9.65 12.31+++ CPI 2.75 2.90 2.94+++ Financial Times Actuaries Pacific Excluding Japan 89.78 40.53 35.68+++ + If you invested $1,000 at the beginning of 1993, the total return on December 31, 1993 would be $1,787.60 ($1,000 x 1.7876). ++ Assumes purchase of one share of New Asia Fund at the public offering price of $10.00 on September 28, 1990. Over this time, stock prices in general have risen. +++ 09/30/90 - 12/31/93 Price-Fleming believes that foreign economies have performed well, and emerging economies are significantly better than the world average, as shown in the chart below. PAGE 41 GDP Growth Rates ________________ Average 1975-84 1985 1986 1987 1988 1989 1990 19911992 _______ ____ ____ ____ ____ ____ ____ ________ World 3.3 3.8 3.6 3.9 4.6 3.3 2.0 0.6 1.8 Industrialized 2.5 3.3 2.8 3.2 4.3 3.2 2.1 0.2 1.5 Developing (Asia) 6.3 7.2 7.1 8.1 9.1 5.5 5.7 5.8 7.9 Source: World Economic Outlook, IMF, May 1993 Foreign Equity Fund Cumulative Performance Percentage Change Since 1 Year 3 Years Inception Ended Ended 9/7/89 to 12/31/93+ 12/31/93 12/31/93++ _________ ________ __________ Foreign Equity Fund 40.76% 56.41% 53.06% S&P 500 10.07 54.48 53.91 Dow Jones Industrial Average 16.99 56.11 59.84 Lipper International Funds Average 39.40 50.37 44.50+++ EAFE Index 32.94 31.84 10.75+++ CPI 2.75 8.97 17.01+++ Financial Times Actuaries Euro-Pacific Index 31.37 28.95 8.22+++ Average Annual Compound Rates of Return Since 1 Year 3 Years Inception Ended Ended 9/07/89 to 12/31/93+ 12/31/93 12/31/93++ _________ ________ __________ Foreign Equity Fund 40.76% 16.08% 10.37% S&P 500 10.07 15.60 10.51 Dow Jones Industrial Average 16.99 16.0111.48 Lipper International Funds Average 39.40 14.298.58+++ EAFE Index 32.94 9.65 2.38+++ CPI 2.75 2.90 3.69+++ Financial Times Actuaries Euro-Pacific Index 31.37 8.84 0.69+++ + If you invested $1,000 at the beginning of 1993, the total return on December 31, 1993 would be $1,407.60 ($1,000 x 1.4076). ++ Assumes purchase of one share of Foreign Equity Fund at the public offering price of $10.00 on September 7, 1989. Over this time, stock prices in general have risen. +++ 8/31/89 - 12/31/93 The EAFE Index (Capital International Europe, Australia, Far East Index) is a generally accepted benchmark for performance of major overseas markets. From time to time, in reports and promotional literature: (1) each Fund's total return performance or P/E ratio may be compared to any one or combination of the following: (i) the Standard & Poor's 500 Stock Index and PAGE 42 Dow Jones Industrial Average so that you may compare the Fund's results with those of a group of unmanaged securities widely regarded by investors as representative of the U.S. stock market in general; (ii) other groups of mutual funds, including T. Rowe Price Funds, tracked by: (A) Lipper Analytical Services, Inc., a widely used independent research firm which ranks mutual funds by overall performance, investment objectives, and assets which includes the Lipper Pacific Region Average which tracks the average performance of funds which concentrate investments in equity securities whose primary trading markets or operations are in the Western Pacific basin region, or a single country within this region; (B) Morningstar, Inc., another widely used independent research firm which rates mutual funds; or (C) other financial or business publications, such as Business Week, Money Magazine, Forbes and Barron's, which provide similar information; (iii) The Financial Times (a London based international financial newspaper)-Actuaries World Indices, including Europe and sub indices comprising this Index (a wide range of comprehensive measures of stock price performance for the major stock markets as well as for regional areas, broad economic sectors and industry groups); (iv) Morgan Stanley Capital International Indices, including the EAFE Index, Pacific Basin Index, Japan Index and Pacific Ex Japan Index which is a widely-recognized series of indices in international market performance; (v) Baring International Investment Management Limited (an international securities trading, research, and investment management firm), as a source for market capitalization, GDP and GNP; (vi) the International Finance Corporation (an affiliate of the World Bank established to encourage economic development in less developed countries), World Bank, OECD (Organization for Economic Co- Operation and Development) and IMF (International Monetary Fund) as a source of economic statistics; (vii) the Nikkei Average, a generally accepted benchmark for performance of the Japanese stock market; (viii) indices of stocks comparable to those in which each Fund invests including the Topix Index, which reflects the performance of the First Section of the Tokyo Stock Exchange; and (ix) the performance of U.S. government and corporate bonds, notes and bills. (The purpose of these comparisons would be to illustrate historical trends in different market sectors so as to allow potential investors to compare different investment strategies.); (2) the Consumer Price Index (measure for inflation) may be used to assess the real rate of return from an investment in each Fund; (3) other U.S. or foreign government statistics such as GNP, and net import and export figures derived from governmental publications, e.g. The Survey of Current Business, may be used to illustrate investment attributes of the Fund or the general economic, business, investment, or financial environment in which the Fund operates; (4) the effect of tax-deferred compounding on each Fund's investment returns, or on returns in general, may be illustrated by graphs, charts, etc. where such graphs or charts would compare, at various points in time, the return from an investment in each Fund (or returns in general) on a tax-deferred basis (assuming reinvestment of capital gains and dividends and assuming one or more tax rates) with the return on a taxable basis; and (5) the sectors or industries in which each Fund invests may be compared to relevant indices or surveys (e.g. S&P Industry Surveys) in order to evaluate each Fund's historical performance or current or potential value with respect to the particular industry or sector. In connection with (4) above, information derived from the following chart may be used: IRA Versus Taxable Return Assuming 9% annual rate of return, $2,000 annual contribution and 28% tax bracket. PAGE 43 Year Taxable Tax Deferred ____ _______ ____________ 10 $ 28,700 $ 33,100 15 51,400 64,000 20 82,500 111,500 25 125,100 184,600 30 183,300 297,200 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. 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 on the next page. PAGE 44 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 on the next page. PAGE 45 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. Other Publications From time to time, in newsletters and other publications issued by T. Rowe Price Investment Services, Inc., reference may be made to economic, financial and political developments in the U.S. and abroad and their effect on securities prices. Such discussions may take the form of commentary on these developments by T. Rowe Price mutual fund portfolio managers and their views and analysis on how such developments could affect investments in mutual funds. Redemptions in Kind In the unlikely event a shareholder in any of the International Funds were to receive an in kind redemption of portfolio securities of a Fund, PAGE 46 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 Fund; (b) are acquired for investment and not for resale except in accordance with applicable law; (c) have a value that is readily ascertainable via listing on or trading in a recognized United States or international exchange or market; and (d) are not illiquid. 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 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 PAGE 47 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 !!R. TODD RUPPERT, Vice President--Vice President, T. Rowe Price, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan Services, Inc. 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. INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price ! Messrs. Askew, Bruce, Campbell, Edwards, Ilott, Rothery, Smith, Thomas, VanDyke, and Wiese are Vice Presidents of the International Funds only. Mmes. Cranmer and Holmes are Assistant Vice Presidents of the International Funds only. !! Mr. Ruppert is a Vice President of the Foreign Equity Fund. The Funds' Executive Committee, comprised of Messrs. Testa and Wade, have 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. PAGE 48 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 shareholder beneficially owned more than 5% of the outstanding shares of the International Stock, New Asia and European Stock Funds, respectively: Charles Schwab & Co. Inc., Reinvestment Account, Attn.: Mutual Fund Dept., 101 West Montgomery Street, San Francisco, California 94104-4122. Each of the following shareholders beneficially owned more than 5% of the outstanding shares of the Foreign Equity Fund: Continental Bank N.A., c/o Robert Kramer, 231 S. Lasalle Street, Chicago, Illinois 60604-1407; T. Rowe Price Trust Co. TTEE, BAL Fund Employee Profit Sharing Ret., Plan of Winn Dixie Stores, Inc., Attn.: Marie Seltzer, 100 E. Pratt Street, Baltimore, Maryland 21202-1009; and T. Rowe Price Trust Co. TTEE, Stocks Plus Fund for Honeywell Ret. and Savings Plans, Attn.: Maria Seltzer, 100 E. Pratt Street, Baltimore, Maryland 21202-1009. 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 49 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. All Funds, except Foreign Equity Fund 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 50 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 0.35% for the International Stock Fund, 0.50% each for the European Stock, Japan and New Asia Funds, 0.75% each for the International Discovery and Latin America 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 following chart sets forth the total management fees if any, paid to Price-Fleming by the Funds, during the last three years: International Stock International Discovery Japan 1993 $14,955,000 1993 $1,982,000 1993 $458,000 1992 $12,522,000 1992 $1,798,000 1992 $ 19,000 1991 $ 9,233,000 1991 $1,549,000 1991 * European Stock New Asia Latin America 1993 $1,422,000 1993 $4,937,000 1993 * 1992 $1,198,000 1992 $1,954,000 1992 * 1991 $ 976,000 1991 $ 449,000 1991 * *Prior to commencement of Fund operations. 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 PAGE 51 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. International Discovery Fund In the interest of limiting the expenses of the Fund, Price-Fleming agreed to bear any expenses through December 31, 1990, which would cause the Fund's ratio of expenses to average net assets to exceed 1.50%. Effective January 1, 1991, Price-Fleming agreed to extend the Fund's expense ratio for a period of two years through December 31, 1992. Effective January 1, 1993 Price-Fleming agreed to extend the 1.50% expense limitation through December 31, 1993. Expenses paid or assumed by Price-Fleming under each agreement, are subject to reimbursement to Price-Fleming the Fund whenever the Fund's expense ratio is below 1.50%; however, no reimbursement will be made after December 31, 1992 (for the initial agreement), December 31, 1994 (for the first extension), December 31, 1995 (for the second extension), or if it would result in the expense ratio exceeding 1.50%. The Management Agreement also provides that one or more additional expense limitation periods may be implemented after the expiration of the one on December 31, 1990, and that with respect to any additional limitation period (of the same or different time periods), 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. Pursuant to the Fund's past expense limitations, management fees aggregating $85,000, $185,000 and $360,000 were not accrued for the ten-month fiscal period ended October 31, 1993 and the fiscal years ended December 31 1992 and December 31, 1991, respectively. These unaccrued fees are subject to reimbursement through December 31, 1995. Japan 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 1.50%. Effective January 1, 1994 Price-Fleming agreed to extend the 1.50% expense limitation through October 31, 1995. Expenses paid or assumed by Price-Fleming under each agreement are subject to reimbursement to Price-Fleming by the Fund whenever the Fund's expense ratio is below 1.50%; however, no reimbursement will be made after December 31, 1995 (for the initial agreement), October 31, 1997 (for the second agreement), or if it would result in the expense ratio exceeding 1.50%. 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 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 the Fund's past expense limitation, management fees aggregating $100,000 and $211,000 were not accrued for the ten-month fiscal period ended October 31, 1993 and the fiscal period ended December 31, 1992, respectively. These unaccrued fees are subject to reimbursement through December 31, 1995. PAGE 52 Latin America 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 October 31, 1995, which would cause the Fund's ratio of expenses to average net assets to exceed 2.00%. 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 2.00%; however, no reimbursement will be made after October 31, 1997, or if it would result in the expense ratio exceeding 2.00%. 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 October 31, 1995, and that with respect to any such additional limitation period, the Fund's 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. T. Rowe Price Spectrum Fund, Inc. (International Stock 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 Fund, are funds in which Spectrum Fund invests (collectively all such funds "Underlying Price Funds"). The Agreement provides that, if the Board of Directors of any Underlying Price Fund determines that such Underlying Fund's share of the aggregate expenses of Spectrum Fund is less than the estimated savings to the Underlying Price Fund from the operation of Spectrum Fund, the Underlying Price Fund will bear those expenses in proportion to the average daily value of its shares owned by Spectrum Fund, provided further that no Underlying Price Fund will bear such expenses in excess of the estimated savings to it. Such savings are expected to result primarily from the elimination of numerous separate shareholder accounts which are or would have been invested directly in the Underlying Price Funds and the resulting reduction in shareholder servicing costs. Although such cost savings are not certain, the estimated savings to the Underlying Price Funds generated by the operation of Spectrum Fund are expected to be sufficient to offset most, if not all, of the expenses incurred by Spectrum Fund. Foreign Equity Fund Limitation on Fund Expenses Price-Fleming agreed that through February 29, 1992, the Fund's expense ratio would not exceed 1.00% of the average daily net assets of the Fund. However, any amount paid or assumed by Price-Fleming pursuant to this expense ratio limitation is subject to reimbursement monthly by the Fund to Price-Fleming after February 29, 1992, provided, that no such reimbursement will be made to Price-Fleming after February 28, 1994, and any such reimbursement will only be made to the extent it does not result in the Fund's aggregate expenses exceeding an expense ratio limitation of 1.00% (or such lower amount as may be imposed by a state expense ratio limitation to which the Fund is subject) in any month. The Management Agreement also provides that one or more additional expense limitation periods may be implemented after the expiration of the one on February 29, 1992, and that with respect to any additional limitation period, the Fund may reimburse Price-Fleming for a period of up to two years, provided the reimbursement does not result in the PAGE 53 Fund's aggregate expenses exceeding the additional expense limitation (or any applicable state expense limitation). Although Price-Fleming may at any time voluntarily extend an expense limitation without shareholder approval, this provision permits Price-Fleming to adopt an additional expense limitation from time to time and be reimbursed for any amount it assumed or waived under such an additional expense limitation after the expiration of the present expense limitation on February 29, 1992. Effective January 1, 1992, 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 the 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 after December 31, 1993, or if it would result in the expense ratio exceeding 1.00%. For its services to the Fund under the Management Agreement, Price-Fleming is paid an annual fee, in monthly installments, based on the Fund's average daily net assets at the rate of .70%. For the years 1993, 1992, and 1991, Price-Fleming received from the Fund management fees totaling $2,064,000, $1,437,000, and $767,000, respectively. 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. PAGE 54 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 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 Funds are made by Price-Fleming. Price-Fleming is also responsible for implementing these decisions, including the allocation of portfolio brokerage and principal business and the negotiation of commissions. 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 PAGE 55 undisclosed commission or markup. In underwritten offerings, the price includes a disclosed, fixed commission or discount. 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 PAGE 56 overall responsibilities of the adviser with respect to the accounts as to which it exercises investment discretion. Accordingly, Price-Fleming may 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 PAGE 57 the use of their trading desks, although orders for a Fund's portfolio transactions may be placed with affiliates of Robert Fleming and JFG who may receive a commission. 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. During the year 1993, the International Stock, International Discovery, New Asia, Japan, and Foreign Equity Funds paid $1,198,000, $245,000, $1,834,000, $111,000, and $71,000, respectively, in total brokerage commissions in connection with their portfolio transactions. The brokerage commissions paid to JFS represented 22%, 19%, 27%, 27%, and 13%, respectively, of the Funds' aggregate brokerage commissions paid during 1993. The aggregate dollar amount of transactions effected through JFS, involving the payment of commissions represented 18%, 13%, 28%, 25%, and 12%, respectively, of the aggregate dollar amount of all transactions involving the payment of commissions during 1993. International Stock and European Stock Funds paid to RF&Co., $100,000, and $1,000, respectively, in total brokerage commissions in connection with their portfolio transactions. The brokerage commissions paid to RF&Co. represented 2%, and 1%, respectively, of the Funds' aggregate brokerage commissions paid during 1993. The aggregate dollar amount of transactions effected through RF&Co., involving the payment of commissions represented 2%, and 1%, respectively, of the aggregate dollar amount of all transactions involving the payment of commissions during 1993. Japan Fund paid to Robert Fleming, Inc. (a New York brokerage firm), $1,000 in total brokerage commissions in connection with their portfolio transactions. The brokerage commissions paid to Robert Fleming, Inc. (a New York brokerage firm) represented 1%, of the Funds' aggregate brokerage commissions paid during 1993. The aggregate dollar amount of transactions effected through RF&Co., involving the payment of commissions represented 1%, of the aggregate dollar amount of all transactions involving the payment of commissions during 1993. In accordance with the written procedures adopted pursuant to Rule 17e-1, the independent directors of each Fund reviewed the 1993 transactions with affiliated brokers and determined that such transactions resulted in an economic advantage to the Funds either in the form of lower execution costs or otherwise. Other For the years 1993, 1992, and 1991, the total brokerage commissions paid by International Stock Fund, including the discounts received by PAGE 58 securities dealers in connection with underwritings, were $5,419,000, $4,052,000, and $3,119,000, respectively. Of these commissions, approximately 76%, 85%, and 90%, respectively, were paid to firms which provided research, statistical, or other services to Price-Fleming in connection with the management of the Fund or, in some cases, to the Fund. The portfolio turnover rate of the International Stock Fund for each of the last three years has been as follows: 1993--29.8%, 1992--37.8%, and 1991--45.0%, respectively. For the years 1993, 1992, and 1991, the total brokerage commissions paid by the International Discovery Fund, including the discounts received by securities dealers in connection with underwritings, were $1,277,000, $458,000, and $778,000, respectively. Of these commissions, approximately 81%, 81%, and 78%, respectively, were paid to firms which provided research, statistical, or other services to Price-Fleming in connection with the management of the Fund or, in some cases, to the Fund. The portfolio turnover rate of the International Discovery Fund for each of the last three years has been as follows: 1993--71.8%, 1992--38.0%, and 1991--56.3%, respectively. For the years 1993, 1992, and 1991, the total brokerage commissions paid by the European Stock Fund, including the discounts received by securities dealers in connection with underwritings, were $182,000, $328,000, and $214,000, respectively. Of these commissions, approximately 99% was paid for 1993 and for 1992, and 1991, all commissions were paid to firms which provided research, statistical, or other services to Price-Fleming in connection with the management of the Fund or, in some cases, to the Fund. The portfolio turnover rate of the European Stock Fund for each of the last three years has been as follows: 1993--21.3%, 1992--52.0%, and 1991- - -57.7%, respectively. For the years 1993, and 1992, the total brokerage commissions paid by the Japan Fund, including the discounts received by securities dealers in connection with underwritings, were $412,000, and $277,000, respectively. Of these commissions, approximately 73%, and 91% were paid to firms which provided research, statistical, or other services to Price-Fleming in connection with the management of the Fund or, in some cases, to the Fund. The portfolio turnover rate of the Japan Fund for the years 1993, and 1992, has been as follows: 1993--61.4%, and 1992--41.6%. For the years 1993, 1992, and 1991, the total brokerage commissions paid by the New Asia Fund, including the discounts received by securities dealers in connection with underwritings, were $6,642,000, $1,757,000, and $794,000, respectively. Of these commissions, approximately 72%, 64%, and 64%, respectively, were paid to firms which provided research, statistical, or other services to Price-Fleming in connection with the management of the Fund or, in some cases, to the Fund. The portfolio turnover rate of the New Asia Fund for each of the last three years has been as follows: 1993-40.4%, 1992--36.3%, and 1991-- 49.0%, respectively. For the years 1993, 1992, and 1991, the total brokerage commissions paid by the Foreign Equity Fund, including the discounts received by securities dealers in connection with underwritings, were $853,000, $563,000, PAGE 59 and $389,000, respectively. Of these commissions, approximately 79.0%, 87.0%, and 84.0%, respectively, were paid to firms which provided research, statistical, or other services to Price-Fleming in connection with the management of the Fund or, in some cases, to the Fund. The portfolio turnover rate of the Foreign Equity Fund for each of the last three years has been as follows: 1993--27.4%, 1992--35.1%, and 1991-- 46.7%. PRICING OF SECURITIES Equity securities listed or regularly traded on a securities exchange (including NASDAQ) are valued at the last quoted sales price at the time the valuations are made. A security which is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Other equity securities and those listed securities that are not traded on a particular day are valued at a price within the limits of the latest bid and asked prices deemed by the Board of Directors or by persons delegated by the Board, best to reflect fair value. Debt securities are generally traded in the over-the-counter market and are valued at a price deemed best to reflect fair value as quoted by dealers who make markets in these securities or by an independent pricing service. Short-term debt securities are valued at their cost in local currency which, when combined with accrued interest, approximates fair value. 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 a major bank. Assets and liabilities for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by or under the supervision of the officers of the Funds, 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, PAGE 60 other than the Japan 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 net asset value per share of the Japan Fund is calculated as of the close of trading on the NYSE each day the NYSE and the Tokyo Stock Exchange ("TSE") are both open. 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. The TSE is scheduled to be closed on the following week days in 1994: January 3; February 11; March 21; April 29; May 3, 4, 5; September 15, 23; October 10; November 3, 23; and December 23, as well as the following week days in 1995: January 2, 3, 16; March 21; May 3, 4, 5; September 15; October 10; and November 3, 23. If the TSE closes on any additional or different dates, the Japan Fund will be closed on such dates. 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, or in the case of the Japan Fund, either the NYSE or TSE is closed, (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. DIVIDENDS Unless you elect otherwise, dividends and capital gain distributions 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, the income dividend paid by the Funds will be decreased. Adjustments, to reflect these gains and losses will be made at the end of each Fund's taxable year. PAGE 61 At the time of your purchase, each Fund's net asset value may reflect undistributed income, capital gains or net unrealized appreciation or depreciation of securities held by each 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. Undistributed Net Realized Unrealized Fund Net Income Capital Gains Appreciation International Stock $22,022,000 $131,726,000 $598,128,000 International Discovery 361,000 23,231,000 42,930,000 European Stock (45,000) 5,175,000 34,689,000 Japan (86,000) 4,302,000 12,845,000 New Asia 4,570,000 170,946,000 10,351,000 Undistributed Net Realized Unrealized Fund Net Income Capital Gains Depreciation Latin America $ (193,000) $ 213,000 $18,638,000 Foreign Equity 3,718,000 13,846,000 2,683,000 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 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, if 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 PAGE 62 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 may 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 "International Corporation") was 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 Institutional International Funds, Inc. (the "Institutional Corporation") was organized in 1989, as a Maryland corporation. Each 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." Currently, the International 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 Short- Term Global Income, Global Government Bond and International Bond Funds are described in a separate Statement of Additional Information. Currently, the Institutional Corporation consists of one series, which was added in 1990 to the Corporation. Each Charter also provides that the Board of Directors may issue additional series of shares. Each 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 PAGE 63 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 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 PAGE 64 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 Stock, International Discovery, European Stock, Japan and Latin America Funds Price Waterhouse, 7 St. Paul Street, Suite 1700, Baltimore, Maryland 21202, are independent accountants to each Fund. The financial statements of the International Stock, International Discovery, European Stock, and Japan Funds for the ten months ended October 31, 1993, and the report of independent accountants are included in each Fund's Annual Report for the ten months ended October 31, 1993, on pages 9-21, 7-21, 5-15, and 5- 12, 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 ten months ended October 31, 1993, are incorporated into this Statement of Additional Information by reference: International International Stock Fund Discovery Fund Annual Report Annual Report Page Page ______________________________ Report of Independent Accountants 21 21 Statement of Net Assets, October 31, 1993 9-14 7-14 Statement of Operations, ten months ended October 31, 1993 15 15 Statement of Changes in Net Assets, ten months ended October 31, 1993 and the years ended December 31, 1992 and December 31, 1991 1616 Notes to Financial Statements October 31, 1993 17-19 17-19 Financial Highlights 20 19 PAGE 65 European Stock Fund Annual Report Page _____________ Report of Independent Accountants 15 Statement of Net Assets, October 31, 1993 5-9 Statement of Operations, ten months ended October 31, 1993 and year ended December 31, 1992 10 Statement of Changes in Net Assets, ten months ended October 31, 1993 and years ended December 31, 1992 and December 31, 1991 11 Notes to Financial Statements, October 31, 1993 12-13 Financial Highlights 14 Japan Fund Annual Report Page _____________ Report of Independent Accountants 12 Statement of Net Assets, October 31, 1993 5-6 Statement of Operations, ten months ended October 31, 1993 and December 30, 1991 (Commencement of Operations) to December 31, 1992 7 Statement of Changes in Net Assets, ten months ended October 31, 1993 and December 30, 1991 (Commencement of Operations) to December 31, 1992 8 Notes to Financial Statements, October 31, 1993 9-10 Financial Highlights, ten months ended October 31, 1993 December 30, 1991 (Commencement of Operations) to December 31, 1992 11 New Asia and Foreign Equity Funds Coopers & Lybrand, 217 East Redwood Street, Baltimore, Maryland 21202, are independent accountants to the Fund. The financial statements of the New Asia and Foreign Equity Funds for the ten months ended October 31, 1993, and the report of independent accountants are included in each Fund's Annual Report for the ten months ended October 31, 1993, on pages 9-15 and 4- 18, 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 ten months ended October 31, 1993, are incorporated into this Statement of Additional Information by reference: PAGE 66 New Asia Foreign Fund Equity Annual Annual Report Page Report Page ___________ ___________ Report of Independent Accountants 15 18 Statement of Net Assets, October 31, 1993 9 3-12 Statement of Operations, ten months ended October 31, 1993 and year ended December 31, 1992 10 13 Statement of Changes in Net Assets, ten months ended October 31, 1993 and years ended December 31, 1992 and December 31, 1991 11 14 Notes to Financial Statements, October 31, 1993 12-13 15-16 Financial Highlights 13 17 PAGE 67 APPENDIX A Chart 1 Bar graph appears here comparing small companies of the U.S., Japan, U.K., and the U.S. to large companies in the same countries for the years 12/31/83 to 12/31/93. 9.71 15.11 18.06 18.56 10.78 14.92 Japan-Small Japan-Large U.K.-Small U.K.-Large U.S.-Small U.S.-Large Chart 2 A line graph with the vertical axis representing percent return+ ranging from - 0 to 3,000 for the Japan Topix and 0 to 200 for U.S. S&P 500 and the horizontal axis indicating periods ended December 31 from 1981 to 1993. The Topix Index hovers around 600 from 12/81 to 12/82, followed by increases to approximately 2,800 during 1989, and then declines to 1,600 during 1993. The S&P 500 hovers around 30 from 12/81 thru 12/82 then steadily increases to 2,500 as of 12/93. The chart is for illustrative purposes only and should not be considered representative of an investment in the Fund or of the Fund's performance. Chart 3 The following is a line graph depicting the following plot points: IFCI Composite 100 in January, 1989 and climbs steadily to 200 in June, 1990 then declines to 150 in January, 1991 then increases to 250 by May, 1992, then drops to 220 in September, 1992, and climbs steadily to 240 in January, 1993. IFCI Latin America 100 drops to 98 in January, 1989 and climbs steadily to 575 in June, 1992 then declines to 425 in November, 1992 then increases to 500 by March, 1993. IFCI Asia 100 climbs to 170 in July, 1990 then declines to 130 in September, 1991 then climbs steadily to 170 by March, 1993. IFCI Europe/Mideast 100 steadily climbs to 330 in July, 1990 then declines to 200 in December, 1990 then climbs to 240 in February, 1991 and slowly declines to 99 in October, 1992 and slowly climbs to 130 in January, 1993 and then drops to 120 in March, 1993. S&P 500 fluctuates between 130 to 150 up to December, 1992 then steadily climbs to 190 in March, 1993. EAFE 100 climbs to 110 in January, 1990, then drops to 90 in March, 1990 and climbs to 100 in June, 1990 and then declines 80 to 90 through March, 1993. *IFCI represents International Finance Corp. Index The chart is intended to represent an investment of $100 in each of the indices at the beginning on 1989 and the investments ending value as of March, 1993. -----END PRIVACY-ENHANCED MESSAGE-----