<PAGE>

 PROSPECTUS
                                                                    July 1, 2000
Tax-Exempt Money Fund
Tax-Free Short-Intermediate Fund
Tax-Free Intermediate Bond Fund
Tax-Free Income Fund
Tax-Free High Yield Fund

 A family of money and municipal bond funds for investors seeking income exempt
 from federal income taxes.

TROWEPRICERAMLOGO
 The Securities and Exchange Commission has not approved or disapproved these
 securities or passed upon the adequacy of this prospectus. Any representation
 to the contrary is a criminal offense.
<PAGE>

T. Rowe Price Tax-Free Funds
  Tax-Exempt Money Fund
  Tax-Free Short-Intermediate Fund
  Tax-Free Intermediate Bond Fund
  Tax-Free Income Fund
  Tax-Free High Yield Fund
Prospectus

July 1, 2000

<TABLE>
<CAPTION>
<S>      <C>  <C>                                       <C>
1             ABOUT THE FUNDS
              Objective, Strategy, Risks, and Expenses      1
              -----------------------------------------------
              Other Information About the Funds             8
              -----------------------------------------------
              Some Characteristics of Municipal             9
              Securities
              -----------------------------------------------
              Some Basics of Fixed Income Investing        11
              -----------------------------------------------

2             ABOUT YOUR ACCOUNT
              Pricing Shares and Receiving                 14
              Sale Proceeds
              -----------------------------------------------
              Distributions and Taxes                      15
              -----------------------------------------------
              Transaction Procedures and                   18
              Special Requirements
              -----------------------------------------------

3             MORE ABOUT THE FUNDS
              Organization and Management                  21
              -----------------------------------------------
              Understanding Performance Information        23
              -----------------------------------------------
              Investment Policies and Practices            24
              -----------------------------------------------
              Financial Highlights                         35
              -----------------------------------------------

4             INVESTING WITH T. ROWE PRICE
              Account Requirements                         40
              and Transaction Information
              -----------------------------------------------
              Opening a New Account                        40
              -----------------------------------------------
              Purchasing Additional Shares                 41
              -----------------------------------------------
              Exchanging and Redeeming                     42
              -----------------------------------------------
              Rights Reserved by the Funds                 43
              -----------------------------------------------
              Information About Your Services              44
              -----------------------------------------------
              T. Rowe Price Brokerage                      46
              -----------------------------------------------
              Investment Information                       47
              -----------------------------------------------
</TABLE>


 Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc., and its affiliates managed $185.2 billion, including over $7 billion in
municipal bond assets, for more than eight million individual and institutional
investor accounts as of March 31, 2000.
 Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other government agency, and are subject to investment risks, including
possible loss of the principal amount invested.
<PAGE>

 ABOUT THE FUNDS
 OBJECTIVE, STRATEGY, RISKS, AND EXPENSES
 ----------------------------------------------------------
   To help you decide whether these funds are appropriate for you, this section
   reviews their major characteristics.


 What is each fund's objective?

   The Tax-Exempt Money Fund seeks to provide preservation of capital, liquidity
   and, consistent with these objectives, the highest current income exempt from
   federal income taxes.

   The Tax-Free Short-Intermediate Fund seeks to provide, consistent with modest
   price fluctuation, a high level of income exempt from federal income taxes by
   investing primarily in short- and intermediate-term investment-grade
   municipal securities.

   The Tax-Free Intermediate Bond Fund seeks to provide a high level of income
   exempt from federal income taxes consistent with moderate price fluctuation
   by investing primarily in municipal securities.

   The Tax-Free Income Fund seeks to provide a high level of income exempt from
   federal income taxes by investing primarily in long-term investment-grade
   municipal securities.

   The Tax-Free High Yield Fund seeks to provide a high level of income exempt
   from federal income taxes by investing primarily in long-term low- to
   upper-medium-grade municipal securities.


 What is each fund's principal investment strategy?

<TABLE>

 Table 1  Differences Among Funds
<CAPTION>
                                                                    Expected
                                                                    share price   Expected average
  Fund                 Credit-quality categories         Income*    fluctuation   maturity
 ---------------------
 <S>                  <C>                               <C>        <C>           <C>
  Money                Two highest                       Low        Stable        90 days or less

  Short-Intermediate   Predominately four highest        Low to     Low to        2 to 5 years
                                                         moderate   moderate

  Intermediate         Two highest                       Moderate   Moderate      5 to 10 years

  Income               Predominately four highest        Moderate   Higher        Over 15 years

  High Yield           Generally low-quality to          High       Higher        Over 15 years
                       upper-medium quality
 ---------------------------------------------------------------------------------------------------
</TABLE>


 * relative to each other
<PAGE>


T. ROWE PRICE                                 2
   The Tax-Exempt Money Fund invests in municipal securities that mature in 397
   days or less. The fund's weighted average maturity will not exceed 90 days.
   While the fund's yield will fluctuate with changes in interest rates, its
   share price is managed to remain stable at $1.00. The fund buys securities
   within the two highest money market categories as rated by established
   agencies or, if unrated, by T. Rowe Price. All securities in the fund present
   minimal credit risks, in T. Rowe Price's opinion.

   The Tax-Free Short-Intermediate Fund invests primarily in short- and
   intermediate-term municipal securities. Its weighted average maturity
   normally ranges from two to five years and is not expected to exceed five
   years. The fund generally buys investment-grade securities, which means their
   ratings are within the four highest credit categories (AAA, AA, A, BBB) as
   determined by a national rating organization or, if unrated, by T. Rowe
   Price. The fund may invest up to 5% of assets in below-investment-grade
   securities with ratings of BB (or the T. Rowe Price equivalent).

   The Tax-Free Intermediate Bond Fund invests in investment-grade tax-exempt
   securities. There are no maturity limitations on individual securities, but
   the fund's weighted average maturity will normally range between five and ten
   years. The fund buys investment-grade securities, which means their ratings
   are within the four highest credit categories (AAA, AA, A, BBB) as determined
   by a national rating organization or, if unrated, by T. Rowe Price.

   The Tax-Free Income Fund invests primarily in long-term investment-grade
   municipal securities, and its weighted average maturity is expected to exceed
   15 years. The fund may invest up to 5% of assets in below-investment-grade
   securities, including those with the lowest rating or, if unrated, believed
   by T. Rowe Price to be noninvestment grade.

   The Tax-Free High Yield Fund invests a substantial portion of assets in
   below-investment-grade municipal or "junk" bonds and may buy bonds in default
   as long as they do not exceed 10% of assets. The fund's weighted average
   maturity is expected to exceed 15 years.

   All Funds

   In selecting securities for the money fund, the fund manager may examine
   relationships among yields of various types and maturities of money market
   securities in the context of the outlook for interest rates. Similarly,
   investment decisions for the bond funds reflect the managers' outlook for
   interest rates and the economy as well as the prices and yields of various
   securities. This approach is designed to help the manager capture
   appreciation opportunities when rates are falling and reduce the impact of
   falling prices when rates are rising. For example, if we expect rates to
   fall, we may buy longer-term securities within each fund's maturity range to
   provide higher yield (and, in the case of the bond
<PAGE>


ABOUT THE FUNDS                               3
   funds, greater appreciation potential). Conversely, shorter maturities may be
   favored if rates are expected to rise. In addition, if our economic outlook
   is positive, we may take advantage of the bond fund's "basket" for
   noninvestment-grade bonds. From time to time, a fund may invest a significant
   portion of its assets in municipal bonds of certain sectors with special
   risks, such as hospital, electric utility, or private activity bonds. The
   funds may sell holdings for a variety of reasons, such as to adjust the
   portfolio's average maturity or quality or to shift assets into
   higher-yielding securities.

   While most assets will be invested in municipal securities, other securities
   may also be purchased, including derivatives such as futures, in keeping with
   fund objectives.


 What are the main risks of investing in the funds?

   Any of the following could cause a decline in a fund's price or income.

  . Interest rate risk  This risk refers to the decline in bond prices that
   accompanies a rise in the overall level of interest rates. (Bond prices and
   interest rates move in opposite directions.) Generally, the longer the
   maturity of a fund or security, the greater its interest rate risk. This risk
   is minimal for the money fund.

   While a rise in rates is the principal source of interest rate risk for bond
   funds, falling rates bring the possibility that a bond may be "called," or
   redeemed before maturity, and that the proceeds may be reinvested in
   lower-yielding securities.

  . Credit risk  This is the chance that any of a fund's holdings will have its
   credit rating downgraded or will default (fail to make scheduled interest or
   principal payments), potentially reducing the fund's income level and share
   price. This risk is reduced for the money fund because of the high-rated
   securities in its portfolio. On the other hand, the Tax-Free High Yield Fund
   is most exposed to this risk because of its high component of
   noninvestment-grade bonds, which carry a greater risk of default.
   Lower-quality municipals are vulnerable to real or perceived changes in the
   business climate and can be less liquid and more volatile.

   While generally considered to be of medium quality, securities in the BBB
   category are more susceptible to adverse economic or investing conditions,
   and some BBB securities have speculative characteristics. The funds may
   retain a security whose credit quality is downgraded after purchase.

  . Political risk  This is the chance that a significant restructuring of
   federal income tax rates, or even serious discussion on the topic in
   Congress, could cause municipal bond prices to fall. The demand for municipal
   securities is strongly influenced by the value of tax-exempt income to
   investors. Broadly lower income tax rates could reduce the advantage of
   owning municipals.
<PAGE>


T. ROWE PRICE                                 4
  . Other risks  Bonds of certain sectors have special risks. For example, the
   health care industry can be affected by federal or state legislation,
   electric utilities are subject to governmental regulation, and private
   activity bonds are not government backed.

  . Derivatives risk (bond funds)  To the extent each fund uses these
   instruments, it may be exposed to additional volatility and potential losses.

  . Risks of the money fund  An investment in the money market fund is not
   insured or guaranteed by the FDIC or any other government agency. Although
   the fund seeks to preserve the value of your investment at $1.00 per share,
   it is possible to lose money by investing in the fund. For example, a sharp
   and unexpected rise in interest rates in an unusually short period of time or
   the default of a portfolio security could cause the fund's NAV to fall below
   $1.00. However, the fund has maintained a constant share price since its
   inception, and the fund manager will make every effort to continue to meet
   this objective.

   As with any mutual fund, there can be no guarantee the funds will achieve
   their objectives.

  . The yield of each fund will fluctuate with changing market conditions and
   interest rate levels. The bond funds'  share prices will fluctuate as
   interest rates change, so when you sell your shares, you may lose money.


 How can I tell which fund is most appropriate for me?

   Consider your investment goals, your time horizon for achieving them, and
   your tolerance for risk. The funds can be used to generate income or to
   diversify a stock portfolio. The higher your tax bracket, the more likely
   tax-exempt securities are appropriate. If you are investing for maximum
   tax-free income and can accept sharp price declines in an effort to achieve
   income exempt from federal income taxes and capital appreciation, the High
   Yield Fund could be an appropriate part of your overall investment strategy.
   If you are looking for high income with less volatility and risk, the Income
   Fund may be more appropriate. If you seek moderate income with still less
   volatility, the Intermediate Fund could be the proper choice. If you are
   seeking more income than a money fund offers with low volatility, the
   Short-Intermediate Fund would be a possibility. Finally, if you are investing
   for principal stability and liquidity, you should consider the money market
   fund.

   The funds are inappropriate for tax-deferred accounts, such as IRAs.

  . The fund or funds you select should not represent your complete investment
   program or be used for short-term trading purposes.
<PAGE>


ABOUT THE FUNDS                               5
 How has each fund performed in the past?

   The bar charts showing calendar year returns and the average annual total
   return table indicate risk by illustrating how much returns can differ from
   one year to the next and over time. Fund past performance is no guarantee of
   future returns.

   The funds can also experience short-term performance swings, as shown by the
   best and worst calendar quarter returns during the years depicted in the
   charts.



<TABLE>
<CAPTION>
                                               Calendar Year Total Returns
         Fund            "90"   "91"    "92"   "93"    "94"    "95"    "96"   "97"    "98"   "99"
 --------------------------------------------------------------------------------------------------------
 <S>               <S>  <C>    <C>     <C>    <C>     <C>     <C>     <C>    <C>     <C>    <C>     <S>
  Tax-Exempt
  Money                 5.38    3.89   2.53    2.01    2.46    3.40   3.05    3.24   3.08   2.83
  Tax-Free
  Short-Intermediate    6.04    7.88   6.02    6.32    0.33    8.11   4.01    5.30   4.97   0.99
  Tax-Free
  Intermediate
  Bond                    --      --     --   12.66   -2.62   13.00   4.15    7.24   5.72   -1.26
  Tax-Free Income       5.85   12.18   9.38   12.77   -5.47   17.69   3.27    9.33   5.98   -3.91
  Tax-Free High         7.11   11.74   9.56   12.97   -4.39   16.60   4.98   10.17   5.55   -5.10
  Yield
 --------------------------------------------------------------------------------------------------------
</TABLE>



 Tax-Exempt Money         Quarter ended Total return

 Best quarter   12/31/90  1.37%

 Worst quarter  3/31/93   0.45%



 Tax-Free Short-Intermediate Quarter ended Total return

 Best quarter   3/31/95   2.67%

 Worst quarter  3/31/94   -1.25%



 Tax-Free Intermediate Bond Quarter ended Total return

 Best quarter   3/31/95   5.01%

 Worst quarter  3/31/94   -3.79%



 Tax-Free Income Quarter ended Total return

 Best quarter   3/31/95   6.85%

 Worst quarter  3/31/94   -5.70%



 Tax-Free High Yield      Quarter ended Total return

 Best quarter   3/31/95   6.15%

 Worst quarter  3/31/94   -4.28%



 The Tax-Exempt Money Fund's return for the 3 months ended 3/31/00 was 0.79%.

 The Tax-Free Short-Intermediate Fund's return for the 3 months ended 3/31/00
   was 1.06%.

 The Tax-Free Intermediate Bond Fund's return for the 3 months ended 3/31/00 was
   1.84%.

 The Tax-Free Income Fund's return for the 3 months ended 3/31/00 was 3.27%.

 The Tax-Free High Yield Fund's return for the 3 months ended 3/31/00 was 2.05%.

<PAGE>


T. ROWE PRICE                                 6
<TABLE>
 Table 2  Average Annual Total Returns
<CAPTION>
                           Periods ended December 31, 1999
                                          Shorter of 10 years
                         1 year  5 years  or since inception    Inception date
 ------------------------
 <S>                     <C>     <C>      <C>                  <S>
  Tax-Exempt Money Fund   2.83%   3.12%          3.18%             4/08/80
  Lipper Tax-Exempt
  Money Market Funds
  Average                 2.68    3.03           3.17
  Lipper Tax-Exempt
  Money Market Funds
  Index                   2.81    3.13           3.27

  Tax-Free
  Short-Intermediate
  Fund                    0.99    4.65           4.97              12/23/83
  Lehman Brothers 3
  Year General
  Obligation Municipal
  Bond Index              1.92    5.16           5.62
  Lipper
  Short-Intermediate
  Municipal Debt Funds
  Average                 0.31    4.41           5.17
  Lipper Short
  Intermediate
  Municipal Debt Funds
  Index                   0.71    4.58             --

  Tax-Free Intermediate
  Bond Fund              -1.26    5.67           5.54              11/30/92
  Lehman Brothers 7
  Year Municipal Bond
  Index                  -0.14    6.35           5.62
  Lipper Intermediate
  Municipal Debt Funds
  Average                -1.65    5.55           5.14
  Lipper Intermediate
  Municipal Debt Funds   -1.37    5.59           4.91
  Index
 ------------------------------------------------------------------------------
</TABLE>







<TABLE>
 Average Annual Total Returns (continued)
<CAPTION>
 <S>                     <C>     <C>      <C>                  <C>
                           Periods ended December 31, 1999


                                                                Inception date
  Tax-Free Income Fund   -3.91    6.23           6.48             10/26/76
  Lehman Brothers
  Municipal Bond Index   -2.06    6.91           6.89
  Lipper General
  Municipal Debt Funds
  Average                -4.63    5.76           6.18
  Lipper General
  Municipal Bond Index   -4.07    6.14           6.29

  Tax-Free High Yield
  Fund                   -5.10    6.20           6.70             3/01/85
  Lehman Brothers
  Revenue Bond Index     -2.26    7.24           7.17
  Lipper High Yield
  Municipal Debt Funds
  Average                -4.16    6.06           6.14
  Lipper High Yield
  Municipal Debt Funds   -3.65    6.23           6.24
  Index
 ------------------------------------------------------------------------------
</TABLE>



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


ABOUT THE FUNDS                               7
 Lehman indices do not reflect the deduction of any fees or expenses.


 What fees or expenses will I pay?

   The funds are 100% no load. There are no fees or charges to buy or sell fund
   shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
   are no 12b-1 fees.


<TABLE>
 Table 3  Fees and Expenses of the Funds
<CAPTION>
                                                 Annual fund operating expenses
                                          (expenses that are deducted from fund assets)
                                         Management       Other       Total annual fund
  Fund                                       fee        expenses     operating expenses
 ------------------------------------------------------------------------------------------
 <S>                                    <C>            <C>          <C>                    <S>
  Tax-Exempt Money                          0.42%         0.11%             0.53%
                                        ---------------------------------------------------
  Tax-Free Short-Intermediate               0.42          0.11              0.53
                                        ---------------------------------------------------
  Tax-Free Intermediate Bond                0.37          0.26              0.63
                                        ---------------------------------------------------
  Tax-Free Income                           0.47          0.08              0.55
                                        ---------------------------------------------------
  Tax-Free High Yield                       0.62          0.09              0.71
 -----------------------------------------------------------------------------------------------
</TABLE>


   Example.  The following table gives you a rough idea of how expense ratios
   may translate into dollars and helps you to compare the cost of investing in
   these funds with that of other mutual funds. Although your actual costs may
   be higher or lower, the table shows how much you would pay if operating
   expenses remain the same, you invest $10,000, earn a 5% annual return, and
   hold the investment for the following periods and then redeem:
<PAGE>


T. ROWE PRICE                                 8
<TABLE>
<CAPTION>
  Fund                         1 year  3 years  5 years  10 years
 -----------------------------------------------------------------------
 <S>                           <C>     <C>      <C>      <C>       <S>

  Tax-Exempt Money              $54     $170     $296      $665
                               ------------------------------------
  Tax-Free Short-Intermediate    54      170      296       665
                               ------------------------------------
  Tax-Free Intermediate Bond     64      202      351       786
                               ------------------------------------
  Tax-Free Income                56      176      307       689
                               ------------------------------------
  Tax-Free High Yield            73      227      395       883
 -----------------------------------------------------------------------
</TABLE>




 OTHER INFORMATION ABOUT THE FUNDS
 ----------------------------------------------------------

 What are the funds' potential rewards?

   The regular income dividends you receive from the funds should be exempt from
   federal income taxes.

   The Tax-Exempt Money Fund is expected to provide a high level of tax-free
   income consistent with price stability.

   The Tax-Free Short-Intermediate Fund is the most conservative of the four
   bond funds; its price fluctuation should be modest and its income should be
   higher than the money fund's but lower than the other bond funds.

   The Tax-Free Intermediate Bond Fund should provide higher income and
   volatility than the Short-Intermediate Fund but less than the other bond
   funds.

   The Tax-Free Income Fund should provide higher income and volatility than the
   funds with shorter maturities as well as the potential for capital
   appreciation. It may take on additional interest rate risk in achieving its
   objective, but will seek to cushion losses from rising interest rates.

   The Tax-Free High Yield Fund is the most aggressive of these funds. Its
   income should be the highest because the average credit quality of its
   holdings is lowest.


 How does the portfolio manager try to reduce risk?

   Consistent with each fund's objective, the portfolio manager uses various
   tools to try to reduce risk and increase total return, including:

  . Diversification of assets to reduce the impact of a single holding or sector
   on a fund's net asset value.

  . Thorough credit research by our own analysts.

  . Adjustment of fund duration to try to reduce the drop in price when interest
   rates rise or to benefit from the rise in price when rates fall. Duration is
   a measure of a fund's sensitivity to interest rate changes.
<PAGE>


ABOUT THE FUNDS                               9
 What are derivatives and can each fund invest in them?

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

   Each fund will invest in derivatives only if the expected risks and rewards
   are consistent with its objective, policies, and overall risk profile as
   described in this prospectus. The money fund does not invest in high-risk,
   highly leveraged derivatives. The bond funds use derivatives in situations in
   which they may enable the funds to accomplish the following: increase yield;
   hedge against a decline in principal value; invest in eligible asset classes
   with greater efficiency and lower cost than is possible through direct
   investment; or adjust portfolio duration.

   The bond funds will not invest in any high-risk, highly leveraged derivative
   instrument that is expected to cause the price volatility of the portfolio to
   be meaningfully different from that of 1) a five-year investment-grade bond
   for the Short-Intermediate Fund; 2) a 5- to 10-year investment-grade bond for
   the Intermediate Bond Fund; or, 3) a long-term (over 15-year maturity)
   investment-grade bond for the Income and High Yield Funds.


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

   Investment Policies and Practices in Section 3 discusses various types of
   portfolio securities the funds may purchase as well as types of management
   practices the funds may use.



 SOME CHARACTERISTICS OF MUNICIPAL SECURITIES
 ----------------------------------------------------------

 Who issues municipal securities?

   State and local governments and governmental authorities sell notes and bonds
   (usually called "municipals") to pay for public projects and services.
<PAGE>


T. ROWE PRICE                                 10
 Who buys municipal securities?

   Individuals are the primary investors, and a principal way they invest is
   through mutual funds. Prices of municipals may be affected by major changes
   in cash flows of money into or out of municipal funds. For example,
   substantial and sustained redemptions from municipal bond funds could result
   in lower prices for these securities.


 What is tax-free about municipals and municipal funds?

   The regular income dividends you receive should be exempt from regular
   federal income taxes. A portion of these dividends may also be exempt from
   your state's income tax (if any). However, fund capital gain distributions
   are taxable to you. (See Useful Information on Distributions and Taxes for
   details.)

  . Municipal securities are also called "tax-exempts" because the interest
   income they provide is usually exempt from federal income taxes.


 Is interest income from municipal issues always exempt from federal taxes?

   No. Since 1986 income from so-called "private activity" municipals has been
   subject to the federal alternative minimum tax (AMT). For instance, some
   bonds financing airports, stadiums, and student loan programs fall into this
   category. These bonds carry higher yields than regular municipals.
   Shareholders subject to the AMT must include income derived from private
   activity bonds in their AMT calculation. Relatively few taxpayers are
   required to pay the tax. Normally, each fund will not purchase a security if,
   as a result, more than 20% of the fund's income would be subject to the AMT.
   The portion of income subject to the AMT will be reported annually to
   shareholders. (Please see Distributions and Taxes -Taxes on Fund
   Distributions.)

   Additionally, under highly unusual circumstances, the IRS may determine that
   a bond issued as tax-exempt should in fact be taxable. If a fund were to hold
   such a bond, it might have to distribute taxable income or reclassify as
   taxable income previously distributed as tax-free.


 Why are yields on municipals usually below those on otherwise comparable
 taxable securities?

   Since the income provided by most municipals is exempt from federal taxation,
   investors are willing to accept lower yields on a municipal bond than on an
   otherwise similar (in quality and maturity) taxable bond.


 How can I tell if a tax-free or taxable fund is suitable for me?

   The primary factor is your expected federal income tax rate. The higher your
   tax bracket, the more likely tax-exempts will be appropriate. If a municipal
   fund's tax-exempt yield is higher than the after-tax yield on a taxable bond
   or money fund, then your income will be higher in the municipal fund. To find
   what a
<PAGE>


ABOUT THE FUNDS                               11
   taxable fund would have to yield to equal the yield on a municipal fund,
   divide the municipal fund's yield by one minus your tax rate. For quick
   reference, the next table shows a range of taxable-equivalent yields.


<TABLE>
 Table 4  Taxable-Equivalent Yields
<CAPTION>
  If your                                    A tax-free yield of
  federal tax                       2%     3%     4%     5%     6%     7%
  rate is:                               Equals a taxable yield of:
 <S>                               <C>    <C>    <C>    <C>    <C>    <C>    <S>
  28%                              2.8%   4.2%   5.6%   6.9%   8.3%    9.7%
                                   ------------------------------------------
  31%                              2.9    4.3    5.8    7.2    8.7    10.1
                                   ------------------------------------------
  36%                              3.1    4.7    6.2    7.8    9.4    10.9
                                   ------------------------------------------
  39.6%                            3.3    5.0    6.6    8.3    9.9    11.6
 ---------------------------------------------------------------------------------
</TABLE>




 SOME BASICS OF FIXED INCOME INVESTING
 ----------------------------------------------------------

 Is a fund's yield fixed or will it vary?

   It will vary. The yield is calculated every day by dividing a fund's net
   income per share, expressed at annual rates, by the share price. Since both
   income and share price will fluctuate, a fund's yield will also vary.
   (Although money fund prices are stable, income is variable.)


 Is yield the same as total return?

   Not for bond funds. The total return reported for a fund is the result of
   reinvested distributions (income and capital gains) and the change in share
   price for a given time period. Income is always a positive contributor to
   total return and can enhance a rise in share price or serve as an offset to a
   drop in share price. Since money funds are managed to maintain a stable share
   price, their yield and total return should be the same.


 What is credit quality and how does it affect yield?

   Credit quality refers to a bond issuer's expected ability to make all
   required interest and principal payments on time. Because highly rated
   issuers represent less risk, they can borrow at lower interest rates than
   less creditworthy issuers. Therefore, a fund investing in high-quality
   securities should have a lower yield than an otherwise comparable fund
   investing in lower-quality securities.
<PAGE>


T. ROWE PRICE                                 12
 What is meant by a bond fund's maturity?

   Every bond has a stated maturity date when the issuer must repay the bond's
   entire principal value to the investor. However, many bonds are "callable,"
   meaning their principal can be repaid earlier, on or after specified call
   dates. Bonds are most likely to be called when interest rates are falling
   because the issuer can refinance at a lower rate, just as a homeowner
   refinances a mortgage. In that environment, a bond's "effective maturity" is
   usually its nearest call date.

   A bond mutual fund has no real maturity, but it does have a weighted average
   maturity and a weighted average effective maturity. This number is an average
   of the stated or effective maturities of the underlying bonds, with each
   bond's maturity "weighted" by the percentage of fund assets it represents.
   Some funds target effective maturities rather than stated maturities when
   computing the average. This provides additional flexibility in portfolio
   management.


 What is meant by a bond fund's duration?

   Duration is a calculation that seeks to measure the price sensitivity of a
   bond or a bond fund to changes in interest rates. It is expressed in years,
   like maturity, but it is a better indicator of price sensitivity than
   maturity because it takes into account the time value of cash flows generated
   over the bond's life. Future interest and principal payments are discounted
   to reflect their present value and then are multiplied by the number of years
   they will be received to produce a value expressed in years - the duration.
   "Effective" duration takes into account call features and sinking fund
   payments that may shorten a bond's life.

   Since duration can also be computed for bond funds, you can estimate the
   effect of interest rates on share price by multiplying fund duration by an
   expected change in interest rates. For example, the price of a bond fund with
   a duration of five years would be expected to fall approximately 5% if rates
   rose by one percentage point. (T. Rowe Price shareholder reports show
   duration.)


 How is a municipal's price affected by changes in interest rates?

   When interest rates rise, a bond's price usually falls, and vice versa. In
   general, the longer a bond's maturity, the greater the price increase or
   decrease in response to a given change in rates, as shown in Table 5.
<PAGE>


ABOUT THE FUNDS                               13
<TABLE>
 Table 5  How Interest Rates May Affect Bond Prices
<CAPTION>
                                  Price per $1,000 of a Municipal Bond if Interest Rates:
                                     Rates                        Rates
  Bond maturity          Coupon     Increase                     Decrease
                                       1%            2%             1%             2%
 <S>             <S>    <S>      <C>             <C>          <C>             <C>           <S>
  1 year          2001   4.30%        $990          $981          $1,010         $1,020
                                 -----------------------------------------------------------
  3 years         2003   4.86          973           947           1,028          1,057
                                 -----------------------------------------------------------
  5 years         2005   4.96          957           917           1,045          1,092
                                 -----------------------------------------------------------
  10 years        2010   5.16          926           859           1,081          1,170
                                 -----------------------------------------------------------
  20 years        2020   5.69          891           797           1,129          1,281
                                 -----------------------------------------------------------
  30 years        2030   5.80          873           769           1,158          1,356
 ------------------------------------------------------------------------------------------------
</TABLE>


 The table reflects yields on AAA-rated municipals as of April 30, 2000. This is
 an illustration and does not represent expected yields or share price changes
 of any T. Rowe Price fund.


 What are the major differences between money market and bond funds?

  . Maturity  Short- and intermediate-term bond funds have longer average
   maturities (from one to 10 years) than money market funds (90 days or less).
   Longer-term bond funds have the longest average maturities (10 years or
   more).

  . Price  Bond funds have fluctuating share prices. Money market funds are
   managed to maintain a stable share price.

  . Income  Short- and intermediate-term bond funds typically offer more income
   than money market funds and less income than longer-term bond funds.


 Do money market securities react to changes in interest rates?

   Yes. As interest rates change, the prices of money market securities
   fluctuate, but changes are usually small because of their very short
   maturities. Investments are typically held until maturity in a money fund to
   help the fund maintain a $1.00 share price.
<PAGE>

 ABOUT YOUR ACCOUNT
 PRICING SHARES AND RECEIVING SALE PROCEEDS
 ----------------------------------------------------------
   Here are some procedures you should know when investing in a T. Rowe Price
   fund.


 How and when shares are priced

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

  . The various ways you can buy, sell, and exchange shares are explained at the
   end of this prospectus and on the New Account Form. These procedures may
   differ for institutional accounts.


 How your purchase, sale, or exchange price is determined

   If we receive your request in correct form by 4 p.m. ET, your transaction
   will be priced at that day's NAV. If we receive it after 4 p.m., it will be
   priced at the next business day's NAV.

   We cannot accept orders that request a particular day or price for your
   transaction or any other special conditions.

   Fund shares may be purchased through various third-party intermediaries
   including banks, brokers, and investment advisers. Where authorized by a
   fund, orders will be priced at the NAV next computed after receipt by the
   intermediary. Consult your intermediary to determine when your orders will be
   priced. The intermediary may charge a fee for its services.

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


 How you can receive the proceeds from a sale

  . When filling out the New Account Form, you may wish to give yourself the
   widest range of options for receiving proceeds from a sale.

   If your request is received by 4 p.m. ET in correct form, proceeds are
   usually sent on the next business day. Proceeds can be sent to you by mail or
   to your bank account by Automated Clearing House (ACH) transfer or bank wire.
   ACH is an automated method of initiating payments from, and receiving
   payments in,
<PAGE>


ABOUT THE FUNDS                               15
   your financial institution account. The ACH system is supported by over
   20,000 banks, savings banks, and credit unions. Proceeds sent by ACH transfer
   should be credited the second business day after the sale. Proceeds sent by
   bank wire should be credited to your account the first business day after the
   sale.

  . Exception:  Under certain circumstances and when deemed to be in a fund's
   best interest, your proceeds may not be sent for up to seven calendar days
   after we receive your redemption request.

  . If for some reason we cannot accept your request to sell shares, we will
   contact you.



 USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
 ----------------------------------------------------------
  . All net investment income and realized capital gains are distributed to
   shareholders.


 Dividends and Other Distributions

   Dividend and capital gain distributions are reinvested in additional fund
   shares in your account unless you select another option on your New Account
   Form. The advantage of reinvesting distributions arises from compounding;
   that is, you receive income dividends and capital gain distributions on a
   rising number of shares.

   Distributions not reinvested are paid by check or transmitted to your bank
   account via ACH. If the Post Office 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 NAV on the day of the
   reinvestment and to reinvest all subsequent distributions in shares of the
   fund. No interest will accrue on amounts represented by uncashed distribution
   or redemption checks.

   Income dividends
  . Money funds declare income dividends daily to shareholders of record as of
   12 noon ET on that day. Wire purchase orders received before 12 noon ET
   receive the dividend for that day. Other purchase orders receive the dividend
   on the next business day after payment has been received.

  . Bond funds declare income dividends daily at 4 p.m. ET to shareholders of
   record at that time provided payment has been received on the previous
   business day.

  . Dividends are ordinarily paid on the first business day of each month.
<PAGE>


T. ROWE PRICE                                 16
  . Fund shares will earn dividends through the date of redemption; also, shares
   redeemed on a Friday or prior to a holiday will continue to earn dividends
   until the next business day. Generally, if you redeem all of your shares at
   any time during the month, you will also receive all dividends earned through
   the date of redemption in the same check. When you redeem only a portion of
   your shares, all dividends accrued on those shares will be reinvested, or
   paid in cash, on the next dividend payment date.

   Capital gains
  . Since money funds are managed to maintain a constant share price, they are
   not expected to make capital gain distributions.

  . A capital gain or loss is the difference between the purchase and sale price
   of a security.

  . If a fund has net capital gains for the year (after subtracting any capital
   losses), they are usually declared and paid in December to shareholders of
   record on a specified date that month.


 Tax Information

  . You will be sent timely information for your tax filing needs.

   Although the regular monthly income dividends you receive from each fund are
   expected to be exempt from federal income taxes, you need to be aware of the
   possible tax consequences when:

  . You sell fund shares, including an exchange from one fund to another.

  . A fund makes a distribution to your account.

   Note: You must report your total tax-exempt income on IRS Form 1040. The IRS
   uses this information to help determine the tax status of any Social Security
   payments you may have received during the year. For shareholders who receive
   Social Security benefits, the receipt of tax-exempt interest may increase the
   portion of benefits that are subject to tax.

   If a fund invests in certain "private activity" bonds, shareholders who are
   subject to the alternative minimum tax (AMT) must include income generated by
   these bonds in their AMT computation. The portion of your fund's income that
   should be included in your AMT calculation, if any, will be reported to you
   in January.

   Taxes on fund redemptions
   When you sell shares in any fund, you may realize a gain or loss. An exchange
   from one fund to another is still a sale for tax purposes. If you realize a
   loss on the sale or exchange of fund shares held six months or less, your
   capital loss is reduced by the tax-exempt dividends received on those shares.
<PAGE>


ABOUT THE FUNDS                               17
   In January, you will be sent Form 1099-B indicating the date and amount of
   each sale you made in the fund during the prior year. This information will
   also be reported to the IRS. For most new accounts or those opened by
   exchange in 1984 or later, we will provide the gain or loss on the shares you
   sold during the year, based on the "average cost," single category method.
   This information is not reported to the IRS, and you do not have to use it.
   You may calculate the cost basis using other methods acceptable to the IRS,
   such as "specific identification."

   To help you maintain accurate records, we send you a confirmation immediately
   following each transaction you make (except for systematic purchases and
   redemptions) and a year-end statement detailing all your transactions in each
   fund account during the year.

   Taxes on fund distributions
   In January, you will be sent Form 1099-DIV indicating the tax status of any
   capital gain distributions made to you. This information will also be
   reported to the IRS. A fund's capital gain distributions are generally
   taxable to you for the year in which they were paid. Dividends are expected
   to be tax-exempt.

   The tax treatment of a capital gain distribution is determined by how long
   the fund held the portfolio securities, not how long you held shares in the
   fund. Short-term (one year or less) capital gain distributions are taxable at
   the same rate as ordinary income and long-term gains on securities held more
   than 12 months are taxed at a maximum rate of 20%. However, if you realized a
   loss on the sale or exchange of fund shares that you held six months or less,
   your short-term loss will be reclassified to a long-term loss to the extent
   of any long-term capital gain distribution received during the period you
   held the shares.

   A portion of the capital gains realized on the sale of market discount bonds
   with maturities beyond one year may be treated as ordinary income and cannot
   be offset by other capital losses. Therefore, to the extent each fund invests
   in these securities, the likelihood of a taxable gain distribution will be
   increased.

  . Distributions are taxable whether reinvested in additional shares or
   received in cash.

   Tax effect of buying shares before a capital gain distribution
   If you buy shares shortly before or on the "record date" -  the date that
   establishes you as the person to receive the upcoming distribution - you will
   receive a portion of the money you just invested in the form of a taxable
   distribution. Therefore, you may wish to find out a fund's record date before
   investing. Of course, a fund's share price may, at any time, reflect
   undistributed capital gains or income and unrealized appreciation, which may
   result in future taxable distributions.
<PAGE>


T. ROWE PRICE                                 18
 TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
 ----------------------------------------------------------
  . Following these procedures helps assure timely and accurate transactions.


 Purchase Conditions

   Nonpayment
   If you pay with a check or ACH transfer that does not clear or if your
   payment is not timely received, your purchase will be canceled. You will be
   responsible for any losses or expenses incurred by each fund or transfer
   agent, and the fund can redeem shares you own in this or another identically
   registered T. Rowe Price account as reimbursement. Each fund and its agents
   have the right to reject or cancel any purchase, exchange, or redemption due
   to nonpayment.

   U.S. dollars; type of check
   All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
   banks.


 Sale (Redemption) Conditions

   Holds on immediate redemptions: 10-day hold
   If you sell shares that you just purchased and paid for by check or ACH
   transfer, the funds will process your redemption but will generally delay
   sending you the proceeds for up to 10 calendar days to allow the check or
   transfer to clear. If your redemption request was sent by mail or mailgram,
   proceeds will be mailed no later than the seventh calendar day following
   receipt unless the check or ACH transfer has not cleared. If, during the
   clearing period, we receive a check drawn against your bond or money market
   account, it will be returned marked "uncollected." (The 10-day hold does not
   apply to purchases paid for by bank wire or automatic purchases through your
   paycheck.)

   Telephone, Tele*Access/(R)/, and personal computer transactions
   Exchange and redemption services through telephone and Tele*Access are
   established automatically when you sign the New Account Form unless you check
   the boxes that state you do not want these services. Personal computer
   transactions must be authorized separately. T. Rowe Price funds and their
   agents use reasonable procedures to verify the identity of the shareholder.
   If these procedures are followed, the funds and their agents are not liable
   for any losses that may occur from acting on unauthorized instructions. A
   confirmation is sent promptly after a transaction. Please review it carefully
   and contact T. Rowe Price immediately about any transaction you believe to be
   unauthorized. All telephone conversations are recorded.

   Redemptions over $250,000
   Large sales can adversely affect a portfolio manager's ability to implement a
   fund's investment strategy by causing the premature sale of securities that
   would otherwise be held. If, in any 90-day period, you redeem (sell) more
   than
<PAGE>


ABOUT THE FUNDS                               19
   $250,000, or your sale amounts to more than 1% of fund net assets, the fund
   has the right to pay the difference between the redemption amount and the
   lesser of the two previously mentioned figures with securities from the fund.


 Excessive Trading

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

   Frequent trades in your account or accounts controlled by you can disrupt
   management of a fund and raise its expenses. To deter such activity, the
   funds have adopted an excessive trading policy. If you violate our excessive
   trading policy, you may be barred indefinitely and without further notice
   from further purchases of T. Rowe Price funds.

  . Trades placed directly with T. Rowe Price  If you trade directly with T.
   Rowe Price, you can make one purchase and one sale involving the same fund
   within any 120-day period. For example, if you are in fund A, you can move
   assets from fund A to fund B and, within the next 120 days, sell your shares
   in fund B to return to fund A or move to fund C. If you exceed this limit, or
   if your trade activity involves market timing, you are in violation of our
   excessive trading policy.

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

  . Trades placed through intermediaries  If you purchase fund shares through an
   intermediary including a broker, bank, investment adviser, or other third
   party, you can make one purchase and one sale involving the same fund within
   any 120-day period. If you exceed this limit or if you hold fund shares for
   less than 60 calendar days, you are in violation of our excessive trading
   policy. Systematic purchases and redemptions are exempt from this policy.


 Keeping Your Account Open

   Due to the relatively high cost to a fund of maintaining small accounts, we
   ask you to maintain an account balance of at least $1,000. If your balance is
   below $1,000 for three months or longer, we have the right to close your
   account after giving you 60 days in which to increase your balance.


 Small Account Fee

   Because of the disproportionately high costs of servicing accounts with low
   balances, a $10 fee, paid to T. Rowe Price Services, the funds' transfer
   agent, will automatically be deducted from nonretirement accounts with
   balances falling below a minimum. The valuation of accounts and the deduction
   are expected to take place during the last five business days of September.
   The fee will be
<PAGE>


T. ROWE PRICE                                 20
   deducted from accounts with balances below $2,000, except for UGMA/UTMA
   accounts, for which the minimum is $500. The fee will be waived for any
   investor whose T. Rowe Price mutual fund accounts total $25,000 or more.
   Accounts employing automatic investing (e.g., payroll deduction, automatic
   purchase from a bank account, etc.) are also exempt from the charge. The fee
   does not apply to IRAs and other retirement plan accounts, but a separate
   custodial fee may apply to such accounts.


 Signature Guarantees

  . A signature guarantee is designed to protect you and the T. Rowe Price funds
   from fraud by verifying your signature.

   You may need to have your signature guaranteed in certain situations, such
   as:

  . Written requests 1) to redeem over $100,000, or 2) to wire redemption
   proceeds.

  . Remitting redemption proceeds to any person, address, or bank account not on
   record.

  . Transferring redemption proceeds to a T. Rowe Price fund account with a
   different registration (name or ownership) from yours.

  . Establishing certain services after the account is opened.

   You can obtain a signature guarantee from most banks, savings institutions,
   broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
   accept guarantees from notaries public or organizations that do not provide
   reimbursement in the case of fraud.
<PAGE>

 MORE ABOUT THE FUNDS
 ORGANIZATION AND MANAGEMENT
 ----------------------------------------------------------

 How are the funds organized?

   The funds are "diversified, open-end investment companies," or mutual funds,
   and were incorporated in Maryland as follows: 1) Tax-Exempt Money Fund, 1980;
   2) Tax-Free Short-Intermediate Fund, 1983; 3) Tax-Free Insured Intermediate
   Bond Fund, 1992; 4) Tax-Free Income Fund, 1976; and 5) Tax-Free High Yield
   Fund, 1984. Mutual funds pool money received from shareholders and invest it
   to try to achieve specified objectives.

  . Shareholders benefit from T. Rowe Price's 63 years of investment management
   experience.


 What is meant by "shares"?

   As with all mutual funds, investors purchase shares when they put money in a
   fund. These shares are part of a fund's authorized capital stock, but share
   certificates are not issued.

   Each share and fractional share entitles the shareholder to:

  . Receive a proportional interest in a fund's income and capital gain
   distributions.

  . Cast one vote per share on certain fund matters, including the election of
   fund directors, changes in fundamental policies, or approval of changes in
   the fund's management contract.


 Do T. Rowe Price funds have annual shareholder meetings?

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


T. ROWE PRICE                                 22
 Who runs the funds?

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

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

   Portfolio Management
   Each fund has an Investment Advisory Committee whose chairman has day-to-day
   responsibility for managing the portfolio and works with the committee in
   developing and executing each fund's investment program. (The Tax-Free High
   Yield Fund also has a co-manager.) The Investment Advisory Committees
   comprise the following members:

   Tax-Exempt Money Fund  Patrice Berchtenbreiter Ely, Chairman, Jeremy N.
   Baker, Marcy M. Lash, Joseph K. Lynagh, Mary J. Miller, William T. Reynolds,
   and Edward A. Wiese. Ms. Berchtenbreiter Ely has been chairman of the fund's
   committee since 1992. She joined T. Rowe Price in 1972 and has been managing
   investments since 1987.

   Tax-Free Short-Intermediate Bond Fund  Charles B. Hill, Chairman, Janet G.
   Albright, Patricia S. Deford, Joseph K. Lynagh, Konstantine B. Mallas, Mary
   J. Miller, and Arthur S. Varnado. Mr. Hill has been chairman of the fund's
   committee since 1997. He joined T. Rowe Price in 1991 and has been managing
   investments since 1986.

   Tax-Free Intermediate Bond Fund  Charles B. Hill, Chairman, Robert A.
   Donahue, Eric N. Mader, Konstantine B. Mallas, Mary J. Miller, Julie A.
   Salsbery, and Arthur S. Varnado. Mr. Hill has been chairman of the fund's
   committee since 1997. He joined T. Rowe Price in 1991 and has been managing
   investments since 1986.

   Tax-Free Income Fund  Mary J. Miller, Chairman, Janet G. Albright, Patricia
   S. Deford, Charles B. Hill, Alan D. Levenson, Konstantine B. Mallas, Hugh D.
   McGuirk, and Arthur S. Varnado. Ms. Miller has been chairman of the committee
   since 1997. She joined T. Rowe Price in 1983 and has been managing
   investments since 1987.

   Tax-Free High Yield Fund  Mary J. Miller, Chairman, Patricia S. Deford,
   Konstanstine, B. Mallas, Arthur S. Varnado, and Stephen Wolfe II. Ms. Miller
   has been chairman of the Committee since 2000. She joined T. Rowe Price in
   1983 and has been managing investments since 1987.
<PAGE>


ABOUT THE FUNDS                               23
   The Management Fee
   This fee has two parts - an "individual fund fee," which reflects a fund's
   particular characteristics, and a "group fee." The group fee, which is
   designed to reflect the benefits of the shared resources of the T. Rowe Price
   investment management complex, is calculated daily based on the combined net
   assets of all T. Rowe Price funds (except the Spectrum Funds, and any
   institutional, index, or private label mutual funds). The group fee schedule
   (shown below) is graduated, declining as the asset total rises, so
   shareholders benefit from the overall growth in mutual fund assets.

<TABLE>
   Group Fee Schedule
<CAPTION>
    <S>               <C>
        0.334%/a/      First $50 billion

         0.305%        Next $30 billion

         0.300%        Next $40 billion

         0.295%        Thereafter
    --------------------------------------
</TABLE>


   /a/     Represents a blended group fee rate containing various break points.



   Each fund's portion of the group fee is determined by the ratio of its daily
   net assets to the daily net assets of all the T. Rowe Price funds described
   previously. Based on combined T. Rowe Price fund assets of over $108 billion
   at February 28, 2000 the group fee was 0.32%. The individual fund fees are as
   follows: Money, 0.10%; Short-Intermediate, 0.10%; Intermediate, 0.05%;
   Income, 0.15%; and High Yield, 0.30%.



 UNDERSTANDING PERFORMANCE INFORMATION
 ----------------------------------------------------------
   This section should help you understand the terms used to describe fund
   performance. You will come across them in shareholder reports you receive
   from us; in our newsletter, The Price Report; in T. Rowe Price
   advertisements; and in the media.


 Total Return

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

   Advertisements may include cumulative or average annual total return figures,
   which may be compared with various indices, other performance measures, or
   other mutual funds.
<PAGE>


T. ROWE PRICE                                 24
 Cumulative Total Return

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


 Average Annual Total Return

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


 Yield

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

   For bond funds, the advertised or SEC yield is found by determining the net
   income per share (as defined by the Securities and Exchange Commission)
   earned by a fund during a 30-day base period and dividing this amount by the
   per share price on the last day of the base period. The SEC yield-also called
   the standardized yield-may differ from the dividend yield.

   The Money Fund may advertise a current yield, reflecting the latest seven-day
   income annualized, or an "effective" yield, which assumes the income has been
   reinvested in the fund.



 INVESTMENT POLICIES AND PRACTICES
 ----------------------------------------------------------
   This section takes a detailed look at fund securities and the various kinds
   of investment practices that may be used in day-to-day portfolio management.
   Fund investments are subject to further restrictions and risks described in
   the Statement of Additional Information.

   Shareholder approval is required to substantively change fund objectives and
   certain investment restrictions noted in the following section as
   "fundamental policies." The managers also follow certain "operating
   policies," which can be
<PAGE>


ABOUT THE FUNDS                               25
   changed without shareholder approval. However, significant changes are
   discussed with shareholders in fund reports. Fund investment restrictions and
   policies are adhered to at the time of investment. A later change in
   circumstances will not require the sale of an investment if it was proper at
   the time it was made.

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

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

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


 Types of Portfolio Securities

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

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

   Operating policy (money fund)  Except as permitted by Rule 2a-7 under the
   Investment Company Act of 1940, the money fund will not purchase a security
   if, as a result, more than 5% of its total assets would be invested in
   securities of a single issuer. Under Rule 2a-7, the 5% limit, among other
   things, does not apply to purchases of U.S. government securities or
   securities subject to certain types of guarantees. Additionally, the fund may
   invest up to 25% of its total assets in the first tier securities (as defined
   by Rule 2a-7) of a single issuer for a period of up to three business days.
<PAGE>


T. ROWE PRICE                                 26
   Municipal Securities
   Fund assets are invested primarily in various tax-free municipal debt
   securities. The issuers have a contractual obligation to pay interest at a
   stated rate on specific dates and to repay principal (the bond's face value)
   on a specified date or dates. An issuer may have the right to redeem or
   "call" a bond before maturity, and the funds may have to reinvest the
   proceeds at lower rates.

   There are two broad categories of municipal bonds. General obligation bonds
   are backed by the issuer's "full faith and credit," that is, its full taxing
   and revenue raising power. Revenue bonds usually rely exclusively on a
   specific revenue source, such as charges for water and sewer service, to
   generate money for debt service.

  . In purchasing municipals, the funds rely on the opinion of the issuer's bond
   counsel regarding the tax-exempt status of the investment.

   Private Activity Bonds and Taxable Securities
   While income from most municipals is exempt from federal income taxes, the
   income from certain types of private activity bonds (a type of revenue bond)
   may be subject to the alternative minimum tax (AMT). However, only persons
   subject to the AMT pay this tax. Private activity bonds may be issued for
   purposes such as housing or airports or to benefit a private company. (Being
   subject to the AMT does not mean the investor necessarily pays this tax. For
   further information, please see Distributions and Taxes.)

   Fundamental policy  Under normal market conditions, the funds will not
   purchase any security if, as a result, less than 80% of the funds' income
   would be exempt from federal income taxes. Up to 20% of fund income could be
   derived from securities subject to the alternative minimum tax.

   Operating policy  During periods of abnormal market conditions, for temporary
   defensive purposes, there is no limit on fund investments in high-quality,
   short-term securities whose income is subject to federal income tax.

   Operating policy  Industrial development bonds are a special type of private
   activity bond permitted under IRS guidelines and are typically backed by a
   corporate obligor to finance projects benefiting the public. Fund investments
   in industrial development bonds related to the same industry (such as solid
   waste, nuclear utility, or airlines) are limited to 25% of total assets.
   Bonds which are refunded with escrowed U.S. government securities or subject
   to certain types of guarantees are not subject to the 25% limitation.

   In addition to general obligation and revenue bonds, fund investments may
   include, but are not limited to, the following types of securities:
<PAGE>


ABOUT THE FUNDS                               27
   Municipal Lease Obligations
   A lease is not a full faith and credit obligation of the issuer and is
   usually backed only by the borrowing government's unsecured pledge to make
   annual appropriations for lease payments. There have been challenges to the
   legality of lease financing in numerous states and, from time to time,
   certain municipalities have considered not appropriating money for lease
   payments. In deciding whether to purchase a lease obligation, the funds would
   assess the financial condition of the borrower, the merits of the project,
   the level of public support for the project, and the legislative history of
   lease financing in the state. These securities may be less readily marketable
   than other municipals. Fund purchases of unrated lease obligations may also
   be made.

   Municipal Warrants (bond funds)
   Municipal warrants are essentially call options on municipal bonds. In
   exchange for a premium, they give the purchaser the right, but not the
   obligation, to purchase a municipal bond in the future. The bond funds might
   purchase a warrant to lock in forward supply in an environment where the
   current issuance of bonds is sharply reduced. Like options, warrants may
   expire worthless and they may have reduced liquidity.

   Operating policy  Each bond fund may invest up to 2% of its total assets in
   municipal warrants.

   Securities With "Puts"
   Some longer-term municipals give the investor the right to "put" or sell the
   security at par (face value) within a specified number of days following the
   investor's request - usually one to seven days. This feature enhances a
   security's liquidity by shortening its effective maturity and enables it to
   trade at a price equal to or very close to par. The money fund typically
   purchases a significant number of these securities. If a put feature
   terminates prior to being exercised, the funds may be forced to hold the
   longer-term security, which could experience substantially more volatility.

   Securities With Credit Enhancements
  . Letters of credit  Letters of credit are issued by a third party, usually a
   bank, to enhance liquidity and ensure repayment of principal and any accrued
   interest if the underlying municipal security should default.

  . Municipal Bond Insurance  This insurance, which is usually purchased by the
   bond issuer from a private, nongovernmental insurance company, provides an
   unconditional and irrevocable guarantee that the insured bond's principal and
   interest will be paid when due. Insurance does not guarantee the price of the
   bond or the share price of any fund. The credit rating of an insured bond
   reflects the credit rating of the insurer, based on its claims-paying
   ability.
<PAGE>


T. ROWE PRICE                                 28
   The obligation of a municipal bond insurance company to pay a claim extends
   over the life of each insured bond. Although defaults on insured municipal
   bonds have been low to date and municipal bond insurers have met their
   claims, there is no assurance this will continue. A higher-than-expected
   default rate could strain the insurer's loss reserves and adversely affect
   its ability to pay claims to bondholders, such as the funds. The number of
   municipal bond insurers is relatively small, and not all of them have the
   highest rating.

  . Standby Purchase Agreements  A Standby Bond Purchase Agreement (SBPA) is a
   liquidity facility provided to pay the purchase price of bonds that cannot be
   remarketed. The obligation of the liquidity provider (usually a bank) is only
   to advance funds to purchase tendered bonds that cannot be remarketed and
   does not cover principal or interest under any other circumstances. The
   liquidity provider's obligations under the SBPA are usually subject to
   numerous conditions, including the continued creditworthiness of the
   underlying borrower.

   Synthetic or Derivative Securities
   Derivatives and synthetics in which the funds may invest include:

  . Residual Interest Bonds (bond funds) (These are a type of potentially
   high-risk derivative.) The income stream provided by an underlying bond is
   divided to create two securities, one short term and one long term. The
   interest rate on the short-term component is reset by an index or auction
   process normally every seven to 35 days. After income is paid on the
   short-term securities at current rates, the residual income goes to the
   long-term securities. Therefore, rising short-term interest rates result in
   lower income for the longer-term portion, and vice versa. The longer-term
   bonds can be very volatile and may be less liquid than other municipals of
   comparable maturity. The funds will invest only in securities deemed
   tax-exempt by a nationally recognized bond counsel, but there is no guarantee
   the interest will be exempt because the IRS has not issued a definitive
   ruling on the matter.

   Operating policy  Each bond fund may invest up to 10% of its total assets in
   residual interest bonds.

  . Participation Interests This term covers various types of securities created
   by converting fixed rate bonds into short-term, variable rate certificates.
   These securities have been developed in the secondary market to meet the
   demand for short-term, tax-exempt securities. The funds will invest only in
   securities deemed tax-exempt by a nationally recognized bond counsel, but
   there is no guarantee the interest will be exempt because the IRS has not
   issued a definitive ruling on the matter. There is no limit on fund
   investments in these securities.

  . Embedded Interest Rate Swaps and Caps (bond funds)  In a fixed rate,
   long-term municipal bond with an interest rate swap attached to it, the
   bondholder usually receives the bond's fixed coupon payment as well as a
   variable rate payment
<PAGE>


ABOUT THE FUNDS                               29
   that represents the difference between a fixed rate for the term of the swap
   (which is typically shorter than the bond it is attached to) and a variable
   rate short-term municipal index. The bondholder receives excess income when
   short-term rates remain below the fixed interest rate swap rate. If
   short-term rates rise above the fixed income swap rate, the bondholder's
   income is reduced. At the end of the interest rate swap term, the bond
   reverts to a single fixed coupon payment.

   An embedded interest rate cap allows the bondholder to receive payments
   whenever short-term rates rise above a level established at the time of
   purchase. They normally are used to hedge against rising short-term interest
   rates.

   Both instruments may be volatile and of limited liquidity, and their use may
   adversely affect fund total return.

   Operating policy  Each bond fund may invest up to 10% of its total assets in
   embedded interest rate swaps and caps.

  . Index Total Return Swaps (bond funds)  This investment vehicle allows a fund
   to participate in the municipal market in a generic fashion without buying or
   selling individual municipal securities. As such, index swaps can be used to
   "buy" the index (if we expect municipal yields to fall and prices to rise) or
   to "sell" the index (if we expect municipal yields to rise and prices to
   fall). The funds will make or receive a payment (at the swap termination
   date) based on a comparison of the value of the index at swap termination
   versus the value at swap initiation. Index swaps can be customized as to par
   amount, maturity along the yield curve, and term (or length) of the swap.
   Thus, an intermediate fund may prefer a swap pegged to the 10-year maturity
   within the index while a long fund may prefer a 20-year maturity. The index
   can be designated to be any widely followed benchmark for municipal yields.
   If the funds' view of interest rates at the time of entering into the swap is
   incorrect, they would likely lose money from these investments.

   Operating policy  Each bond fund may invest up to 10% of its total assets in
   index total return swaps.

   Private Placements
   Each fund may seek to enhance its yield through the purchase of private
   placements. These securities are sold through private negotiations, usually
   to institutions or mutual funds, and may have resale restrictions. Their
   yields are usually higher than comparable public securities to compensate the
   investor for their limited marketability.

   Operating policy  The bond funds may invest up to 15% (10% for the money
   fund) of fund net assets in illiquid securities, including unmarketable
   private placements.
<PAGE>


T. ROWE PRICE                                 30
 Types of Investment Management Practices

   Reserve Position (bond funds)
   A portion of fund assets will be held in short-term, tax-exempt money market
   securities maturing in one year or less. Fund reserve positions provide
   flexibility in meeting redemptions, expenses, and the timing of new
   investments; can help in structuring each fund's weighted average maturity;
   and serve as a short-term defense during periods of unusual market
   volatility. Fund reserve positions can consist of shares of one or more T.
   Rowe Price internal money market funds as well as short-term,
   investment-grade securities, including tax-exempt commercial paper, municipal
   notes, and short-term maturity bonds. Some of these securities may have
   adjustable, variable, or floating rates. For temporary, defensive purposes,
   there is no limit on fund investments in money market reserves (which may not
   be tax-exempt). The effect of taking such a position is that the funds may
   not achieve their investment objectives.

   When-Issued Securities (all funds) and Forwards (bond funds)
   New issues of municipals are often sold on a "when-issued" basis, that is,
   delivery and payment take place 15 - 45 days after the buyer has agreed to
   the purchase. Some bonds, called "forwards," have longer-than-standard
   settlement dates, typically six to 24 months. When buying these securities,
   each fund will maintain cash or high-grade marketable securities held by its
   custodian equal in value to its commitment for these securities. Each fund
   does not earn interest on when-issued and forward securities until
   settlement, and the value of the securities may fluctuate between purchase
   and settlement. Municipal "forwards" typically carry a substantial yield
   premium to compensate the buyer for their greater interest rate, credit, and
   liquidity risks.

   Interest Rate Futures (bond funds)
   Futures (a type of potentially high-risk derivative) 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. Specifically, futures (and options on futures) may
   be bought or sold in an effort to accomplish any number of objectives,
   including: to hedge against a potentially unfavorable change in interest
   rates and to adjust fund exposure to the municipal bond market; to protect
   portfolio value; to enhance income; as a cash management tool; and to adjust
   portfolio duration. The use of futures for hedging and non-hedging purposes
   may not always be successful. Their prices can be highly volatile, using them
   could lower fund total return, and the potential loss from their use could
   exceed a fund's initial exposure to such contracts.

   Operating policy  Initial margin deposits on futures and premiums on options
   used for non-hedging purposes will not exceed 5% of bond fund net asset
   value.
<PAGE>


ABOUT THE FUNDS                               31
   Borrowing Money and Transferring Assets
   Fund borrowings may be made from banks and other T. Rowe Price funds for
   temporary emergency purposes to facilitate redemption requests, or for other
   purposes consistent with fund policies as set forth in this prospectus. Such
   borrowings may be collateralized with fund assets, subject to restrictions.

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

   Operating policy  Fund transfers of portfolio securities as collateral will
   not be made except as necessary in connection with permissible borrowings or
   investments, and then such transfers may not exceed 33/1//\\/3/\\% of fund
   total assets. Fund purchases of additional securities will not be made when
   borrowings exceed 5% of total assets.

   Portfolio Turnover (bond funds)
   Each fund generally purchases securities with the intention of holding them
   for investment; however, when market conditions or other circumstances
   warrant, securities may be purchased and sold without regard to the length of
   time held.

   Due to the nature of each fund's investment program, a fund's portfolio
   turnover rate may exceed 100%. Although the funds do not expect to generate
   any taxable income, a high turnover rate may increase transaction costs and
   result in additional taxable gains. The funds' portfolio turnover rates are
   listed in the table in the Financial Highlights section.

   Sector Concentration
   It is possible that each fund could have a considerable amount of assets (25%
   or more) in municipal securities that would tend to respond similarly to
   particular economic or political developments. An example would be securities
   of issuers whose revenues are paid from similar types of projects, such as
   transportation bonds.

   High-Yield, High-Risk Investing (High Yield, Income, and Short-Intermediate
   Funds)
   The total return and yield of lower-quality (high-yield, high-risk) bonds,
   commonly referred to as "junk," may fluctuate more than the total return and
   yield of higher-quality bonds. Junk bonds (those rated below BBB or in
   default) are regarded as predominantly speculative with respect to the
   issuer's ability to meet principal and interest payments. Successful
   investment in lower-medium- and low-quality bonds involves greater investment
   risk and is highly dependent on T. Rowe Price's credit analysis. A real or
   perceived economic downturn, or rising interest rates, could cause a decline
   in high-yield bond prices by lessening the ability of issuers to make
   principal and interest payments. These bonds are often thinly traded and can
   be more difficult to sell and value accurately than high-quality bonds.
   Because objective pricing data may be less available, judgment may play a
   greater role in the valuation process.
<PAGE>


T. ROWE PRICE                                 32
   Operating policy The Tax-Free High Yield Fund may invest without limit in
   below-investment-grade securities. The Tax-Free Income Fund may invest up to
   5% of its total assets in below-investment-grade securities. The Tax-Free
   Short-Intermediate Fund may invest up to 5% of its total assets in
   below-investment-grade securities with ratings of BB by a national rating
   agency (or, if unrated, the T. Rowe Price equivalent).

   Credit-Quality Considerations
   The credit quality of most bond issues is evaluated by rating agencies such
   as Moody's and Standard & Poor's on the basis of the issuer's ability to meet
   all required interest and principal payments. The highest ratings are
   assigned to issuers perceived to be the best credit risks. T. Rowe Price
   research analysts also evaluate all fund holdings, including those rated by
   outside agencies. Other things being equal, lower-rated bonds have higher
   yields due to greater risk. High-yield bonds, also called "junk" bonds, are
   those rated below BBB.

   Table 6 shows the rating scale used by the major rating agencies, and Table 7
   provides an explanation of quality ratings. T. Rowe Price considers publicly
   available ratings but emphasizes its own credit analysis when selecting
   investments.
<PAGE>


ABOUT THE FUNDS                               33
<TABLE>
 Table 6  Ratings of Municipal Debt Securities
<CAPTION>
 <C>                                          <S>            <S>              <S>    <S>           <S>       <S>    <S>
                                              Moody's        Standard
                                              Investors      & Poor's         Fitch
                                              Service, Inc.  Corporation      IBCA, Inc.           Definition
  Long Term                                    Aaa            AAA              AAA                  Highest quality
                                              --------------------------------------------------------------------------------------
                                               Aa             AA               AA                   High quality
                                              --------------------------------------------------------------------------------------
                                               A              A                A                    Upper medium grade
                                              --------------------------------------------------------------------------------------
                                               Baa            BBB              BBB                  Medium grade
                                              --------------------------------------------------------------------------------------
                                               Ba             BB               BB                   Speculative
                                              --------------------------------------------------------------------------------------
                                               B              B                B                    Highly speculative
                                              --------------------------------------------------------------------------------------
                                               Caa            CCC, CC          CCC, CC              Vulnerable to default
                                              --------------------------------------------------------------------------------------
                                               Ca             C                C                    Default is imminent
                                              --------------------------------------------------------------------------------------
                                               C              D                DDD, DD, D           Probably in default
                                              Moody's                         S&P                            Fitch IBCA
  Short Term                                   MIG1/ VMIG1    Best quality     SP1+   Very strong quality     F-1+   Exceptionally
                                                                               SP1    Strong grade                   strong quality
                                                                                                              F-1    Very strong
                                                                                                                     quality
                                              --------------------------------------------------------------------------------------
                                               MIG2/ VMIG2    High quality     SP2    Satisfactory grade      F-2    Good credit
                                                                                                                     quality
                                              --------------------------------------------------------------------------------------
                                               MIG3/ VMIG3    Favorable quality                               F-3    Fair credit
                                                                                                                     quality
                                              --------------------------------------------------------------------------------------
                                               MIG4/ VMIG4    Adequate quality
                                              --------------------------------------------------------------------------------------
                                               SG             Speculative      SP3    Speculative grade       F-5    Weak credit
                                                              quality                                                quality
                                              --------------------------------------------------------------------------------------
  Commercial                                   P-1            Superior         A-1+   Extremely strong        F-1+   Exceptionally
  Paper                                                       quality                 quality                        strong quality
                                                                               A-1    Strong quality          F-1    Very strong
                                                                                                                     quality
                                              --------------------------------------------------------------------------------------
                                               P-2            Strong quality   A-2    Satisfactory quality    F-2    Good credit
                                                                                                                     quality
                                              --------------------------------------------------------------------------------------
                                               P-3            Acceptable       A-3    Adequate quality        F-3    Fair credit
                                                              quality          B      Speculative quality     F-5    quality
                                                                               C      Doubtful quality               Weak credit
                                                                                                                     quality
 -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>


T. ROWE PRICE                                 34
<TABLE>
 Table 7  Explanation of Quality Ratings
<CAPTION>
 <C>                                    <S>       <S>                                        <S>
                                        Bond
                                        Rating    Explanation
  Moody's Investors                      Aaa       Highest quality, smallest degree of
  Service, Inc.                                    investment risk.
                                        -----------------------------------------------------
                                         Aa        High quality; together with Aaa bonds,
                                                   they compose the high-grade bond group.
                                        -----------------------------------------------------
                                         A         Upper-medium-grade obligations; many
                                                   favorable investment attributes.
                                        -----------------------------------------------------
                                         Baa       Medium-grade obligations; neither highly
                                                   protected nor poorly secured. Interest
                                                   and principal appear adequate for the
                                                   present, but certain protective elements
                                                   may be lacking or may be unreliable over
                                                   any great length of time.
                                        -----------------------------------------------------
                                         Ba        More uncertain with speculative
                                                   elements. Protection of interest and
                                                   principal payments not well safeguarded
                                                   in good and bad times.
                                        -----------------------------------------------------
                                         B         Lack characteristics of desirable
                                                   investment; potentially low assurance of
                                                   timely interest and principal payments
                                                   or maintenance of other contract terms
                                                   over time.
                                        -----------------------------------------------------
                                         Caa       Poor standing, may be in default;
                                                   elements of danger with respect to
                                                   principal or interest payments.
                                        -----------------------------------------------------
                                         Ca        Speculative in high degree; could be in
                                                   default or have other marked
                                                   shortcomings.
                                        -----------------------------------------------------
                                         C         Lowest rated. Extremely poor prospects
                                                   of ever attaining investment standing.
                                        -----------------------------------------------------
  Standard & Poor's                      AAA       Highest rating; extremely strong
  Corporation                                      capacity to pay principal and interest.
                                        -----------------------------------------------------
                                         AA        High quality; very strong capacity to
                                                   pay principal and interest.
                                        -----------------------------------------------------
                                         A         Strong capacity to pay principal and
                                                   interest; somewhat more susceptible to
                                                   the adverse effects of changing
                                                   circumstances and economic conditions.
                                        -----------------------------------------------------
                                         BBB       Adequate capacity to pay principal and
                                                   interest; normally exhibit adequate
                                                   protection parameters, but adverse
                                                   economic conditions or changing
                                                   circumstances more likely to lead to
                                                   weakened capacity to pay principal and
                                                   interest than for higher-rated bonds.
                                        -----------------------------------------------------
                                         BB, B,    Predominantly speculative with respect
                                         CCC, CC   to the issuer's capacity to meet
                                                   required interest and principal
                                                   payments. BB - lowest degree of
                                                   speculation;
                                                   CC - the highest degree of speculation.
                                                   Quality and protective characteristics
                                                   outweighed by large uncertainties or
                                                   major risk exposure to adverse
                                                   conditions.
                                        -----------------------------------------------------
                                         D         In default.
                                        -----------------------------------------------------
  Fitch IBCA, Inc.                       AAA       Highest quality; obligor has
                                                   exceptionally strong ability to pay
                                                   interest and repay principal, which is
                                                   unlikely to be affected by reasonably
                                                   foreseeable events.
                                        -----------------------------------------------------
                                         AA        Very high quality; obligor's ability to
                                                   pay interest and repay principal is very
                                                   strong. Because bonds rated in the AAA
                                                   and AA categories are not significantly
                                                   vulnerable to foreseeable future
                                                   developments, short-term debt of these
                                                   issuers is generally rated F-1+.
                                        -----------------------------------------------------
                                         A         High quality; obligor's ability to pay
                                                   interest and repay principal is
                                                   considered to be strong, but may be more
                                                   vulnerable to adverse changes in
                                                   economic conditions and circumstances
                                                   than higher-rated bonds.
                                        -----------------------------------------------------
                                         BBB       Satisfactory credit quality; obligor's
                                                   ability to pay interest and repay
                                                   principal is considered adequate.
                                                   Unfavorable changes in economic
                                                   conditions and circumstances are more
                                                   likely to adversely affect these bonds
                                                   and impair timely payment. The
                                                   likelihood that the ratings of these
                                                   bonds will fall below investment grade
                                                   is higher than for higher-rated bonds.
                                        -----------------------------------------------------
                                         BB,       Not investment grade; predominantly
                                         CCC,      speculative with respect to the issuer's
                                         CC, C     capacity to repay interest and principal
                                                   in accordance with the terms of the
                                                   obligation for bond issues not in
                                                   default. BB is the least speculative. C
                                                   is the most speculative.
 -------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>


ABOUT THE FUNDS                               35
 FINANCIAL HIGHLIGHTS
 ----------------------------------------------------------
   Table 9, which provides information about each fund's financial history, is
   based on a single share outstanding throughout each fiscal year. Each fund's
   section of the table is part of the fund's financial statements, which are
   included in its annual report and are incorporated by reference into the
   Statement of Additional Information (available upon request). The total
   returns in the tables represent the rate that an investor would have earned
   or lost on an investment in each fund (assuming reinvestment of all dividends
   and distributions). The financial statements in the annual report were
   audited by the funds' independent accountants, PricewaterhouseCoopers LLP.


<TABLE>
 Table 9  Financial Highlights
<CAPTION>
                                        Year ended February 28
  Tax-Exempt Money       1996/a/      1997       1998       1999     2000/a/
 ------------------------------------------------------------------------------------
 <S>                     <C>        <C>        <C>        <C>        <C>        <C>

  Net asset value,
  beginning of period    $  1.000   $  1.000   $  1.000   $  1.000   $  1.000
  Income From Investment Operations
  Net investment income     0.033      0.030      0.032      0.029      0.029
                         -------------------------------------------------------
  Net gains or losses
  on securities (both
  realized and                 --         --         --         --         --
  unrealized)
                         -------------------------------------------------------
  Total from investment
  operations                0.033      0.030      0.032      0.029      0.029
  Less Distributions
  Dividends (from net      (0.033)    (0.030)    (0.032)    (0.029)    (0.029)
  investment income)
                         -------------------------------------------------------
  Distributions (from          --         --         --         --         --
  capital gains)
                         -------------------------------------------------------
  Total distributions      (0.033)    (0.030)    (0.032)    (0.029)    (0.029)
                         -------------------------------------------------------
  Net asset value, end   $  1.000   $  1.000   $  1.000   $  1.000   $  1.000
  of period
                         -------------------------------------------------------
  Total return               3.38%      3.05%      3.24%      2.97%      2.94%
  Ratios/Supplemental Data
  Net assets, end of     $679,143   $678,135   $740,757   $710,569   $669,615
  period (in thousands)
                         -------------------------------------------------------
  Ratio of expenses to       0.56%      0.55%      0.52%      0.52%      0.53%
  average net assets
                         -------------------------------------------------------
  Ratio of net income        3.33%      3.00%      3.20%      2.93%      2.91%
  to average net assets
 ------------------------------------------------------------------------------------
</TABLE>


 /a /      Year ended February 29.
<PAGE>


T. ROWE PRICE                                 36
<TABLE>
 Table 9  Financial Highlights (continued)
<CAPTION>
                                          Year ended February 28
  Tax-Free
  Short-Intermediate     1996/a/      1997       1998       1999     2000/a/
 ------------------------------------------------------------------------------------
 <S>                     <C>        <C>        <C>        <C>        <C>        <C>

  Net asset value,
  beginning of period    $   5.25   $   5.37   $   5.35   $   5.37   $   5.39
  Income From Investment Operations
  Net investment income      0.23       0.23       0.22       0.22       0.21
                         -------------------------------------------------------
  Net gains or losses
  on securities (both
  realized and               0.12      (0.02)      0.05       0.04      (0.18)
  unrealized)
                         -------------------------------------------------------
  Total from investment
  operations                 0.35       0.21       0.27       0.26       0.03
  Less Distributions
  Dividends (from net       (0.23)     (0.23)     (0.22)     (0.22)     (0.21)
  investment income)
                         -------------------------------------------------------
  Distributions (from          --         --      (0.03)     (0.02)     (0.01)
  capital gains)
                         -------------------------------------------------------
  Total distributions       (0.23)     (0.23)     (0.25)     (0.24)     (0.22)
                         -------------------------------------------------------
  Net asset value, end   $   5.37   $   5.35   $   5.37   $   5.39   $   5.20
  of period
                         -------------------------------------------------------
  Total return               6.87%      4.02%      5.28%      4.90%      0.67%
  Ratios/Supplemental Data
  Net assets, end of     $445,228   $443,631   $438,951   $459,319   $404,634
  period (in thousands)
                         -------------------------------------------------------
  Ratio of expenses to       0.57%      0.56%      0.54%      0.53%      0.53%
  average net assets
                         -------------------------------------------------------
  Ratio of net income        4.39%      4.30%      4.23%      4.06%      4.07%
  to average net assets
                         -------------------------------------------------------
  Portfolio turnover         69.9%      84.3%      76.8%      39.9%      49.7%
  rate
 ------------------------------------------------------------------------------------
</TABLE>


 /a /      Year ended February 29.
<PAGE>


ABOUT THE FUNDS                               37
<TABLE>
 Table 9  Financial Highlights (continued)
<CAPTION>
                                                Year ended February 28
  Tax-Free Intermediate Bond
                                 1996/a/    1997        1998        1999     2000/a/
 ---------------------------------------------------------------------------------------------
 <S>                            <C>        <C>        <C>         <C>        <C>         <C>

  Net asset value,
  beginning of period           $ 10.35    $ 10.84    $  10.80    $  11.06   $  11.13
  Income From Investment Operations
  Net investment income           0.48/b/    0.48/b/     0.48/b/      0.48       0.48
                                ---------------------------------------------------------
  Net gains or losses on
  securities (both realized        0.49      (0.04)       0.29        0.10      (0.63)
  and unrealized)
                                ---------------------------------------------------------
  Total from investment
  operations                       0.97       0.44        0.77        0.58      (0.15)
  Less Distributions
  Dividends (from net             (0.48)     (0.48)      (0.48)      (0.48)     (0.48)
  investment income)
                                ---------------------------------------------------------
  Distributions (from capital        --         --       (0.03)      (0.03)     (0.04)
  gains)
                                ---------------------------------------------------------
  Total distributions             (0.48)     (0.48)      (0.51)      (0.51)     (0.52)
                                ---------------------------------------------------------
  Net asset value, end          $ 10.84    $ 10.80    $  11.06    $  11.13   $  10.46
  of period
                                ---------------------------------------------------------
  Total return                     9.57%b     4.19%b      7.31%b      5.37%     (1.37)%
  Ratios/Supplemental Data
  Net assets, end of period     $92,153    $99,176    $108,256    $121,053   $111,844
  (in thousands)
                                ---------------------------------------------------------
  Ratio of expenses to average     0.65%/b/   0.65%/b/    0.65%/b/    0.65%      0.63%
  net assets
                                ---------------------------------------------------------
  Ratio of net income to           4.52%/b/   4.47%/b/    4.43%/b/    4.35%      4.46%
  average net assets
                                ---------------------------------------------------------
  Portfolio turnover rate          63.8%      76.8%       56.1%       24.3%      47.6%
 ---------------------------------------------------------------------------------------------
</TABLE>


 /a/       Year ended February 29.

 /b/
   Excludes expenses in excess of a 0.65% voluntary expense limitation through
   February 28, 1998.
<PAGE>


T. ROWE PRICE                                 38
<TABLE>
 Table 9  Financial Highlights (continued)
<CAPTION>
                                                    Year ended February 28
  Tax-Free Income                1996/a/        1997         1998         1999       2000/a/
 ------------------------------------------------------------------------------------------------------
 <S>                            <C>          <C>          <C>          <C>          <C>           <C>

  Net asset value,
  beginning of period           $     9.25   $     9.66   $     9.59   $     9.95   $     9.94
  Income From Investment Operations
  Net investment income               0.52         0.52         0.52         0.50         0.49
                                ------------------------------------------------------------------
  Net gains or losses on
  securities (both realized           0.41        (0.07)        0.36         0.03        (0.83)
  and unrealized)
                                ------------------------------------------------------------------
  Total from investment
  operations                          0.93         0.45         0.88         0.53        (0.34)
  Less Distributions
  Dividends (from net                (0.52)       (0.52)       (0.52)       (0.50)       (0.49)
  investment income)
                                ------------------------------------------------------------------
  Distributions (from capital           --           --           --        (0.04)       (0.01)
  gains)
                                ------------------------------------------------------------------
  Total distributions                (0.52)       (0.52)       (0.52)       (0.54)       (0.50)
                                ------------------------------------------------------------------
  Net asset value, end          $     9.66   $     9.59   $     9.95   $     9.94   $     9.10
  of period
                                ------------------------------------------------------------------
  Total return                       10.31%        4.81%        9.37%        5.48%       (3.42%)
  Ratios/Supplemental Data
  Net assets, end of period     $1,375,507   $1,336,626   $1,396,288   $1,483,478    1,311,149
  (in thousands)
                                ------------------------------------------------------------------
  Ratio of expenses to average        0.58%        0.57%        0.55%        0.55%        0.55%
  net assets
                                ------------------------------------------------------------------
  Ratio of net income to              5.49%        5.41%        5.31%        5.06%        5.24%
  average net assets
                                ------------------------------------------------------------------
  Portfolio turnover rate             48.7%        40.7%        36.3%        34.1%        44.3%
 ------------------------------------------------------------------------------------------------------
</TABLE>



 /a/       Year ended February 29.
<PAGE>


ABOUT THE FUNDS                               39
<TABLE>
 Table 9  Financial Highlights (continued)
<CAPTION>
                                                 Year ended February 28
  Tax-Free High Yield           1996/a/       1997         1998         1999      2000/a/
 ------------------------------------------------------------------------------------------------
 <S>                            <C>        <C>          <C>          <C>          <C>       <C>

  Net asset value,
  beginning of period           $  11.62   $    12.10   $    12.12   $    12.66   $12.53
  Income From Investment Operations
  Net investment income             0.72         0.70         0.69         0.66     0.66
                                ------------------------------------------------------------
  Net gains or losses on
  securities (both realized         0.48         0.02         0.54        (0.07)   (1.32)
  and unrealized)
                                ------------------------------------------------------------
  Total from investment
  operations                        1.20         0.72         1.23         0.59    (0.66)
  Less Distributions
  Dividends (from net              (0.72)       (0.70)       (0.69)       (0.66)   (0.66)
  investment income)
                                ------------------------------------------------------------
  Distributions (from capital         --           --           --        (0.06)      --
  gains)
                                ------------------------------------------------------------
  Total distributions              (0.72)       (0.70)       (0.69)       (0.72)   (0.66)
                                ------------------------------------------------------------
  Net asset value, end          $  12.10   $    12.12   $    12.66   $    12.53   $11.21
  of period
                                ------------------------------------------------------------
  Total return                     10.62%        6.22%       10.42%        4.80%   (5.41%)
  Ratios/Supplemental Data
  Net assets, end of period     $989,534   $1,053,106   $1,241,990   $1,357,000   $1,080
  (in thousands)
                                ------------------------------------------------------------
  Ratio of expenses to average      0.75%        0.74%        0.72%        0.71%    0.71%
  net assets
                                ------------------------------------------------------------
  Ratio of net income to            6.07%        5.86%        5.59%        5.28%    5.54%
  average net assets
                                ------------------------------------------------------------
  Portfolio turnover rate           39.3%        37.0%        24.4%        38.9%    57.4%
 ------------------------------------------------------------------------------------------------
</TABLE>


 /a/       Year ended February 29.
<PAGE>

 INVESTING WITH T. ROWE PRICE
 ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
 ----------------------------------------------------------
                                                       Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.

Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.

                                                          Institutional Accounts
Transaction procedures in the following sections may not apply to institutional
accounts. For institutional account procedures, please call your designated
account manager or service representative.



 OPENING A NEW ACCOUNT
 ----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts

                                                            Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)

                                                                         By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept third-party checks
to open new accounts. In addition, the funds do not accept purchases made by
credit card check.

Mail via U.S. Postal Service
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21297-1300
<PAGE>


ABOUT THE FUNDS                               41
Mail via private carriers/overnight services
T. Rowe Price Account Services Mailcode 17300 4515 Painters Mill Road Owings
Mills, MD 21117-4903

                                                                         By Wire
Call Investor Services for an account number and give the following wire
information to your bank:

Receiving Bank:  PNC Bank, N.A. (Pittsburgh) Receiving Bank ABA#:  043000096
Beneficiary:  T. Rowe Price [fund name] Beneficiary Account:  1004397951
Originator to Beneficiary Information (OBI):  name of owner(s) and account
number

Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.

Note: No services will be established and IRS penalty withholding may occur
until we receive a signed New Account Form.

                                                                     By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Information About Your Services). The new account will
have the same registration as the account from which you are exchanging.
Services for the new account may be carried over by telephone request if
preauthorized on the existing account. For limitations on exchanging, see
explanation of Excessive Trading under Transaction Procedures and Special
Requirements.

                                                                       In Person
Drop off your New Account Form at any location listed on the back cover and
obtain a receipt.



 PURCHASING ADDITIONAL SHARES
 ----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts

                                                                 By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
<PAGE>


T. ROWE PRICE                                 42
                                                                         By Wire
Call Shareholder Services or use the wire address listed in Opening a New
Account.

                                                                         By Mail
 1. Make your check payable to T. Rowe Price Funds (otherwise it may be
   returned).

 2. Mail the check to us at the following address with either a fund
   reinvestment slip or a note indicating the fund you want to buy and your fund
   account number.

 3. Remember to provide your account number and the fund name on the memo line
   of your check.

Mail via U.S. Postal Service
T. Rowe Price Funds Account Services P.O. Box 17300 Baltimore, MD 21297-1300

/(For //mail via private carriers and overnight services//, see previous /
/section.)/

                                                      By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.



 EXCHANGING AND REDEEMING SHARES
 ----------------------------------------------------------
                                                                Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.)

                                                                     Redemptions
Redemption proceeds can be mailed to your account address, sent by ACH transfer
to your bank, or wired to your bank (provided your bank information is already
on file). For charges, see Electronic Transfers - By Wire under Information
About Your Services.

Some of the T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on
shares held for less than six months, one year, or two years, as specified in
the prospectus. The fee is paid to the fund.
<PAGE>


ABOUT THE FUNDS                               43
                                                                        By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer or Tele*Access (if you have
previously authorized these services), mailgram, or express mail. For exchange
policies, please see Transaction Procedures and Special Requirements - Excessive
Trading.

                                                                         By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to specify any fund you
are exchanging out of and the fund or funds you are exchanging into. T. Rowe
Price requires the signatures of all owners exactly as registered, and possibly
a signature guarantee (see Transaction Procedures and Special Requirements -
Signature Guarantees). Please use the appropriate address below:

via U.S. Postal Service
T. Rowe Price Account Services P.O. Box 17302 Baltimore, MD 21297-1302

via private carriers/overnight services
T. Rowe Price Account Services Mail Code 17302 4515 Painters Mill Road Owings
Mills, MD 21117-4903



 RIGHTS RESERVED BY THE FUNDS
 ----------------------------------------------------------
Each fund and its agents reserve the following rights: (1) to waive or lower
investment minimums; (2) to accept initial purchases by telephone or mailgram;
(3) to refuse any purchase or exchange order; (4) to cancel or rescind any
purchase or exchange order (including, but not limited to, orders deemed to
result in excessive trading, market timing, fraud, or 5% ownership) upon notice
to the shareholder within five business days of the trade or if the written
confirmation has not been received by the shareholder, whichever is sooner; (5)
to freeze any account and suspend account services when notice has been received
of a dispute between the regis-
<PAGE>


T. ROWE PRICE                                 44
tered or beneficial account owners or there is reason to believe a fraudulent
transaction may occur; (6) to otherwise modify the conditions of purchase and
any services at any time; and (7) to act on instructions believed to be genuine.
These actions will be taken when, in the sole discretion of management, they are
deemed to be in the best interest of the fund.

In an effort to protect each fund from the possible adverse effects of a
substantial redemption in a large account, as a matter of general policy, no
shareholder or group of shareholders controlled by the same person or group of
persons will knowingly be permitted to purchase in excess of 5% of the
outstanding shares of the fund, except upon approval of the fund's management.



 INFORMATION ABOUT YOUR SERVICES
 ----------------------------------------------------------
            Shareholder Services 1-800-225-5132 Investor Services 1-800-638-5660
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize or request on the New
Account Form. By signing up for services on the New Account Form rather than
later on, you avoid having to complete a separate form and obtain a signature
guarantee. This section discusses some of the services currently offered. Our
Services Guide, which we mail to all new shareholders, contains detailed
descriptions of these and other services.

Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.

                                                                Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k)s, and 403(b)(7)s. For
information on IRAs or our no-load variable annuity, call Investor Services. For
information on all other retirement plans, please call our Trust Company at
1-800-492-7670.
<PAGE>


ABOUT THE FUNDS                               45
                  Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via a toll-free number enables you to (1) access information on
fund performance, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers in this section).

                                                  Web Address www.troweprice.com
After authorizing this service, account transactions may also be conducted
through our Web site on the Internet. If you subscribe to America Online/(R)/,
you can access our Web site via keyword "T. Rowe Price" and conduct transactions
in your account.

                                                Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.

                                                  Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the back cover.

                                                            Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.

By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.

                                                                    Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
<PAGE>


T. ROWE PRICE                                 46
                                                             Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:

Automatic Asset Builder
You can instruct us to move $50 or more from your bank account, or you can
instruct your employer to send all or a portion of your paycheck to the fund or
funds you designate.

Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.



 T. ROWE PRICE BROKERAGE
 ----------------------------------------------------------
              To Open an Account 1-800-638-5660 For Existing Brokerage Customers
                                                                  1-800-225-7720
Investments available through our brokerage service include  stocks, options,
bonds, and others  at commission savings over full-service brokers*. We also
provide a wide range of services, including:

Automated Telephone and Computer Services
You can enter stock and option orders, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades entered through Tele-Trader save you an additional
10% on commissions. For stock trades entered through Internet-Trader, you will
pay a commission of $24.95 for up to 1,000 shares plus $.02 for each share over
1,000. Option trades entered through Internet-Trader save you 10% over our
standard commission schedule. All trades are subject to a $35 minimum commission
except stock trades placed through Internet-Trader.

Investor Information
A variety of informative reports, such as our Brokerage Insights series and S&P
Market Month newsletter, as well as access to on-line research tools can help
you better evaluate economic trends and investment opportunities.

Dividend Reinvestment Service
If you elect to participate in this service, the cash dividends from the
eligible securities held in your account will automatically be reinvested in
additional shares of
<PAGE>


ABOUT THE FUNDS                               47
the same securities free of charge. Dividend payments must be $10.00 or greater
to qualify for reinvestment. Most securities listed on national securities
exchanges or on Nasdaq are eligible for this service.

/*Services //v//ary //b//y //f//irm./

/T. Rowe Price// Brokerage is a division of //T. Rowe Price// Investment /
/Services, Inc., Member NASD/SIPC./



 INVESTMENT INFORMATION
 ----------------------------------------------------------
To help shareholders monitor their investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements. Most of this information is also
available on our Web site at www.troweprice.com.

Shareholder Reports
Fund managers' reviews of their strategies and performance. If several members
of a household own the same fund, only one fund report is mailed to that
address. To receive additional copies, please call Shareholder Services or write
to us at P.O. Box 17630, Baltimore, Maryland 21297-1630.

The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.

Performance Update
A quarterly review of all T. Rowe Price fund results.

Insights
Educational reports on investment strategies and financial markets.

Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, Managing Your Retirement Distribution,
Personal Strategy Planner, Retirees Financial Guide, Retirement Planning Kit,
and Tax Considerations for Investors.
<PAGE>


T. ROWE PRICE                                 48
<PAGE>

To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
informative reports.
A fund Statement of Additional Information has been filed with the Securities
and Exchange Commission and is incorporated by reference into this prospectus.
Further information about fund investments, including a review of market
conditions and the manager's recent strategies and their impact on performance,
is available in the annual and semiannual shareholder reports. To obtain free
copies of any of these documents, or for shareholder inquiries, call
1-800-638-5660.

Fund information and Statements of Additional Information are also available
from the Public Reference Room of the Securities and Exchange Commission.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-202-942-8090. Fund reports and other fund information are
available on the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. Copies of this information may be obtained, after paying a
duplicating fee, by electronic request at publicinfo@sec.gov, or by writing the
Public Reference Room, Washington D.C. 20549-0102.

Walk-in
Investor Centers
 For directions, call 1-800-225-5132 or visit our Web site

Baltimore Area
Downtown
 101 East Lombard Street

Owings Mills
 Three Financial Center 4515 Painters Mill Road

Boston Area
 386 Washington Street Wellesley

Colorado Springs
 4410 ArrowsWest Drive

Los Angeles Area
 Warner Center 21800 Oxnard Street Suite 270 Woodland Hills

Tampa
 4200 West Cypress Street 10th Floor

Washington, D.C.
 900 17th Street, N.W. Farragut Square
 For Mutual Fund or T. Rowe Price Brokerage Information
 Investor Services
 1-800-638-5660

For Existing Accounts
 Shareholder Services
 1-800-225-5132

For Yields, Prices, Account Information, or to Conduct Transactions
 Tele*Access/(R)/
 24 hours, 7 days 1-800-638-2587

Internet Address
 www.troweprice.com



LOGO

T. Rowe Price Associates, Inc. 100 East Pratt Street Baltimore, MD 21202

1940 Act File No. 811-3055; 811-3872; 811-7051; 811-2684; 811-4163

C03-040 7/1/00


<PAGE>

  STATEMENT OF ADDITIONAL INFORMATION
   The date of this Statement of Additional Information is July 1, 2000.

         T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST (the "Trust")
              California Tax-Free Bond Fund
              California Tax-Free Money Fund
                                       and
         T. ROWE PRICE STATE TAX-FREE INCOME TRUST (the "Trust")
              Florida Intermediate Tax-Free Fund
              Georgia Tax-Free Bond Fund
              Maryland Short-Term Tax-Free Bond Fund
              Maryland Tax-Free Bond Fund
              New Jersey Tax-Free Bond Fund
              New York Tax-Free Bond Fund
              New York Tax-Free Money Fund
              Virginia Short-Term Tax-Free Bond Fund
              Virginia Tax-Free Bond Fund
                                       and
         T. ROWE PRICE TAX-EFFICIENT FUNDS, INC.
              T. Rowe Price Tax-Efficient Balanced Fund
              T. Rowe Price Tax-Efficient Growth Fund
         T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.

              T. Rowe Price Tax-Exempt Money Fund
              T. Rowe Price Tax-Exempt Money Fund--PLUS Class
         T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
         T. ROWE PRICE TAX-FREE INCOME FUND, INC.
         T. ROWE PRICE TAX-FREE INTERMEDIATE BOND FUND, INC.
         T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
 -------------------------------------------------------------------------------

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

   This Statement of Additional Information is not a prospectus but should be
   read in conjunction with the appropriate fund prospectus dated July 1, 2000,
   which may be obtained from T. Rowe Price Investment Services, Inc.
   ("Investment Services").

   Each fund's financial statements for the year ended February 29, 2000, and
   the report of independent accountants are included in each fund's Annual
   Report and incorporated by reference into this Statement of Additional
   Information.

   If you would like a prospectus or an annual or semiannual shareholder report
   for a fund of which you are not a shareholder, please call 1-800-638-5660. A
   prospectus with more complete information, including management fees and
   expenses, will be sent to you. Please read it carefully.

   C03-043 7/1/00
<PAGE>

<TABLE>
<CAPTION>
                              TABLE OF CONTENTS
                              -----------------
                        Page                                             Page
                        ----                                             ----
<S>                     <S>   <C>  <S>                                   <S>
Capital Stock             69       Pricing of Securities                     60

------------------------------     --------------------------------------------
Code of Ethics            53       Principal Holders of Securities           47

------------------------------     --------------------------------------------
Custodian                 53       Ratings of Commercial Paper               75

------------------------------     --------------------------------------------
Distributor for the       52       Ratings of Municipal Debt Securities      73
Funds
------------------------------     --------------------------------------------
Dividends and             62       Ratings of Municipal Notes and            75
Distributions                      Variable Rate Securities
------------------------------     --------------------------------------------
Federal Registration      71       Risk Factors                               3
of Shares
------------------------------     --------------------------------------------
Independent               71       Risk Factors Associated with a             5
Accountants                        California Portfolio
------------------------------     --------------------------------------------
Investment Management     48       Risk Factors Associated with a             7
Services                           Florida Portfolio
------------------------------     --------------------------------------------
Investment Objectives      2       Risk Factors Associated with a             9
and Policies                       Georgia Portfolio
------------------------------     --------------------------------------------
Investment Performance    66       Risk Factors Associated with a            11
                                   Maryland Portfolio
------------------------------     --------------------------------------------
Investment Program        19       Risk Factors Associated with a New        12
                                   Jersey Portfolio
------------------------------     --------------------------------------------
Investment                37       Risk Factors Associated with a New        13
Restrictions                       York Portfolio
------------------------------     --------------------------------------------
Legal Counsel             71       Risk Factors Associated with a            16
                                   Virginia Portfolio
------------------------------     --------------------------------------------
Management of the                  Risk Factors Associated with
Funds                              Tax-Efficient Growth Fund and the
                          40       Equity Portion of Tax-Efficient           18
                                   Balanced Fund
------------------------------     --------------------------------------------
Net Asset Value Per       61       Services by Outside Parties               53
Share
------------------------------     --------------------------------------------
Organization of the       70       Tax Status                                62
Funds
------------------------------     --------------------------------------------
Portfolio Management      26       Yield Information                         64
Practices
------------------------------     --------------------------------------------
Portfolio Transactions    54

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





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

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

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

   Throughout this Statement of Additional Information, "the fund" is intended
   to refer to each fund listed on the cover page, unless otherwise indicated.


<PAGE>

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

   All Funds (other than Tax-Efficient Growth Fund)

   The funds are designed for investors who, because of their tax bracket, can
   benefit from investment in municipal bonds whose income is exempt from
   federal taxes. The funds are not appropriate for qualified retirement plans
   where income is already tax-deferred.

   All Funds

   Because of their investment policies, the funds may or may not be suitable or
   appropriate for all investors. The funds (except for the Money Funds) are not
   an appropriate investment for those whose primary objective is principal
   stability. The value of the portfolio securities of the fund will fluctuate
   based upon market conditions. The Tax-Efficient Balanced Fund will normally
   have 40-50% of its assets in equity securities. The Tax-Efficient Growth Fund
   will normally invest substantially all of its assets in common stocks. Assets
   of these funds invested in equity securities will be subject to all of the
   risks of investing in the stock market. There can, of course, be no assurance
   that the funds will achieve their investment objectives.

   All Funds (other than Tax-Efficient Growth Fund)


                              Municipal Securities

   Yields on municipal securities are dependent on a variety of factors,
   including the general conditions of the money market and the municipal bond
   market, the size of a particular offering, the maturity of the obligations,
   and the rating of the issue. Municipal securities with longer maturities tend
   to produce higher yields and are generally subject to potentially greater
   capital appreciation and depreciation than obligations with shorter
   maturities and lower yields. The market prices of municipal securities
   usually vary, depending upon available yields. An increase in interest rates
   will generally reduce the value of portfolio investments, and a decline in
   interest rates will generally increase the value of portfolio investments.
   The ability of all the funds to achieve their investment objectives is also
   dependent on the continuing ability of the issuers of municipal securities in
   which the funds invest to meet their obligations for the payment of interest
   and principal when due. The ratings of Moody's, S&P, and Fitch IBCA, Inc.
   ("Fitch") represent their opinions as to the quality of municipal securities
   which they undertake to rate. Ratings are not absolute standards of quality;
   consequently, municipal securities with the same maturity, coupon, and rating
   may have different yields. There are variations in municipal securities, both
   within a particular classification and between classifications, depending on
   numerous factors. It should also be pointed out that, unlike other types of
   investments, offerings of municipal securities have traditionally not been
   subject to regulation by, or registration with, the SEC, although there have
   been proposals which would provide for regulation in the future.

   The federal bankruptcy statutes relating to the debts of political
   subdivisions and authorities of states of the United States provide that, in
   certain circumstances, such subdivisions or authorities may be authorized to
   initiate bankruptcy proceedings without prior notice to or consent of
   creditors, which proceedings could result in material and adverse changes in
   the rights of holders of their obligations.

   Proposals have been introduced in Congress to restrict or eliminate the
   federal income tax exemption for interest on municipal securities, and
   similar proposals may be introduced in the future. Proposed "Flat Tax" and
   "Value Added Tax" proposals would also have the effect of eliminating the tax
   preference for municipal securities. Some of the past proposals would have
   applied to interest on municipal securities issued before the date of
   enactment, which would have adversely affected their value to a material
   degree. If such a proposal were enacted, the availability of municipal
   securities for investment by the funds and the value of a fund's portfolio
   would be affected and, in such an event, a fund would reevaluate its
   investment objectives and policies.


<PAGE>

   Although the banks and securities dealers with which the fund will transact
   business will be banks and securities dealers that T. Rowe Price believes to
   be financially sound, there can be no assurance that they will be able to
   honor their obligations to the fund with respect to such transactions.

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

   Municipal Bond Insurance All of the funds may purchase insured bonds from
   time to time. Municipal bond insurance provides an unconditional and
   irrevocable guarantee that the insured bond's principal and interest will be
   paid when due. The guarantee is purchased from a private, non-governmental
   insurance company.

   There are two types of insured securities that may be purchased by the funds:
   bonds carrying either (1) new issue insurance; or (2) secondary insurance.
   New issue insurance is purchased by the issuer of a bond in order to improve
   -------------------
   the bond's credit rating. By meeting the insurer's standards and paying an
   insurance premium based on the bond's principal value, the issuer is able to
   obtain a higher credit rating for the bond. Once purchased, municipal bond
   insurance cannot be canceled, and the protection it affords continues as long
   as the bonds are outstanding and the insurer remains solvent.

   The funds may also purchase bonds that carry secondary insurance purchased by
                                                -------------------
   an investor after a bond's original issuance. Such policies insure a security
   for the remainder of its term. Generally, the funds expect that portfolio
   bonds carrying secondary insurance will have been insured by a prior
   investor. However, the funds may, on occasion, purchase secondary insurance
   on their own behalf.

   Each of the municipal bond insurance companies has established reserves to
   cover estimated losses. Both the method of establishing these reserves and
   the amount of the reserves vary from company to company. The risk that a
   municipal bond insurance company may experience a claim extends over the life
   of each insured bond. Municipal bond insurance companies are obligated to pay
   a bond's interest and principal when due if the issuing entity defaults on
   the insured bond. Although defaults on insured municipal bonds have been low
   to date, there is no assurance this low rate will continue in the future. A
   higher than expected default rate could deplete loss reserves and adversely
   affect the ability of a municipal bond insurer to pay claims to holders of
   insured bonds, such as the fund.

   Money Funds

   The Money Funds will limit their purchases of portfolio instruments to those
   U.S. dollar-denominated securities which the fund's Board of
   Directors/Trustees determines present minimal credit risk, and which are
   Eligible Securities as defined in Rule 2a-7 under the 1940 Act. Eligible
   Securities are generally securities which have been rated (or whose issuer
   has been rated or whose issuer has comparable securities rated) in one of the
   two highest short-term rating categories (which may include sub-categories)
   by nationally recognized statistical rating organizations or, in the case of
   any instrument that is not so rated, is of comparable high quality as
   determined by T. Rowe Price pursuant to written guidelines established under
   the supervision of the fund's Board of Directors/Trustees. In addition, the
   fund may treat variable and floating rate instruments with demand features as
   short-term securities pursuant to Rule 2a-7 under the 1940 Act.

   Bond and Balanced Funds

   Because of their investment policies, the Bond and Balanced Funds may not be
   suitable or appropriate for all investors. The funds are designed for
   investors who wish to invest in non-money market funds for income, and who
   would benefit, because of their tax bracket, from receiving income that is
   exempt from federal income taxes. The Bond and Balanced Funds' investment
   programs permit the purchase of investment-grade securities that do not meet
   the high-quality standards of the Money Fund. Since investors generally
   perceive


<PAGE>

   that there are greater risks associated with investment in lower-quality
   securities, the yield from such securities normally exceeds those obtainable
   from higher-quality securities. In addition, the principal value of long-term
   lower-rated securities generally will fluctuate more widely than
   higher-quality securities. Lower-quality investments entail a higher risk of
   default--that is, the nonpayment of interest and principal by the issuer than
   higher-quality investments. The value of the portfolio securities of the Bond
   and Balanced Funds will fluctuate based upon market conditions. Although
   these funds seek to reduce credit risk by investing in a diversified
   portfolio, such diversification does not eliminate all risk. These funds are
   also not intended to provide a vehicle for short-term trading purposes.

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


               RISK FACTORS ASSOCIATED WITH A CALIFORNIA PORTFOLIO
   The funds' concentration in debt obligations of one state carries a higher
   risk than a portfolio that is geographically diversified. In addition to
   state general obligations and notes, the funds will invest in local bond
   issues, lease obligations and revenue bonds, the credit quality and risk of
   which will vary according to each security's own structure and underlying
   economics.

   Debt The state, its agencies and local governmental entities issued $27.0
   billion in long-term debt in 1999. Approximately 25% was general obligation
   debt, backed by the taxing power of the issuer, while 75% were revenue bonds
   and lease-backed obligations, issued for a wide variety of purposes,
   including transportation, housing, education and health care.

   As of February 1, 2000, the State of California had approximately $20.4
   billion in outstanding general obligation bonds secured by the state's
   revenue and taxing power. An additional $11.7 billion in authorized but
   unissued state general obligation debt remains to be issued to comply with
   voter initiatives and legislative mandates. Debt service on roughly 20% of
   the state's outstanding debt is met from revenue producing projects such as
   water, harbor, and housing facilities. As part of its cash management
   program, the state regularly issues short-term notes to meet its disbursement
   requirements in advance of revenue collections. During fiscal 2000, the state
   issued $1.0 billion in short-term notes for this purpose. California also
   operates a commercial paper program which it uses to finance construction
   projects. $1.0 billion of commercial paper was outstanding as of February 1,
   2000. The state supports $5.7 billion in lease-purchase obligations
   attributable to the State Public Works Board and other issuers. These
   obligations are not backed by the full faith and credit of the state but
   instead, are subject to annual appropriations from the State's General Fund.

   In addition to the state obligations described above, bonds have been issued
   by special public authorities in California that are not obligations of the
   state. These include bonds issued by the California Housing Finance Agency,
   the Department of Water Resources, the Department of Veterans Affairs,
   California State University and the California Transportation Commission.

   Economy California's economy is the largest among the 50 states and one of
   the largest in the world. Its 1999 population of 34 million represents 12% of
   the U.S. total. The state's per capita personal income in 1999 exceeded the
   U.S. average by 3%. The State of California has benefitted from its focus on
   the high technology sector.


<PAGE>

   California's economy suffered through a severe recession during the early
   1990s as the effects of a slowdown in the national economy were compounded by
   federal defense spending cuts and military base closings. Since 1994, the
   state has been in a steady recovery, exhibiting significant job growth and
   gains in personal income. Growth was expected to moderate in 1999 and 2000,
   but is, in fact, continuing at strong levels. The level of economic activity
   within the state is important as it influences the growth or contraction of
   state and local government revenues available for operations and debt
   service.

   Recessionary influences and the effects of overbuilding in selected areas
   resulted in a contraction in real estate values in many regions of the state
   in prior years. All urban areas have shown improvement corresponding to gains
   in the general economic level. Future declines in property values could have
   a negative effect on the ability of certain local governments to meet their
   obligations.

   As a state, California is more prone to earthquakes than most other states in
   the country, creating potential economic losses from damages. On January 17,
   1994, a major earthquake, measuring 6.8 on the Richter scale, hit Southern
   California centered in the area of Northridge. Total damage has been
   estimated at $20 billion. Significant federal aid has been received.

   Legislative Due to the funds' concentration in the State of California and
   its municipal issuers, the funds may be affected by certain amendments to the
   California constitution and state statutes which limit the taxing and
   spending authority of California governmental entities and may affect their
   ability to meet their debt service obligations.

   In 1978, California voters approved "Proposition 13" adding Article XIIIA, to
   the state constitution which limits ad valorem taxes on real property to 1%
   of "full cash value" and restricts the ability of taxing entities to increase
   real property taxes. In subsequent actions, the state substantially increased
   its expenditures to provide assistance to its local governments to offset the
   losses in revenues and to maintain essential local services; later the state
   phased out most local aid in response to its own fiscal pressures.

   Another constitutional amendment, Article XIIIB, was passed by voters in 1979
   prohibiting the state from spending revenues beyond its annually adjusted
   "appropriations limit." Any revenues exceeding this limit must be returned to
   the taxpayers as a revision in the tax rate or fee schedule over the
   following two years. Such a refund, in the amount of $1.1 billion, occurred
   in fiscal year 1987 and it is possible another refund will occur in the near
   term based on the strong growth in personal income tax revenues.

   Proposition 218, the "Right to Vote on Taxes Act," was approved by the voters
   in 1996. It further restricts the ability of local governments to levy and
   collect both existing and future taxes, assessments and fees. In addition to
   further limiting the financial flexibility of local governments in the state,
   it also increases the possibility of voter determined tax rollbacks and
   repeals. The interpretation and application of this proposition will
   ultimately be determined by the courts.

   An effect of the tax and spending limitations in California has been a broad
   scale shift by local governments away from general obligation debt that
   requires voter approval and pledging future tax revenues, towards lease
   revenue financing that is subject to abatement and does not require voter
   approval. Lease-backed debt is generally viewed as a less secure form of
   borrowing and therefore entails greater credit risk. Local governments also
   raise capital through the use of Mello-Roos, 1915 Act, and Tax Increment
   Bonds, all of which are generally riskier than general obligation debt as
   they often rely on tax revenues to be generated by future development for
   their support.

   Proposition 98, enacted in 1988, changed the state's method of funding
   education for grades below the university level. Under this constitutional
   amendment, the schools are guaranteed a minimum share of state General Fund
   revenues. The major effect of Proposition 98 has been to restrict the state's
   flexibility to respond to fiscal stress.

   Future initiatives, if proposed and adopted, or future court decisions could
   create renewed pressure on California governments and their ability to raise
   revenues. The state and its underlying localities have displayed flexibility,
   however, in overcoming the negative effects of past initiatives.


<PAGE>

   Financial The recession of the early 1990s placed California's finances under
   pressure. From 1991 through 1995, accumulated deficits were carried over into
   the following years and the state's general obligation bonds were downgraded
   from AAA to A.

   Reflecting the recent trend of economic recovery, the state's financial
   condition has improved considerably. Fiscal 1999 closed with a reserve
   balance of $3.9 billion. Much of this cushion is the result of explosive
   growth in capital gains tax collections and sales tax receipts. The Governor
   has proposed a budget for fiscal 2000 which features continued growth in
   capital gains tax collections, offset by a cut in the vehicle license fee.
   The state's reserve is projected to be $3.0 billion at the end of fiscal 2000
   (1.2% of revenues.) Revenues have been coming in above forecast. In October
   1998, Moody's upgraded the state's general obligation bonds to Aa3 from A1;
   in August 1999, S&P upgraded the state's general obligations to AA- from A+;
   in February 2000, Fitch upgraded the state's general obligation bonds to AA
   from AA-. The consequences of the state's fiscal actions reach beyond its own
   general obligation bond ratings. Many state agencies and local governments
   which depend upon state appropriations realized significant cutbacks in
   funding during the last recession. Entities which have been forced to make
   program reductions or to increase fees or raise special taxes to cover their
   debt service and lease obligations may recover somewhat during periods of
   economic prosperity.

   On December 6, 1994, Orange County filed for protection under Chapter 9 of
   the U.S. Bankruptcy Code after reports of significant losses in its
   investment pool. Upon restructuring, the realized losses in the pool were
   $1.6 billion or 21% of assets. More than 200 public entities, most of which,
   but not all, are located in Orange County were also depositors in the pool.
   The County defaulted on a number of its debt obligations. The County emerged
   from bankruptcy on June 12, 1996. Through a series of long-term financings,
   it repaid most of its obligations to pool depositors and has become current
   on its public debt obligations. The balance of claims against the County are
   payable from any proceeds received from litigation against securities dealers
   and other parties. The County's ratings were restored to investment grade in
   1998 and were upgraded again in 1999.

   Sectors Certain areas of potential investment concentration present unique
   risks. In 1999, $2.4 billion of tax- exempt debt issued in California was for
   public or nonprofit hospitals. A significant portion of the funds' assets may
   be invested in health care issues. For over a decade, the hospital industry
   has been under significant pressure to reduce expenses and shorten length of
   stay, a phenomenon which has negatively affected the financial health of many
   hospitals. All hospitals are dependent on third-party reimbursement sources
   such as the federal Medicare and state MediCal programs or private insurers.
   To the extent these third-party payers reduce reimbursement levels, the
   individual hospitals may be affected. In the face of these pressures, the
   trend of hospital mergers and acquisitions has accelerated in recent years.
   These organizational changes present both risks and opportunities for the
   institutions involved.

   The funds may from time to time invest in electric revenue issues. The
   financial performance of these utilities may be impacted as the industry
   moves toward deregulation and increased competition. California's electric
   utility restructuring plan, Assembly Bill 1890, permits direct competition to
   be phased in between 1998 and 2002. Municipal utilities, while not subject to
   the legislation, are being faced with competitive market forces and must use
   the transition period wisely to proactively prepare for deregulation. They
   are under pressure to reduce rates and cut costs in order to maintain their
   customer bases. In addition, some electric revenue issues have exposure to or
   participate in nuclear power plants which could affect the issuer's financial
   performance. Risks include unexpected outages or plant shutdowns, increased
   Nuclear Regulatory Commission surveillance or inadequate rate relief.

   The funds may invest in private activity bond issues for corporate and
   nonprofit borrowers. These issues sold through various governmental conduits,
   are backed solely by the revenues pledged by the respective borrower
   corporations. No governmental support is implied.


                RISK FACTORS ASSOCIATED WITH A FLORIDA PORTFOLIO
   The fund's program of investing primarily in AAA-rated Florida municipal
   bonds should significantly lessen the credit risks which would be associated
   with a portfolio of lower quality Florida bonds. Nevertheless, the fund's
   concentration in securities issued by the State of Florida and its political
   subdivisions involves greater


<PAGE>

   risk than a fund broadly invested in bonds across many states and
   municipalities. The credit quality of the fund will depend upon the continued
   financial strength of the State of Florida and the numerous public bodies,
   municipalities and other issuers of debt securities in Florida.

   Debt The State of Florida and its local governments issue three basic types
   of debt, with varying degrees of credit risk: general obligation bonds backed
   by the unlimited taxing power of the issuer, revenue bonds secured by
   specific pledged funds or charges for a related project, and tax-exempt lease
   obligations, supported by annual appropriations from the issuer, usually with
   no implied tax or specific revenue pledge. During 1999, $11.6 billion in
   state and local debt was issued in Florida, a 24% decrease from the previous
   year. Debt issued in 1999 was for a wide variety of public purposes,
   including transportation, housing, education, health care and utilities.

   As of June 30,1999, the State of Florida had $9.2 billion outstanding general
   obligation bonds secured by the state's full faith and credit and taxing
   power. General bonded debt service accounted for a modest 2.4% of all
   governmental expenditures in fiscal year 1990. Approximately an additional $4
   billion in outstanding bonds have been issued by the state and secured by
   limited state tax and revenue sources. General obligation debt of the State
   of Florida is rated Aa2 by Moody's, AA+ by S&P, and AA by Fitch as of May 8,
   2000. State debt may only be used to fund capital outlay projects; Florida is
   not authorized to issue obligations to fund operations.

   Several agencies of the state are also authorized to issue debt which does
   not represent a pledge of the state's credit. The Florida Housing Finance
   Authority and Florida Board of Regents are the largest issuers of this type.
   The principal and interest on bonds issued by these bodies are payable solely
   from specified sources such as mortgage repayments and university tuition and
   fees.

   Economy The State of Florida has a population of approximately 15.3 million,
   making it the fourth largest state. Due to immigration, the state's
   population has grown at a rate exceeding the nation for four decades.
   Florida's economy is broadly based with a large concentration in the service
   and trade sectors. Tourism is one of Florida's most important industries. In
   1999, visitor arrivals once again surpassed all previous years and this trend
   is expected to continue. Forecasts show a 5% increase is anticipated for 2000
   and total arrivals will grow to 51.2 million.

   During most of the 1980s, as Florida's population and employment base grew,
   its job growth rate was double that of the nation. However, beginning in
   1988, job growth slowed and unemployment rates began trending above national
   levels for a number of years. During 1991, Florida's unemployment rate was
   8.2% versus 7.4% nationally. Florida's rapid non-farm job growth since 1996
   has reversed this trend and the state's February 2000 unemployment rate now
   stands at 3.7% versus the rate of 4% one year ago. State per capita income is
   98% of the national average and 108% of the level for the Southeast.

   Legislative The State of Florida does not have a personal income tax. A
   constitutional amendment would be required in order to implement such a tax.
   Although the probability appears very low, the fund cannot rule out the
   possibility that a personal income tax may be implemented at some time in the
   future. If such a tax were to be imposed, there is no assurance that interest
   earned on Florida Municipal Obligations would be exempt from this tax.

   Under current Florida law, shares of the fund will be exempt from the state's
   intangible personal property tax to the extent that on the annual assessment
   date (January 1) its assets are solely invested in Florida Municipal
   Obligations and U.S. government securities, certain short-term cash
   investments, or other exempt securities. In recent years, the Florida
   legislature began efforts to gradually reduce the intangibles tax. In the
   1998 and 1999 legislative sessions the rate has been reduced to its current
   level of $.01 per thousand dollars. It is anticipated that the legislature
   will continue to reduce or possibly eliminate the tax in future years.

   The Florida Constitution limits the total ad valorem property tax that may be
   levied by each county, municipality and school district to ten mills (1.0% of
   value). The limit applies only to taxes levied for operating purposes and
   excludes taxes levied for the payment of bonds. This restricts the operating
   flexibility of local governments in the state and may result from time to
   time in budget deficits for some local units.


<PAGE>

   Financial The Florida Constitution and Statutes mandate that the state budget
   as a whole, and each separate fund within the state budget, be kept in
   balance from currently available revenues each state fiscal year (July 1-June
   30). The Governor and Comptroller are responsible for insuring that
   sufficient revenues are collected to meet appropriations and that no deficit
   occurs in any state fund.

   The state's revenue structure is narrowly based, relying on the sales and
   selective sales tax for 75% of its general revenues. This structure has
   brought some volatility to the state's finances, demonstrated most recently
   when the state developed budget shortfalls in fiscal years 1991 and 1992.
   Additionally, the ongoing moratorium one Commerce and internet sales tax
   could affect the states general revenues if such sales are allowed to
   continue without taxation. The state's location also leaves it vulnerable to
   natural disasters such as hurricanes. While these events can be devastating,
   the impact can sometimes be stimulative to the economy. For example, the
   state's finances received a substantial boost in fiscal 1993 as a result of
   increased economic activity associated with rebuilding efforts after
   Hurricane Andrew, which hit south Florida on August 24, 1992. Finally, in
   1996 Florida settled a lawsuit with the tobacco industry where the state
   sought to recover the costs associated with tobacco usage by Floridians. The
   total amount expected to be collected from the tobacco companies through the
   settlement is estimated to be $13 billion over 25 years. This money is
   earmarked to be used for children's health coverage, to reimburse the state
   for smoking related medical expenses and for state enforcement efforts to
   reduce sales of tobacco products. To date, settlement collections of $1
   billion have been reported by the state.

   In November 1994, state voters passed a proposal to limit state revenue
   growth to the average annual growth in personal income over the previous five
   years. The cap excludes revenue to pay certain expenditures, including debt
   service. The limitation should not pose an onerous burden on state finance.
   However, the demand for governmental services continues to grow because of
   above-average population growth and demographics.

   Sectors Certain areas of potential investment concentration present unique
   risks. For example, a significant portion of the fund's assets may be
   invested in health care issues.

   For over a decade, the hospital industry has been under significant pressure
   to reduce expenses and shorten length of stay, a phenomenon which has
   negatively affected the financial health of many hospitals. All hospitals are
   dependent on third-party reimbursement sources such as the federal Medicare
   and state Medicaid programs or private insurers. To the extent these payors
   reduce reimbursement levels, the individual hospitals may be affected. In the
   face of these pressures, the trend of hospital mergers and acquisitions has
   accelerated in recent years. These organizational changes present both risks
   and opportunities for the institutions involved. Due to the high proportion
   of elderly residents, Florida hospitals tend to be highly dependent on
   Medicare. In addition to the regulations imposed by Medicare, the state also
   regulates health care. A state board must approve the budgets of all Florida
   hospitals; certificates of need are required for all significant capital
   expenditures. The primary management objective is cost control. The inability
   of some hospitals to achieve adequate cost control while operating in a
   competitive environment has led to a number of hospital bond defaults.

   The fund may from time to time invest in electric revenue issues which have
   exposure to or participate in nuclear power plants which could affect the
   issuers' financial performance. Such risks include unexpected outages or
   plant shutdowns, increased Nuclear Regulatory Commission surveillance or
   inadequate rate relief. In addition, the financial performance of electric
   utilities may be impacted by increased competition and deregulation in the
   electric utility industry.

   The fund may invest in private activity bond issues for corporate and
   nonprofit borrowers. These issues, sold through various governmental
   conduits, are backed solely by the revenues pledged by the respective
   borrowing corporations. No government support is implied.


                RISK FACTORS ASSOCIATED WITH A GEORGIA PORTFOLIO
   The fund's concentration in the debt obligations of one state carries a
   higher risk than a portfolio that is geographically diversified. In addition
   to State of Georgia general obligations and state agency issues, the fund


<PAGE>

   will invest in local bond issues, lease obligations and revenue bonds, the
   credit quality and risk of which will vary according to each security's own
   structure and underlying economics.

   Debt The State of Georgia and its local governments issued $5.6 billion in
   municipal bonds in 1999, a 7% decrease from the previous year. As of May 8,
   2000, the state was rated Aaa by Moody's and AAA by S&P and Fitch.

   The State of Georgia currently has net direct obligations of approximately
   $5.2 billion. Since 1973, when a Constitutional Amendment authorizing the
   issuance of state general obligation (GO) bonds was implemented, the state
   has funded most of its capital needs through the issuance of GO bonds.
   Previously, capital requirements were funded through the issuance of bonds by
   10 separate authorities and secured by lease rental agreements and annual
   state appropriations. Its Constitution permits the state to issue bonds for
   two types of public purposes: (1) general obligation debt and (2) guaranteed
   revenue debt. The Constitution imposes certain debt limits and controls. GO
   debt service cannot exceed 10% of total revenue receipts less refunds of the
   state treasury. GO bonds have a maximum maturity of 25 years and 67% of the
   state's debt is scheduled to be retired in 10 years or less. Maximum GO debt
   service requirements are well below the legal limit at 5.1% of fiscal year
   1999 treasury receipts.

   Georgia has also taken the step to establish "debt affordability" limits
   which state that outstanding debt will not exceed 2.7% of personal income or
   that maximum annual debt service will not exceed 5% of prior years revenues.
   State debt issuance in the next few years will be limited so that the state
   will decrease to these levels.

   In addition to the general obligation and lease-backed debt described above,
   $318 million bonds have been issued and are outstanding by the Georgia World
   Congress Authority and $754 million bonds have been issued and are
   outstanding by the Georgia Housing and Finance Authority, none of which
   represent direct obligations of the state.

   Economy The State of Georgia has a population of approximately 7.6 million,
   making it the 10th largest state. Since the 1960s, the state's population has
   grown at a rate exceeding the national average, with the growth rate during
   the 1980s nearly twice that of the entire country. Stable to strong economic
   growth during the 1980s was led by the Atlanta metropolitan statistical area,
   where approximately 45% of the state's population is located. This area
   includes the capital city of Atlanta, and 18 surrounding counties. The next
   largest metropolitan area is the Columbus-Muscogee area followed by the Macon
   area.

   The state's economy is well diversified. The current labor force of 4 million
   is largely concentrated in service and wholesale/retail trade jobs, followed
   by lesser amounts in manufacturing and government. Employment gains have
   substantially exceeded the region and the U.S. since 1980. Georgia's one year
   employment growth (February 1999 to February 2000) stood at 4.6% compared to
   the national rate of 2.4%. The state's economy continues to outperform the
   nation. Georgia's per capita income has steadily improved against the
   national average since the 1960s and currently is 94% of the U.S. and 105% of
   the Southeast region.

   Financial To a large degree, the creditworthiness of the portfolio is
   dependent on the financial strength of the State of Georgia and its
   localities. During the 1980s, the state's strong economic performance
   translated into solid financial performance and the accumulation of
   substantial reserves.

   During fiscal 1989 to 1991, the state's financial condition was affected by
   three years of revenue shortfalls brought on by recession. During these
   periods, the Governor called special legislative sessions to enact sizable
   spending cuts to achieve budget balance. Economic conditions improved in
   1992, allowing the state to restore its financial cushion. Results for fiscal
   1998 showed a continuation of this positive trend with a surplus of $685
   million and an ending general fund balance of $1.2 billion, or 9% of
   revenues.

   A significant portion of the portfolio's assets is expected to be invested in
   the debt obligations of local governments and public authorities with
   investment-grade ratings of BBB or higher. While local governments in Georgia
   are primarily reliant on independent revenue sources, such as property taxes,
   they are not immune to budget shortfalls caused by cutbacks in state aid. The
   fund may purchase obligations issued by public authorities in Georgia which
   are not backed by the full faith and credit of the state and may or may not
   be subject to annual appropriations from the State's General Fund. Likewise,
   certain enterprises such as water and sewer systems or hospitals may be
   affected by changes in economic activity.


<PAGE>

   Sectors Certain areas of potential investment concentration present unique
   risks. A significant portion of the fund's assets may be invested in health
   care issues. For over a decade, the hospital industry has been under
   significant pressure to reduce expenses and shorten length of stay, a
   phenomenon which has negatively affected the financial health of many
   hospitals. All hospitals are dependent on third-party reimbursement sources
   such as the federal Medicare and state Medicaid programs or private insurers.
   To the extent these payors reduce reimbursement levels, the individual
   hospitals may be affected. In the face of these pressures, the trend of
   hospital mergers and acquisitions has accelerated in recent years. These
   organizational changes present both risks and opportunities for the
   institutions involved.

   The fund may from time to time invest in electric revenue issues which have
   exposure to or participate in nuclear power plants which could affect the
   issuers' financial performance. Such risks include unexpected outages or
   plant shutdowns, increased Nuclear Regulatory Commission surveillance or
   inadequate rate relief. In addition, the financial performance of electric
   utilities may be impacted by increased competition and deregulation of the
   electric utility industry.

   The fund may invest in private activity bond issues for corporate and
   nonprofit borrowers. These issues sold through various governmental conduits,
   are backed solely by the revenues pledged by the respective borrowing
   corporations. No governmental support is implied.


                RISK FACTORS ASSOCIATED WITH A MARYLAND PORTFOLIO
   The fund's concentration in the debt obligations of one state carries a
   higher risk than a portfolio that is more geographically diversified. In
   addition to State of Maryland general obligations and state agency issues,
   the fund will invest in local bond issues, lease obligations and revenue
   bonds, the credit quality and risk of which will vary according to each
   security's own structure and underlying economics.

   Debt The State of Maryland and its local governments issue two basic types of
   debt, with varying degrees of credit risk: general obligation bonds backed by
   the unlimited taxing power of the issuer and revenue bonds secured by
   specific pledged fees or charges for a related project. Included within the
   revenue bond sector are tax-exempt lease obligations that are subject to
   annual appropriations of a governmental body, usually with no implied tax or
   specific revenue pledge.

   The State of Maryland disclosed in its fiscal year 1999 Comprehensive Annual
   Financial Report (CAFR) dated June 30, 1999 that it has approximately $3.5
   billion in general obligation bonds outstanding and an additional $1.4
   billion in other tax-supported debt. General obligation debt of the State of
   Maryland is rated Triple-A by Moody's, S&P, and Fitch. There is no general
   debt limit imposed by the State Constitution or public general laws. The
   State Constitution imposes a 15-year maturity limit on state general
   obligation bonds. Although voters approved a constitutional amendment in 1982
   permitting the state to borrow up to $100 million in short-term notes in
   anticipation of taxes and revenues, the state has not made use of this
   authority.

   Many agencies of the state government are authorized to borrow money under
   legislation which expressly provides that the loan obligations shall not be
   deemed to constitute debt or a pledge of the faith and credit of the state.
   The Community Development Administration of the Department of Housing and
   Community Development, the Maryland Water Quality Financing Administration of
   the Department of Environment, the Maryland State Lottery Agency, certain
   State higher education institutions, the Maryland Stadium Authority, the
   Maryland Food Center Authority, and the Maryland Environmental Service have
   issued and have outstanding bonds of this type. The principal of and interest
   on bonds issued by these bodies are payable solely from pledged revenues,
   principally fees generated from use of the facilities, enterprises financed
   by the bonds, or other dedicated fees.

   Economy According to the 1999 CAFR, Maryland experienced solid growth in
   calendar year 1998. The strongest areas of employment growth were services,
   construction, and government. Total non-agricultural employment in the State
   increased 2.5%. The State reports that non-agricultural employment is
   expected to grow 2.1% in 1999, slowing to 1.6% in 2000. Personal income is
   estimated to grow by 5.7% in 1999, decelerating slightly to 5.6% in 2000.
   Projections of slower growth in employment and personal income reflect the
   expectation that the nation will experience an economic slowdown in 2000.


<PAGE>

   Financial To a large degree, the risk of the portfolio is dependent upon the
   financial strength of the State of Maryland and its localities. The State
   continues to demonstrate a conservative approach to managing its finances.
   Fiscal year 1999 concluded with a general fund operating surplus of $1.1
   billion. The general fund balance rose to a healthy $2.0 billion or 16% of
   general revenues. The State continues to show strong performance in fiscal
   year 2000. In December 1999, the State's Board of Revenue Estimates reported
   that revenues for fiscal year 2000 have been revised upward to $9.1 billion,
   an increase of $575 million.

   Sectors Investment concentration in a particular sector can present unique
   risks.

   A significant portion of the funds' assets may be invested in health care
   issues. For over a decade, the hospital industry has been under significant
   pressure to reduce expenses and shorten length of stay, a phenomenon which
   has negatively affected the financial health of some hospitals. All hospitals
   are dependent on third-party reimbursement mechanisms. At the present time,
   Maryland hospitals operate under a system in which reimbursement is
   determined by a state-administered set of rates and charges that applies to
   all payors. A federal waiver also allows this system to be applied to
   Medicare reimbursement rather than the Federal Diagnosis-Related Group (DRG)
   system required elsewhere. In order to maintain this Medicare waiver, the
   cumulative rate of increase in Maryland hospital charges since the base year
   1980 must remain below that of U.S. hospitals overall. From 1983 through
   1992, the rate of increase for Maryland hospitals was below the national
   average; for the seven years from 1993 through 1999, Maryland hospital costs
   have grown faster than the national rate, although the cumulative rate of
   increase since the base year is still below the national average. Any loss of
   the Medicare waiver in the future may have an adverse impact upon the credit
   quality of Maryland hospitals.

   The fund may from time to time invest in electric revenue issues which have
   exposure to or participate in nuclear power plants which could affect the
   issuer's financial performance. Such risks include delay in construction and
   operation due to increased regulation, unexpected outages or plant shutdowns,
   increased Nuclear Regulatory Commission surveillance or inadequate rate
   relief. In addition, the financial performance of electric utilities may be
   impacted by increased competition and deregulation of the industry.

   The fund may invest in private activity bond issues for corporate and
   nonprofit borrowers. These issues sold through various governmental conduits
   are backed solely by the revenues pledged by the respective borrowing
   corporations. No governmental support is implied.


               RISK FACTORS ASSOCIATED WITH A NEW JERSEY PORTFOLIO
   The fund's concentration in the debt obligations of one state carries a
   higher risk than a portfolio that is more geographically diversified. In
   addition to State of New Jersey general obligations and state agency issues,
   the fund will invest in local bond issues, lease obligations and revenue
   bonds, the credit quality and risk of which will vary according to each
   security's own structure and underlying economics.

   Debt The State of New Jersey and its local governments issue two basic types
   of debt, with varying degrees of credit risk: general obligation bonds backed
   by the unlimited taxing power of the issuer and revenue bonds secured by
   specific pledged fees or charges for a related project. Included within the
   revenue bond sector are tax-exempt lease obligations that are subject to
   annual appropriations of a governmental body, usually with no implied tax or
   specific revenue pledge.

   The State of New Jersey disclosed in its fiscal year 1999 Comprehensive
   Annual Financial Report (CAFR) dated June 30, 1999 that it has approximately
   $3.6 billion in general obligation bonds outstanding. In addition, the State
   has guaranteed the principal and interest payments on certain bonds issued by
   the New Jersey Sports and Exposition Authority and the State has also
   contracted with the Authority to provide annual appropriations for payment of
   debt service on certain other bonds. As of June 30, 1999, the amounts
   outstanding were $111 million and $571 million respectively. The State may
   also be required to provide appropriations to meet a deficiency in debt
   service payments for the South Jersey Port Corporation and the New Jersey
   Housing and Mortgage Finance Agency. General obligation debt of the state is
   rated Aa1 by Moody's and AA+ by S&P and Fitch.


<PAGE>

   Many agencies of the state government are authorized to borrow money under
   legislation which expressly provides that the loan obligations shall not be
   deemed to constitute debt or a pledge of the faith and credit of the state.
   The New Jersey Building Authority, New Jersey Transportation Trust Fund
   Authority, New Jersey Economic Development Authority, New Jersey Educational
   Facilities Authority, New Jersey Health Care Facilities Financing Authority,
   New Jersey Highway Authority, New Jersey Housing and Mortgage Finance Agency,
   New Jersey Sports and Exposition Authority, New Jersey Transit Corporation,
   and New Jersey Turnpike Authority have outstanding bonds of this type.

   Economy According to the 1999 CAFR, New Jersey's large and diverse economy
   had the best two-year period of economic growth from 1997-1998 since
   1987-1988. In 1998, personal income grew 5.6% and employment experienced a
   second year of 2% growth. Growth is expected to moderate in 1999-2000 as
   growth in the nation's economy slows. Employment is projected to grow 1.7% in
   1999 and 1.4% in 2000. Personal income growth is expected to remain
   approximately 5%. Unemployment dropped to a 4.5% average for 1999, which was
   the lowest annual rate in ten years.

   Financial To a large degree, the risk of the portfolio is dependent on the
   financial strength of the State of New Jersey and its localities. The State
   had a stable 1999 fiscal year with a net increase in fund balance of $343
   million for a healthy year-end amount of $2.2 billion or about 13% of general
   revenues. The New Jersey State Treasurer disclosed on April 12, 2000 that
   revenues for the first nine months of the current fiscal year totaled $13.4
   billion, about one percent or $118 million below the budget forecast.
   Treasurer Machold stated that he was pleased that the budget was within one
   percent of the target for the year. Expenditures have also traditionally been
   below projected budgeted levels in the State of New Jersey.

   Sectors Investment concentration in a particular sector can present unique
   risks.

   A significant portion of the fund's assets may be invested in health care
   issues. For over a decade, the hospital industry has been under significant
   pressure to reduce expenses and shorten length of stay, a phenomenon which
   has negatively affected the financial health of many hospitals. While each
   hospital bond issue is separately secured by the individual hospital's
   revenues, third-party reimbursement sources such as the federal Medicare or
   Medicaid programs and private insurers are common to all hospitals. To the
   extent these payors reduce reimbursement levels, the individual hospitals may
   be affected. In the face of these pressures, the trend of hospital mergers
   and acquisitions has accelerated in recent years. These organizational
   changes present both risks and opportunities for the institutions involved.

   The fund may from time to time invest in electric revenue issues which have
   exposure to or participate in nuclear power plants which could affect the
   issuer's financial performance. Such risks include delay in construction and
   operation due to increased regulation, unexpected outages or plant shutdowns,
   increased Nuclear Regulatory Commission surveillance or inadequate rate
   relief. In addition, financial performance of electric utilities may be
   impacted by increased competition and deregulation in the industry.

   The fund may invest in private activity bond issues for corporate and
   nonprofit borrowers. These issues sold through government conduits, such as
   the New Jersey Economic Development Authority and various local issuers, are
   backed solely by the revenues pledged by the respective borrowing
   corporations. No governmental support is implied. In the past, a number of
   New Jersey Economic Development Authority issues have defaulted as a result
   of borrower financial difficulties.

   The fund may be exposed to solid waste projects. A number of counties and
   utility authorities in the state have issued several billion dollars of bonds
   to fund incinerator projects and solid waste projects. A federal decision
   striking down New Jersey's system of solid waste flow control increases the
   potential risk of default absent a legislative solution, or some form of
   subsidy by local or state governments.


                RISK FACTORS ASSOCIATED WITH A NEW YORK PORTFOLIO
   The funds' concentration in the debt obligations of one state carries a
   higher risk than a portfolio that is geographically diversified. In addition
   to state general obligation bonds and notes and the debt of various state
   agencies, the fund will invest in local bond issues, lease obligations and
   revenue bonds, the credit quality and risk of which will vary according to
   each security's own structure and underlying economics.


<PAGE>

   The funds' ability to maintain a high level of "triple-exempt" income is
   primarily dependent upon the ability of New York issuers to continue to meet
   debt service obligations in a timely fashion. In 1975 the state, New York
   City, and other related issuers experienced serious financial difficulties
   that ultimately resulted in much lower credit ratings and loss of access to
   the public debt markets. A series of fiscal reforms and an improved economic
   climate allowed these entities to return to financial stability by the early
   1980s. Credit ratings were reinstated or raised and access to the public
   credit markets was restored. During the early 1990s, the State and City
   confronted renewed fiscal pressure, as the region suffered moderate economic
   decline. Conditions began to improve in 1993, though below-average economic
   performance and tight budgetary conditions persisted. Both entities
   experienced financial relief in fiscal 1997 because of the strong national
   economy, a robust financial services sector, and vigilant spending control.
   The State and City continue to face out-year budget gaps due to spending
   growth which is anticipated to outpace revenue growth.

   New York State

   The state, its agencies, and local governments issued $20.1 billion in
   long-term municipal bonds in 1999, a 44% decrease from the previous year. As
   of March 31, 2000, total state-related bonded debt was projected to be $35.4
   billion, of which $4.8 billion was general obligation debt and $30.6 billion
   was financed under lease-purchase or other contractual obligations. In
   addition, the state had $293 million in bond anticipation notes outstanding.
   Since 1993, the state has not issued Tax and Revenue Anticipation Notes
   (TRANs) terminating the practice of annual seasonal borrowing which had
   occurred since 1952. As of May 8, 2000, the state's general obligation bonds
   were rated A2 by Moody's, A+ by S&P and A+ by Fitch. All general obligation
   bonds must be approved by the voters prior to issuance. The state no longer
   seeks rating from Moody's however.

   The fiscal stability of the state is also important for numerous authorities
   which have responsibilities for financing, constructing, and operating
   revenue-producing public benefit facilities. As of May 8, 2000, there were 17
   authorities that had aggregate debt outstanding, including refunding bonds
   and combined with state debt, of $95 billion. This makes New York State by
   far the largest debt issuer in the country.

   The authorities most reliant upon annual direct state support include the
   Metropolitan Transit Authority (MTA), the Urban Development Authority (UDC) -
   now the Empire State Development Corporation (ESDC), and the New York Housing
   Finance Agency (HFA). In February 1975, the UDC defaulted on approximately
   $1.0 billion of short-term notes. The default was ultimately cured by the
   creation of the Project Finance Authority (PFA), through which the state
   provided assistance to the UDC, including support for debt service. Since
   then, there have been no additional defaults by state authorities although
   substantial annual assistance is required by the MTA and the HFA in
   particular.

   Subsequent to the fiscal crisis of the mid-70s, New York State maintained
   balanced operations on a cash basis, although by 1992 it had built up an
   accumulated general fund deficit of over $6 billion on a Generally Accepted
   Accounting Principles (GAAP) basis. This deficit consisted mainly of overdue
   tax refunds and payments due localities.

   To resolve its accumulated general fund deficit the state established the
   Local Government Assistance Corporation (LGAC) in 1990. A total of $5.2
   billion in LGAC bonds have been issued. The proceeds of these bonds were used
   to provide the state's assistance to localities and school districts,
   enabling the state to reduce its accumulated general fund deficit. State
   short-term borrowing requirements, which peaked at a record $5.9 billion in
   fiscal 1991, have been reduced to zero. Due to a strong Wall Street
   performance and a booming economy, New York ended fiscal 1999 with an
   accumulated surplus of $1.66 billion. The adopted budget for fiscal 2000
   included tax cuts and a debt reform. Spending is projected to increase by
   5.6%, a rate that is above projected inflation. Because of strong growth in
   personal income and business taxes, fiscal year 1999 ended with an operating
   surplus of $1.08 billion, which helped smooth budget balancing efforts for
   fiscal year 2000. Fiscal year 2000 is estimated to have ended with another
   large operating surplus.

   New York State has a large, diversified economy which has witnessed a basic
   shift away from manufacturing toward service sector employment. In 1999, per
   capita income in New York State was $30,752, 20% above the national average.
   Like most northeastern states, New York suffered a population loss during the
   1970s. However, during the 1980's that trend reversed and population
   increased slightly, standing at 18,175,301 in 1999. During 1990-1992, the
   state experienced a slowing of economic growth evidenced by the loss of


<PAGE>

   425,000 jobs. Conditions have improved with non-farm employment growing by
   3.1% as of February 2000 compared to 2.4% the prior year. Concerns over the
   state's economy continue to focus on the slow growth of the upstate region in
   comparison to the New York City region.

   New York City

   The financial problems of New York City were acute between 1975 and 1979,
   highlighted by a payment moratorium on the City's short-term obligations. In
   the subsequent decade, the City made a significant recovery. The most
   important contribution to the City's fiscal recovery was the creation of the
   Municipal Assistance Corporation for the City of New York (MAC). Backed by
   sales, use, stock transfer, and other taxes, MAC issued bonds and used the
   proceeds to purchase City bonds and notes. Although the MAC bonds met with
   reluctance by investors at first, the program has proven to be very
   successful.

   Much progress has been made since the fiscal crisis of 1975. By 1981, the
   City achieved a budget balanced in accordance with GAAP and has continued to
   generate small surpluses on an operating basis. By 1983, the City eliminated
   its accumulated General Fund deficit and as of the fiscal year ending June
   30, 1999, had a total General Fund balance of $388 million. Although the City
   continues to finance its seasonal cash flow needs through public borrowings,
   the total amount of these borrowings has not exceeded 10% of any year's
   revenues and all have been repaid by the end of the fiscal year.

   As of May 1, 1999 the City's general obligation bonds are rated A3 by
   Moody's, A- by S&P and A by Fitch.

   While New York City sustained a decade long record of relative financial
   stability, during the 1990's budgetary pressures have been evident. Its major
   revenue sources, income and sales taxes, were slowed and a downturn in the
   real estate market reduced property tax revenues. Nonetheless, the City
   concluded the 1999 fiscal year with an operating surplus of $1.66 billion.
   The City's finances have been bolstered by strong tax receipts growth, fueled
   by strong financial markets over the last several years. Revenues and
   expenditures for the 1999 fiscal year were balanced in accordance with GAAP
   for the nineteenth consecutive year. New York City remains exposed to future
   budget pressure should there be a sharp downturn in the financial services
   sector, though it has established a budget stabilization account for
   contingency.

   Long Island and LILCO

   The Long Island Lighting Company (LILCO) was the single largest property
   taxpayer in both Nassau and Suffolk Counties. LILCO experienced substantial
   financial difficulty primarily arising from problems related to its completed
   but unlicensed 809 megawatt Shoreham Nuclear Power Facility located in
   Suffolk County. In 1986, the State Legislature created the Long Island Power
   Authority (LIPA) and ownership of the Shoreham Plant was subsequently
   transferred to LIPA for one dollar in exchange for certain rate benefits to
   LILCO.

   As requested by the Governor, LIPA proposed a plan to restructure LILCO,
   reduce rates on Long Island and provide a framework for long-term competition
   in power production. With the issuance of $7 billion in debt, LIPA purchased
   LILCO common stock, acquired or redeemed certain preferred stock and
   outstanding debt, and funded the cost of certain rebates and credits to
   LIPA's customers. With these purchases, LIPA acquired LILCO's electric
   transmission and distribution system, its 18% ownership interest in the Nine
   Mile Point 2 nuclear plant and the regulatory asset of Shoreham. In May 1998,
   LIPA sold its first two series of bonds amounting to $4.9 billion. This
   allowed for the acquisition of LILCO by LIPA and a merger of the remaining
   portions of the former LILCO business with Keyspan Energy to form Marketspan
   Corp. LIPA will now be the provider of retail electric service throughout
   most of Long Island. In 2000, LIPA and Suffolk County finally reached a
   settlement of County's tax liability for the Shoreham plant.

   Sectors Certain areas of potential investment concentration present unique
   risks. A significant portion of the fund's assets may be invested in health
   care issues. For over a decade, the hospital industry has been under
   significant pressure to reduce expenses and shorten length of stay, a
   phenomenon which has negatively affected the financial health of many
   hospitals. While each hospital bond issue is separately secured by the
   individual hospital's revenues, third-party reimbursement sources such as the
   federal Medicare and state Medicaid programs or private insurers are common
   to all hospitals. To the extent these third-party payors reduce reimbursement
   levels, the individual hospitals may be affected. The state's support for
   Medicaid and health services has slowed over the last several years. In 1997
   health care reform was implemented. Under the


<PAGE>

   new system, hospitals are permitted to negotiate inpatient payment rates with
   private payors. In addition, the federal balanced budget act of 1997 contains
   provisions to reduce Medicare expenditures. In the face of these pressures,
   the trend of hospital mergers and acquisitions has accelerated in recent
   years. These organizational changes present both risks and opportunities for
   the institutions.

   The funds may from time to time invest in electric revenue issues which have
   exposure to or participate in nuclear power plants which could affect the
   issuers' financial performance. Such risks include unexpected outages or plan
   shutdowns, increased Nuclear Regulatory Commission surveillance or inadequate
   rate relief. In addition, the financial performance of electric utilities may
   be impacted by increased competition and deregulation in the industry.

   The funds may invest in private activity bond issues for corporate and
   nonprofit borrowers. These issues sold through various governmental conduits,
   are backed solely by the revenues pledged by the respective borrowing
   corporations. No governmental support is implied.


                RISK FACTORS ASSOCIATED WITH A VIRGINIA PORTFOLIO
   The funds' concentration in the debt obligations of one state carries a
   higher risk than a portfolio that is geographically diversified. In addition
   to Commonwealth of Virginia general obligations and agency issues, the fund
   will invest in local bond issues, lease obligations and revenue bonds, the
   credit quality and risk of which will vary according to each security's own
   structure and underlying economics.

   Debt The Commonwealth of Virginia and its local governments issued $4.3
   billion of municipal bonds in 1999, including general obligation debt backed
   by the unlimited taxing power of the issuer and revenue bonds secured by
   specific pledged fees or charges for an enterprise or project. Included
   within the revenue bond category are tax-exempt lease obligations that are
   subject to annual appropriations of a governmental body to meet debt service,
   usually with no implied tax or specific revenue pledge. Debt issued in 1999
   was for a wide variety of public purposes, including transportation, housing,
   education, health care, and industrial development.

   As of June 30, 1999, the Commonwealth of Virginia had $1.1 billion
   outstanding general obligation bonds secured by the Commonwealth's revenue
   and taxing power, a modest amount compared to many other states. Under state
   law, general obligation debt is limited to 1.15 times the average of the
   preceding three years' income tax and sales and use tax collections. The
   Commonwealth's outstanding general obligation debt is well below that limit
   and over 90% of the debt service is actually met from revenue producing
   capital projects such as universities and toll roads.

   The Commonwealth also supports $2.0 billion in debt issued by the Virginia
   Public Building Authority, the Commonwealth Transportation Board, the
   Virginia College Building Authority, the Virginia Biotechnology Research Park
   Authority, the Virginia Port Authority, and the Innovative Technology
   Authority for transportation purposes. These bonds are not backed by the full
   faith and credit of the Commonwealth but instead, are subject to annual
   appropriations from the Commonwealth's General Fund.

   In addition to the Commonwealth and public authorities described above, an
   additional $8.2 billion in bonds has been issued by special public
   authorities in Virginia that are not obligations of the Commonwealth. These
   bonds include debt issued by the Virginia Public School Authority, the
   Virginia Resources Authority, and the Virginia Housing Development Authority.

   Economy The Commonwealth of Virginia has a population of approximately 6.8
   million, making it the twelfth largest state. Since the 1930s the
   Commonwealth's population has grown at a rate near or exceeding the national
   average. Stable to strong economic growth during the 1980s was led by the
   northern Virginia area outside of Washington, D.C. where approximately 30% of
   the Commonwealth's population is concentrated. The next largest metropolitan
   area is the Norfolk-Virginia Beach-Newport News area, followed by the
   Richmond-Petersburg area, including the Commonwealth's capital of Richmond.
   The Commonwealth's economy is broadly based, with a large concentration in
   service and governmental jobs, followed by manufacturing. Virginia has
   significant concentrations of high technology employers, with nearly 150,000


<PAGE>

   people employed in 3,900 establishments. Per capita income exceeds national
   averages while unemployment figures have consistently tracked below national
   averages.

   Financial To a large degree, the risk of the portfolio is dependent on the
   financial strength of the Commonwealth of Virginia and its localities.
   Virginia is rated AAA by Moody's, S&P and Fitch. The Commonwealth's budget is
   prepared on a biennial basis. From 1970 through 1998 the General Fund showed
   a positive balance for all of its two-year budgetary periods. The national
   recession and its negative effects on Virginia's personal income tax
   collections did, however, force the Commonwealth to draw down its General
   Fund balances to a deficit position in 1992. Spending cuts and improved
   economic conditions allowed for positive operations from 1993 on. The
   Commonwealth posted a budgetary surplus for fiscal years 1995 to 1999 despite
   federal retiree settlements and other transfers. On June 30, 1999, the
   unreserved general fund balance, including a revenue stabilization account,
   totaled $983 million.

   A significant portion of the funds' assets is expected to be invested in the
   debt obligations of local governments and public authorities with
   investment-grade ratings of BBB or higher. While local governments in
   Virginia are primarily reliant on independent revenue sources, such as
   property taxes, they are not immune to budget shortfalls caused by cutbacks
   in state aid. Likewise, certain enterprises such as toll roads or hospitals
   may be affected by changes in economic activity.

   Sectors Certain areas of potential investment concentration present unique
   risks. A significant portion of the fund's assets may be invested in health
   care issues. For over a decade, the hospital industry has been under
   significant pressure to reduce expenses and shorten length of stay, a
   phenomenon which has negatively affected the financial health of many
   hospitals. While each hospital bond issue is separately secured by the
   individual hospital's revenues, third-party reimbursement sources such as the
   federal Medicare and state Medicaid programs or private insurers are common
   to all hospitals. To the extent these payors reduce reimbursement levels, the
   individual hospitals may be affected. In the face of these pressures, the
   trend of hospital mergers and acquisitions has accelerated in recent years.
   These organizational changes present both risks and opportunities for the
   institutions involved.

   The funds may from time to time invest in electric revenue issues which have
   exposure to or participate in nuclear power plants which could affect the
   issuers' financial performance. Such risks include unexpected outages or
   plant shutdowns, increased Nuclear Regulatory Commission surveillance or
   inadequate rate relief.

   The funds may invest in private activity bond issues for corporate and
   nonprofit borrowers. These issues sold through various governmental conduits
   are backed solely by the revenues pledged by the respective borrowing
   corporations. No governmental support is implied.

   All Funds

   Puerto Rico From time to time the funds invest in obligations of the
   Commonwealth of the Puerto Rico and its public corporations which are exempt
   form general state and city or local income taxes. The majority of the
   Commonwealth's debt is issued by the major public agencies that are
   responsible for many of the island's public functions, such as water,
   wastewater, highways, telecommunications, education and public construction.
   In 1999, issuance in the Commonwealth totaled $1.6 billion, a decrease of 67%
   from the previous year total of $5 billion. As of June 30, 1999, public
   sector debt issued by the Commonwealth and its public corporations totaled
   approximately $24 billion.

   Since the 1980's Puerto Rico's economy and financial operations have
   paralleled the economic cycles of the United States. The island's economy,
   particularly the manufacturing sector has experienced substantial gains in
   employment. Much of these economic gains are attributable in part to
   favorable treatment under Section 936 of the Federal Internal Revenue Code
   for United States corporations doing business in Puerto Rico. The number of
   persons employed in Puerto Rico during fiscal year 1999 reached 1.1 million
   people. The number of unemployed citizens, however, remains high at 11.2
   percent but has been decreasing consistently over the past several years.

   Debt ratios for the Commonwealth remain high as it assumes much of the
   responsibility for the local infrastructure. Sizable infrastructure programs
   are ongoing to upgrade the island's water, sewer and


<PAGE>

   transportation systems. The Commonwealth's general obligation debt is secured
   by a first lien on revenues. The Commonwealth has maintained a fiscal policy
   which seeks to correlate the growth in spending with the growth of the
   economic base available to service that debt. Between fiscal years 1996 and
   1999, however the debt increased 27% while gross product rose 15%. Short-term
   debt remained a modest 7.8% of total debt outstanding as of June 30, 1999.
   The maximum annual debt service requirement on Commonwealth general
   obligation debt totals 8.9% of governmental revenues for fiscal year 1998.
   This is well below the 15% limit imposed by the Commonwealth of Puerto Rico
   but if other public corporation debt is included, the number rises
   significantly. This level of debt continues to be of concern.

   The fiscal year 1994 budget was balanced with an increase in the tollgate tax
   on Section 936 companies and improved revenue collections, which enabled the
   Commonwealth to record a strong turnaround in the General Fund balance to
   $309 million (6.8% of general fund expenses). A General Fund balance of $185
   million was recorded for the end of fiscal year 1999. At 1.9% of general fund
   revenues, this reserve level is low compared to other states.

   The Commonwealth's economy remains vulnerable to changes in oil prices,
   American trade, foreign policy, levels of foreign assistance, and natural
   disasters. On September 21, 1998, Puerto Rico was directly hit by Hurricane
   Georges, which caused extensive public and private damage. Despite the
   overall destructiveness of the storm, the net impact may have been positive,
   as aid from the Federal Emergency Management Agency and insurers is estimated
   to exceed $3 billion.

   Per capita income levels, while being the highest in the Caribbean, lag far
   behind the United States. In 1997 legislation was introduced proposing a
   mechanism to permanently settle the political relationship with the United
   States. In March 1998, the U.S. House of Representatives voted in favor of a
   political status act that includes a referendum and a 10-year transition
   plan. A referendum held in December of 1998 resulted in an ambiguous outcome
   to the status question. Of the voting options available, a majority of voters
   opted for the choice labeled "None of the Above." While there are various
   interpretations to this result, it remains clear that no definite resolution
   to the status issue is anticipated in the near future.

   For many years U.S. companies operating in Puerto Rico were eligible to
   receive a special tax credit available under Section 936 of the federal tax
   code, which helped spur significant expansion in capital intensive
   manufacturing activity. Federal tax legislation was passed in 1993 which
   revised the tax benefits received by U.S. corporations (Section 936 firms)
   that operate manufacturing facilities in Puerto Rico. The legislation
   provides these firms with two options: a 5-year phased reduction of the
   income based tax credit to 40% of the previously allowable credit or the
   conversion to a wage based standard, allowing a tax credit for the first 60%
   of qualified compensation paid to employees as defined in the IRS Code.
   Studies indicate that there have been no reductions in the economic growth
   rate or employment in industries which were expected to be impacted by the
   1993 amendments. In 1996, amendments were signed into law to phase out the
   tax credit over a 10-year period for existing claimants and to eliminate it
   for corporations without established operations after October 1995. At
   present, it is difficult to forecast what the short- and long-term effects of
   a phaseout of the Section 936 credit would have on the Puerto Rican economy.

   A final risk factor with Commonwealth is the large amount of unfunded pension
   liabilities. The two main public pension systems are largely unfunded. The
   employees retirement system has an unfunded liability of $6 billion and the
   teachers retirement system has an unfunded liability of $1 billion. The
   government is working to resolve the liability as evidenced by the use of a
   portion of the proceeds of a sale of the Puerto Rican Telephone Company to
   cover a portion of the fund's deficiency.


           RISK FACTORS ASSOCIATED WITH TAX-EFFICIENT GROWTH FUND AND

                THE EQUITY PORTION OF TAX-EFFICIENT BALANCED FUND
   Foreign Securities
   The fund may invest in U.S. dollar-denominated and non-U.S.
   dollar-denominated securities of foreign issuers.


<PAGE>

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



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

                               Types of Securities

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


                              Municipal Securities

   Subject to the investment objectives and programs described in the prospectus
   and the additional investment restrictions described in this Statement of
   Additional Information, each fund's portfolio may consist of any combination
   of the various types of municipal securities described below or other types
   of municipal securities that may be developed. The amount of each fund's
   assets invested in any particular type of municipal security can be expected
   to vary.

   The term "municipal securities" means obligations issued by or on behalf of
   states, territories, and possessions of the United States and the District of
   Columbia and their political subdivisions, agencies and instrumentalities, as
   well as certain other persons and entities, the interest from which is exempt
   from federal, state, and/or city or local, if applicable, income tax. In
   determining the tax-exempt status of a municipal security, the fund relies on
   the opinion of the issuer's bond counsel at the time of the issuance of the
   security. However, it is possible this opinion could be overturned, and as a
   result, the interest received by the fund from such a security might not be
   exempt from federal income tax.

   Municipal securities are classified by maturity as notes, bonds, or
   adjustable rate securities.


                                 Municipal Notes

   Municipal notes generally are used to provide short-term operating or capital
   needs and generally have maturities of one year or less. Municipal notes
   include:

  . Tax Anticipation Notes Tax anticipation notes are issued to finance working
   capital needs of municipalities. Generally, they are issued in anticipation
   of various seasonal tax revenue, such as income, property, use and business
   taxes, and are payable from these specific future taxes.

  . Revenue Anticipation Notes Revenue anticipation notes are issued in
   expectation of receipt of revenues, such as sales taxes, toll revenues or
   water and sewer charges, that are used to pay off the notes.

  . Bond Anticipation Notes Bond anticipation notes are issued to provide
   interim financing until long-term financing can be arranged. In most cases,
   the long-term bonds then provide the money for the repayment of the notes.

  . Tax-Exempt Commercial Paper Tax-exempt commercial paper is a short-term
   obligation with a stated maturity of 270 days or less. It is issued by state
   and local governments or their agencies to finance seasonal working capital
   needs or as short-term financing in anticipation of longer-term financing.

  . Municipal Bonds Municipal bonds, which meet longer-term capital needs and
   generally have maturities of more than one year when issued, have two
   principal classifications: general obligation bonds and revenue bonds. Two
   additional categories of potential purchases are lease revenue bonds and
   pre-refunded/escrowed to maturity bonds. Another type of municipal bond is
   referred to as an Industrial Development Bond.


<PAGE>

  . General Obligation Bonds Issuers of general obligation bonds include states,
   counties, cities, towns, and special districts. The proceeds of these
   obligations are used to fund a wide range of public projects, including
   construction or improvement of schools, public buildings, highways and roads,
   and general projects not supported by user fees or specifically identified
   revenues. The basic security behind general obligation bonds is the issuer's
   pledge of its full faith and credit and taxing power for the payment of
   principal and interest. The taxes that can be levied for the payment of debt
   service may be limited or unlimited as to the rate or amount of special
   assessments. In many cases voter approval is required before an issuer may
   sell this type of bond.

  . Revenue Bonds The principal security for a revenue bond is generally the net
   revenues derived from a particular facility, or enterprise, or in some cases,
   the proceeds of a special charge or other pledged revenue source. Revenue
   bonds are issued to finance a wide variety of capital projects including:
   electric, gas, water and sewer systems; highways, bridges, and tunnels; port
   and airport facilities; colleges and universities; and hospitals. Revenue
   bonds are sometimes used to finance various privately operated facilities
   provided they meet certain tests established for tax-exempt status.

   Although the principal security behind these bonds may vary, many provide
   additional security in the form of a mortgage or debt service reserve fund.
   Some authorities provide further security in the form of the state's ability
   (without obligation) to make up deficiencies in the debt service reserve
   fund. Revenue bonds usually do not require prior voter approval before they
   may be issued.

  . Lease Revenue Bonds Municipal borrowers may also finance capital
   improvements or purchases with tax-exempt leases. The security for a lease is
   generally the borrower's pledge to make annual appropriations for lease
   payments. The lease payment is treated as an operating expense subject to
   appropriation risk and not a full faith and credit obligation of the issuer.
   Lease revenue bonds are generally considered less secure than a general
   obligation or revenue bond and often do not include a debt service reserve
   fund. To the extent the fund's Board determines such securities are illiquid,
   they will be subject to the fund's limit on illiquid securities. There have
   also been certain legal challenges to the use of lease revenue bonds in
   various states.

   The liquidity of such securities will be determined based on a variety of
   factors which may include, among others: (1) the frequency of trades and
   quotes for the obligation; (2) the number of dealers willing to purchase or
   sell the security and the number of other potential buyers; (3) the
   willingness of dealers to undertake to make a market in the security; (4) the
   nature of the marketplace trades, including the time needed to dispose of the
   security, the method of soliciting offers, and the mechanics of transfer; and
   (5) the rating assigned to the obligation by an established rating agency or
   T. Rowe Price.

  . Pre-refunded/Escrowed to Maturity Bonds Certain municipal bonds have been
   refunded with a later bond issue from the same issuer. The proceeds from the
   later issue are used to defease the original issue. In many cases the
   original issue cannot be redeemed or repaid until the first call date or
   original maturity date. In these cases, the refunding bond proceeds typically
   are used to buy U.S. Treasury securities that are held in an escrow account
   until the original call date or maturity date. The original bonds then become
   "pre-refunded" or "escrowed to maturity" and are considered as high-quality
   investments. While still tax-exempt, the security is the proceeds of the
   escrow account. To the extent permitted by the SEC and the Internal Revenue
   Service, a fund's investment in such securities refunded with U.S. Treasury
   securities will, for purposes of diversification rules applicable to the
   fund, be considered as an investment in U.S. Treasury securities.

  . Private Activity Bonds Under current tax law all municipal debt is divided
   broadly into two groups: governmental purpose bonds and private activity
   bonds. Governmental purpose bonds are issued to finance traditional public
   purpose projects such as public buildings and roads. Private activity bonds
   may be issued by a state or local government or public authority but
   principally benefit private users and are considered taxable unless a
   specific exemption is provided.

   The tax code currently provides exemptions for certain private activity bonds
   such as not-for-profit hospital bonds, small-issue industrial development
   revenue bonds and mortgage subsidy bonds, which may still be issued as
   tax-exempt bonds. Some, but not all, private activity bonds are subject to
   alternative minimum tax.

  . Industrial Development Bonds Industrial development bonds are considered
   Municipal Bonds if the interest paid is exempt from federal income tax. They
   are issued by or on behalf of public authorities to raise money to


<PAGE>

   finance various privately operated facilities for business and manufacturing,
   housing, sports, and pollution control. These bonds are also used to finance
   public facilities such as airports, mass transit systems, ports, and parking.
   The payment of the principal and interest on such bonds is dependent solely
   on the ability of the facility's user to meet its financial obligations and
   the pledge, if any, of real and personal property so financed as security for
   such payment.


                           Adjustable Rate Securities

   Municipal securities may be issued with adjustable interest rates that are
   reset periodically by pre-determined formulas or indexes in order to minimize
   movements in the principal value of the investment. Such securities may have
   long-term maturities, but may be treated as a short-term investment under
   certain conditions. Generally, as interest rates decrease or increase, the
   potential for capital appreciation or depreciation on these securities is
   less than for fixed-rate obligations. These securities may take the following
   forms:

       Variable Rate Securities Variable rate instruments are those whose terms
       provide for the adjustment of their interest rates on set dates and
       which, upon such adjustment, can reasonably be expected to have a market
       value that approximates its par value. Subject to the provisions of Rule
       2a-7 under the 1940 Act, (1) a variable rate instrument, the principal
       amount of which is scheduled to be paid in 397 days or less, is deemed to
       have a maturity equal to the period remaining until the next readjustment
       of the interest; (2) a variable rate instrument which is subject to a
       demand feature which entitles the purchaser to receive the principal
       amount of the underlying security or securities either (i) upon notice of
       usually 30 days, or (ii) at specified intervals not exceeding 397 days
       and upon no more than 30 days' notice is deemed to have a maturity equal
       to the longer of the period remaining until the next readjustment of the
       interest rate or the period remaining until the principal amount can be
       recovered through demand; and (3) an instrument that is issued or
       guaranteed by the U.S. government or any agency thereof which has a
       variable rate of interest readjusted no less frequently than every 762
       days may be deemed to have a maturity equal to the period remaining until
       the next readjustment of the interest rate. Should the provisions of Rule
       2a-7 change, the funds will determine the maturity of these securities in
       accordance with the amended provisions of such rule.

       Floating Rate Securities Floating rate instruments are those whose terms
       provide for the adjustment of their interest rates whenever a specified
       interest rate changes and which, at any time, can reasonably be expected
       to have a market value that approximates its par value. Subject to the
       provisions of Rule 2a-7 under the 1940 Act, (1) the maturity of a
       floating rate instrument is deemed to be the period remaining until the
       date (noted on the face of the instrument) on which the principal amount
       must be paid, or in the case of an instrument called for redemption, the
       date on which the redemption payment must be made; and (2) floating rate
       instruments with demand features are deemed to have a maturity equal to
       the period remaining until the principal amount can be recovered through
       demand. Should the provisions of Rule 2a-7 change, the funds will
       determine the maturity of these securities in accordance with the amended
       provisions or such rule.

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

   Participation Interests The funds may purchase from third parties
   participation interests in all or part of specific holdings of municipal
   securities. The purchase may take different forms: in the case of short-term
   securities, the participation may be backed by a liquidity facility that
   allows the interest to be sold back to the third party (such as a trust,
   broker or bank) for a predetermined price of par at stated intervals. The
   seller may receive a fee from the funds in connection with the arrangement.

   In the case of longer-term bonds, the funds may purchase interests in a pool
   of municipal bonds or a single municipal bond or lease without the right to
   sell the interest back to the third party.

   The funds will not purchase participation interests unless a satisfactory
   opinion of counsel or ruling of the Internal Revenue Service has been issued
   that the interest earned from the municipal securities on which the


<PAGE>

   funds hold participation interests is exempt from federal income tax to the
   funds. However, there is no guarantee the IRS would treat such interest
   income as tax-exempt.

   Bond and Balanced Funds

  . Residual Interest Bonds are a type of high-risk derivative. The funds may
   purchase municipal bond issues that are structured as two-part, residual
   interest bond and variable rate security offerings. The issuer is obligated
   only to pay a fixed amount of tax-free income that is to be divided among the
   holders of the two securities. The interest rate for the holders of the
   variable rate securities will be determined by an index or auction process
   held approximately every seven to 35 days while the bondholders will receive
   all interest paid by the issuer minus the amount given to the variable rate
   security holders and a nominal auction fee. Therefore, the coupon of the
   residual interest bonds, and thus the income received, will move inversely
   with respect to short-term, seven- to 35-day tax-exempt interest rates. There
   is no assurance that the auction will be successful and that the variable
   rate security will provide short-term liquidity. The issuer is not obligated
   to provide such liquidity. In general, these securities offer a significant
   yield advantage over standard municipal securities, due to the uncertainty of
   the shape of the yield curve (i.e., short-term versus long-term rates) and
   consequent income flows.

   Unlike many adjustable rate securities, residual interest bonds are not
   necessarily expected to trade at par and in fact present significant market
   risks. In certain market environments, residual interest bonds may carry
   substantial premiums or be at deep discounts. This is a relatively new
   product in the municipal market with limited liquidity to date.

  . Embedded Interest Rate Swaps and Caps In a fixed rate, long-term municipal
   bond with an interest rate swap attached to it, the bondholder usually
   receives the bond's fixed coupon payment as well as a variable rate payment
   that represents the difference between a fixed rate for the term of the swap
   (which is typically shorter than the bond it is attached to) and a variable
   rate, short-term municipal index. The bondholder receives excess income when
   short-term rates remain below the fixed interest rate swap rate. If
   short-term rates rise above the fixed income swap rate, the bondholder's
   income is reduced. At the end of the interest rate swap term, the bond
   reverts to a single fixed coupon payment. Embedded interest rate swaps
   enhance yields, but also increase interest rate risk.

   An embedded interest rate cap allows the bondholder to receive payments
   whenever short-term rates rise above a level established at the time of
   purchase. They normally are used to hedge against rising short-term interest
   rates. Both instruments may be volatile and of limited liquidity, and their
   use may adversely affect the fund's total return.

   The funds may invest in other types of derivative instruments as they become
   available.

   For the purpose of the funds' investment restrictions, the identification of
   the "issuer" of municipal securities which are not general obligation bonds
   is made by the funds' investment manager, T. Rowe Price, on the basis of the
   characteristics of the obligation as described above, the most significant of
   which is the source of funds for the payment of principal and interest on
   such securities.

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

   All Funds (other than Tax-Efficient Growth Fund)


                             When-Issued Securities

   New issues of municipal securities are often offered on a when-issued basis;
   that is, delivery and payment for the securities normally takes place 15 to
   45 days or more after the date of the commitment to purchase. The payment
   obligation and the interest rate that will be received on the securities are
   each fixed at the time the buyer enters into the commitment. A fund will only
   make a commitment to purchase such securities with the intention of actually
   acquiring the securities. However, a fund may sell these securities before
   the settlement date if it is deemed advisable as a matter of investment
   strategy. Each fund will maintain cash, high-grade marketable debt securities
   or other suitable cover with its custodian bank equal in value to commitments
   for when-issued securities. Such securities either will mature or, if
   necessary, be sold on or before the settlement


<PAGE>

   date. Securities purchased on a when-issued basis and the securities held in
   a fund's portfolio are subject to changes in market value based upon the
   public perception of the creditworthiness of the issuer and changes in the
   level of interest rates (which will generally result in similar changes in
   value, i.e., both experiencing appreciation when interest rates decline and
   depreciation when interest rates rise). Therefore, to the extent a fund
   remains fully invested or almost fully invested at the same time that it has
   purchased securities on a when-issued basis, there will be greater
   fluctuations in its net asset value than if it solely set aside cash to pay
   for when-issued securities. In the case of the money funds, this could
   increase the possibility that the market value of the fund's assets could
   vary from $1.00 per share. In addition, there will be a greater potential for
   the realization of capital gains, which are not exempt from federal income
   tax. When the time comes to pay for when-issued securities, a fund will meet
   its obligations from then-available cash flow, sale of securities or,
   although it would not normally expect to do so, from sale of the when-issued
   securities themselves (which may have a value greater or less than the
   payment obligation). The policies described in this paragraph are not
   fundamental and may be changed by a fund upon notice to its shareholders.

   All Funds (other than the Money and Tax-Efficient Growth Funds)


                                    Forwards

   The funds may purchase bonds on a when-issued basis with longer than standard
   settlement dates, in some cases exceeding one to two years. In such cases,
   the funds must execute a receipt evidencing the obligation to purchase the
   bond on the specified issue date, and must segregate cash internally to meet
   that forward commitment. Municipal "forwards" typically carry a substantial
   yield premium to compensate the buyer for the risks associated with a long
   when-issued period, including: shifts in market interest rates that could
   materially impact the principal value of the bond, deterioration in the
   credit quality of the issuer, loss of alternative investment options during
   the when-issued period, changes in tax law or issuer actions that would
   affect the exempt interest status of the bonds and prevent delivery, failure
   of the issuer to complete various steps required to issue the bonds, and
   limited liquidity for the buyer to sell the escrow receipts during the
   when-issued period.


                  Investment in Taxable Money Market Securities

   Although the funds (other than Tax-Efficient Balanced and Tax-Efficient
   Growth Funds) expect to be solely invested in municipal securities, for
   temporary defensive purposes they may elect to invest in the taxable money
   market securities listed next (without limitation) when such action is deemed
   to be in the best interests of shareholders. The interest earned on these
   money market securities is not exempt from federal income tax and may be
   taxable to shareholders as ordinary income.

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

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

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

  . Short-Term Corporate Debt Securities Short-term corporate debt securities
   rated at least AA by S&P, Moody's or Fitch.


<PAGE>

  . Commercial Paper Paper rated A-2 or better by S&P, Prime-2 or better by
   Moody's, or F-2 or better by Fitch, or, if not rated, is issued by a
   corporation having an outstanding debt issue rated A or better by Moody's,
   S&P or Fitch and, with respect to the Money Funds, is of equivalent
   investment quality as determined by the Board of Directors/Trustees.

  . Determination of Maturity of Money Market Securities The Money Funds may
   only purchase securities which at the time of investment have remaining
   maturities of 397 calendar days or less. The other funds may also purchase
   money market securities. In determining the maturity of money market
   securities, funds will follow the provisions of Rule 2a-7 under the 1940 Act.

   Tax-Efficient Balanced and Tax-Efficient Growth Funds


                               Hybrid Instruments

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

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

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


<PAGE>

   expected in the future. Reference is also made to the discussion of futures,
   options, and forward contracts herein for a discussion of the risks
   associated with such investments.

   Hybrid Instruments are potentially more volatile and carry greater market
   risks than traditional debt instruments. Depending on the structure of the
   particular Hybrid Instrument, changes in a Benchmark may be magnified by the
   terms of the Hybrid Instrument and have an even more dramatic and substantial
   effect upon the value of the Hybrid Instrument. Also, the prices of the
   Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
   same direction or at the same time.

   Hybrid Instruments may bear interest or pay preferred dividends at below
   market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
   may bear interest at above market rates but bear an increased risk of
   principal loss (or gain). The latter scenario may result if "leverage" is
   used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
   Instrument is structured so that a given change in a Benchmark or Underlying
   Asset is multiplied to produce a greater value change in the Hybrid
   Instrument, thereby magnifying the risk of loss as well as the potential for
   gain.

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

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


                        Illiquid or Restricted Securities

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

   Notwithstanding the above, the fund may purchase securities which, while
   privately placed, are eligible for purchase and sale under Rule 144A under
   the 1933 Act. This rule permits certain qualified institutional buyers, such
   as the fund, to trade in privately placed securities even though such
   securities are not registered under the 1933 Act. T. Rowe Price, under the
   supervision of the fund's Board of Directors/Trustees, will consider whether
   securities purchased under Rule 144A are illiquid and thus subject to the
   fund's restriction of investing no more than 15% of its net assets in
   illiquid securities. A determination of whether a Rule 144A security is
   liquid or not is a question of fact. In making this determination, T. Rowe
   Price will consider the trading markets for the specific security taking into
   account the unregistered nature of a Rule 144A security. In addition, T. Rowe
   Price could consider the following: (1) frequency of trades and quotes; (2)
   number of dealers and potential purchases; (3) dealer undertakings to make a
   market; and (4) the nature of the security and of marketplace trades (e.g.,
   the time needed to dispose of the security, the method of soliciting offers,
   and


<PAGE>

   the mechanics of transfer). The liquidity of Rule 144A securities would be
   monitored and, if as a result of changed conditions it is determined that a
   Rule 144A security is no longer liquid, the fund's holdings of illiquid
   securities would be reviewed to determine what, if any, steps are required to
   assure that the fund does not invest more than 15% of its net assets in
   illiquid securities. Investing in Rule 144A securities could have the effect
   of increasing the amount of the fund's assets invested in illiquid securities
   if qualified institutional buyers are unwilling to purchase such securities.


                                    Warrants

   The fund may acquire warrants. Warrants can be highly volatile and 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 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.



 PORTFOLIO MANAGEMENT PRACTICES
 -------------------------------------------------------------------------------
   All Funds (other than the Money Funds)


                                Futures Contracts

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

   Transactions in Futures

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

   The Tax-Efficient Balanced and Tax-Efficient Growth Funds may enter into
   futures contracts including stock index, interest rate, and currency futures
   ("futures" or "futures contracts").

   Bond, Balanced, and Growth Funds

   The nature of such futures and the regulatory limitations and risks are the
   same as those described below.

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

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

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


<PAGE>

   Regulatory Limitations
   If the fund purchases or sells futures contracts or related options which do
   not qualify as bona fide hedging under applicable CFTC rules, the aggregate
   initial margin deposits and premium required to establish those positions
   cannot exceed 5% of the liquidation value of the fund after taking into
   account unrealized profits and unrealized losses on any such contracts it has
   entered into; provided, however, that in the case of an option that is
   in-the-money at the time of purchase, the in-the-money amount may be excluded
   in calculating the 5% limitation. For purposes of this policy, options on
   futures contracts and foreign currency options traded on a commodities
   exchange will be considered "related options." This policy may be modified by
   the Board of Directors/Trustees without a shareholder vote and does not limit
   the percentage of the fund's assets at risk to 5%.

   In instances involving the purchase of futures contracts or the writing of
   call or put options thereon by the fund, an amount of cash, liquid assets, or
   other suitable cover as permitted by the SEC, equal to the market value of
   the futures contracts and options thereon (less any related margin deposits),
   will be identified by the fund to cover the position, or alternative cover
   (such as owning an offsetting position) will be employed. Assets used as
   cover or held in an identified account cannot be sold while the position in
   the corresponding option or future is open, unless they are replaced with
   similar assets. As a result, the commitment of a large portion of a fund's
   assets to cover or identified accounts could impede portfolio management or
   the fund's ability to meet redemption requests or other current obligations.

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

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

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

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

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

   Although certain futures contracts, by their terms, require actual future
   delivery of and payment for the underlying instruments, in practice most
   futures contracts are usually closed out before the delivery date. Closing
   out an open futures contract purchase or sale is effected by entering into an
   offsetting futures contract sale or purchase, respectively, for the same
   aggregate amount of the identical securities and the same delivery date. If
   the offsetting purchase price is less than the original sale price, the fund
   realizes a gain; if it is more, the fund realizes a loss. Conversely, if the
   offsetting sale price is more than the original purchase price, the


<PAGE>

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

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

   Tax-Efficient Balanced and Tax-Efficient Growth Funds

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


               Special Risks of Transactions in Futures Contracts

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

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

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

  . Liquidity The fund may elect to close some or all of its futures positions
   at any time prior to their expiration. The fund would do so to reduce
   exposure represented by long futures positions or short futures positions.
   The fund may close its positions by taking opposite positions which would
   operate to terminate the fund's position


<PAGE>

   in the futures contracts. Final determinations of variation margin would then
   be made, additional cash would be required to be paid by or released to the
   fund, and the fund would realize a loss or a gain.

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

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

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

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


<PAGE>

   All Funds (other than the Money Funds)

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


                          Options on Futures Contracts

   Bond and Tax-Efficient Balanced Funds

   The fund might trade in municipal bond index option futures or similar
   options on futures developed in the future. In addition, the fund may also
   trade in options on futures contracts on U.S. government securities and any
   U.S. government securities futures index contract which might be developed.
   In the opinion of T. Rowe Price, there is a high degree of correlation in the
   interest rate, and price movements of U.S. government securities and
   municipal securities. However, the U.S. government securities market and
   municipal securities markets are independent and may not move in tandem at
   any point in time.

   The fund may purchase put options on futures contracts to hedge its portfolio
   of municipal securities against the risk of rising interest rates, and the
   consequent decline in the prices of the municipal securities it owns. The
   funds will also write call options on futures contracts as a hedge against a
   modest decline in prices of the municipal securities held in the fund's
   portfolio. If the futures price at expiration of a written call option is
   below the exercise price, the fund will retain the full amount of the option
   premium, thereby partially hedging against any decline that may have occurred
   in the fund's holdings of debt securities. If the futures price when the
   option is exercised is above the exercise price, however, the fund will incur
   a loss, which may be wholly or partially offset by the increase of the value
   of the securities in the fund's portfolio which were being hedged.

   Tax-Efficient Balanced and Tax-Efficient Growth Funds

   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.

   All Funds (other than the Money Funds)

   Writing a put option on a futures contract serves as a partial hedge against
   an increase in the value of securities the fund intends to acquire. If the
   futures price at expiration of the option is above the exercise price, the
   fund will retain the full amount of the option premium which provides a
   partial hedge against any increase that may have occurred in the price of the
   debt securities the fund intends to acquire. If the futures price when the
   option is exercised is below the exercise price, however, the fund will incur
   a loss, which may be wholly or partially offset by the decrease in the price
   of the securities the fund intends to acquire.

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

   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 fund 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 in Transactions on Futures
   Contracts" are substantially the same as the risks of using options on
   futures. If the fund were to write an option on a futures contract, it would
   be required to deposit and maintain initial and variation margin in the same
   manner as a regular futures contract. In addition, where the fund seeks to
   close out an option position by writing or buying an offsetting option


<PAGE>

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

   In addition, the correlation between movements in the price of options on
   futures contracts and movements in the price of the securities hedged can
   only be approximate. This risk is significantly increased when an option on a
   U.S. government securities future or an option on some type of index future
   is used as a proxy for hedging a portfolio consisting of other types of
   securities. Another risk is that the movements in the price of options on
   futures contract and the value of the call increases by more than the
   increase in the value of the securities held as cover, the fund may realize a
   loss on the call which is not completely offset by the appreciation in the
   price of the securities held as cover and the premium received for writing
   the call.

   The successful use of options on futures contracts requires special expertise
   and techniques different from those involved in portfolio securities
   transactions. 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 or interest rate trends. During periods
   when municipal securities market prices are appreciating, the fund may
   experience poorer overall performance than if it had not entered into any
   options on futures contracts.

   General Considerations Transactions by the fund in options on futures will be
   subject to limitations established by each of the exchanges, boards of trade
   or other trading facilities governing the maximum number of options in each
   class which may be written or purchased by a single investor or group of
   investors acting in concert, regardless of whether the options are written on
   the same or different exchanges, boards of trade or other trading facilities
   or are held or written in one or more accounts or through one or more
   brokers. Thus, the number of contracts which the fund may write or purchase
   may be affected by contracts written or purchased by other investment
   advisory clients of T. Rowe Price. An exchange, board of trade or other
   trading facility may order the liquidations of positions found to be in
   excess of these limits, and it may impose certain other sanctions.


                    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.


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

   Although the fund invests almost exclusively in securities that generate
   income that is exempt from federal income taxes, the fund may enter into
   certain option, futures, and foreign exchange contracts, including options
   and futures on currencies, which will be treated as Section 1256 contracts or
   straddles that are not exempt from such taxes. Therefore, use of the
   investment techniques described above could result in taxable income to
   shareholders of the fund.


<PAGE>

   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. Gains or losses
   recognized 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, without regard to the holding period of the contract.
   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. The holding period of the security
   offsetting an "in-the-money qualified covered call" option on an equity
   security will not include the period of time the option is outstanding.

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

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

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


                              Options on Securities

   Options are another type of potentially high-risk derivative.

   Bond and Money Funds

   The funds have no current intention of investing in options on securities,
   although they reserve the right to do so. Appropriate disclosure would be
   added to the funds' prospectus and Statement of Additional Information when
   and if the funds decide to invest in options.

   Tax-Efficient Balanced and Tax-Efficient Growth Funds


                          Writing Covered Call Options

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

   A call option gives the holder (buyer) the "right to purchase," and the
   writer (seller) has the "obligation to sell," 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.


<PAGE>

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

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

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

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


<PAGE>

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

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

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


                           Writing Covered Put Options

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

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

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

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


<PAGE>

                             Purchasing Put Options

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

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

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

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


                             Purchasing Call Options

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

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


<PAGE>

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


                        Dealer (Over-the-Counter) Options

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

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

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


                         Lending of Portfolio Securities

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


<PAGE>

                              Repurchase Agreements

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


                          Reverse Repurchase Agreements

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

   All Funds


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


                              Fundamental Policies

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

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


<PAGE>

   (2) Commodities Purchase or sell physical commodities; except that the fund
       (other than the Money Funds) may enter into futures contracts and options
       thereon;

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

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

   (5) Percent Limit on Assets Invested in Any One Issuer (California,
       Tax-Efficient Balanced, Tax-Efficient Growth, Tax-Exempt Money, Tax-Free
       High Yield, Tax-Free Income, Tax-Free Intermediate Bond, and Tax-Free
       Short-Intermediate Funds Only) Purchase a security if, as a result, with
       respect to 75% of the value of its total assets, more than 5% of the
       value of the fund's total assets would be invested in the securities of a
       single issuer, except securities issued or guaranteed by the U.S.
       government or any of its agencies or instrumentalities;

   (6) Percent Limit on Share Ownership of Any One Issuer (California,
       Tax-Efficient Balanced, Tax-Efficient Growth, Tax-Exempt Money, Tax-Free
       High Yield, Tax-Free Income, Tax-Free Intermediate Bond, and Tax-Free
       Short-Intermediate Funds Only) Purchase a security if, as a result, with
       respect to 75% of the value of the fund's total assets, more than 10% of
       the outstanding voting securities of any issuer would be held by the fund
       (other than obligations issued or guaranteed by the U.S. government, its
       agencies or instrumentalities);

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

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

   (9) Taxable Securities (All Funds, except Tax-Efficient Balanced and
       Tax-Efficient Growth Funds) During periods of normal market conditions,
       purchase any security if, as a result, less than 80% of the fund's income
       would be exempt from federal, and if applicable, any state, city, or
       local income tax. Normally, the fund will not purchase a security if, as
       a result, more than 20% of the fund's income would be subject to the AMT;
       or

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


                                      NOTES

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

       With respect to investment restriction (1), the Money Funds have no
       current intention of engaging in any borrowing transactions.

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

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


<PAGE>

       which are refunded with escrowed U.S. government securities or subject to
       certain types of guarantees are not subject to the industry limitation of
       25%.

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

       For purposes of investment restriction (9), the fund measures the amount
       of its income from taxable securities, including AMT securities, over the
       course of the fund's taxable year.


                               Operating Policies

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

   (1) Borrowing Purchase additional securities when money borrowed exceeds 5%
       of its total assets;

   (2) Control of Portfolio Companies Invest in companies for the purpose of
       exercising management or control;

   (3) Equity Securities (All Funds except Tax-Efficient Balanced and
       Tax-Efficient Growth Funds) Purchase any equity security or security
       convertible into an equity security provided that the fund (other than
       the Money Funds) may invest up to 10% of its total assets in equity
       securities which pay tax-exempt dividends and which are otherwise
       consistent with the fund's investment objective and, further provided,
       that each Money Fund may invest up to 10% of its total assets in equity
       securities of other tax-free open-end money market funds;

   (4) Futures Contracts Purchase a futures contract or an option thereon, if,
       with respect to positions in futures or options on futures which do not
       represent bona fide hedging, the aggregate initial margin and premiums on
       such options would exceed 5% of the fund's net asset value;

   (5) Illiquid Securities Purchase illiquid securities if, as a result, more
       than 15% (10% for Money Funds) of its net assets would be invested in
       such securities;

   (6) Investment Companies Purchase securities of open-end or closed-end
       investment companies except (i) in compliance with the Investment Company
       Act of 1940; (ii) in the case of the Tax-Free Funds, only securities of
       other tax-free money market funds; or (iii) in the case of Tax-Efficient
       Balanced and Tax-Efficient Growth Funds, securities of the Reserve
       Investment or Government Reserve Investment Funds;

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

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

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

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

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

   (12) Warrants Invest in warrants if, as a result thereof, more than 2% of the
       value of the net assets of the fund would be invested in warrants.


<PAGE>

                                      NOTES

       With respect to investment restriction (6), the funds have no current
       intention of purchasing the securities of other investment companies.
       Duplicate fees could result from any such purchases.



 MANAGEMENT OF THE FUNDS
 -------------------------------------------------------------------------------
   The officers and directors/trustees of the fund are listed below. Unless
   otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
   Maryland 21202. Except as indicated, each has been an employee of T. Rowe
   Price for more than five years. In the list below, the fund's
   directors/trustees who are considered "interested persons" of T. Rowe Price
   as defined under Section 2(a)(19) of the 1940 Act are noted with an asterisk
   (*). These directors/trustees are referred to as inside directors by virtue
   of their officership, directorship, and/or employment with T. Rowe Price.


                       Independent Directors/Trustees/(a)/

   All Funds except Tax-Efficient Funds

   CALVIN W. BURNETT, PH.D., 3/16/32, President, Coppin State College; formerly:
   Director, Maryland Chamber of Commerce and Provident Bank of Maryland;
   formerly: President, Baltimore Area Council Boy Scouts of America; Vice
   President and Board of Directors, The Walters Art Gallery; Address: 2500 West
   North Avenue, Baltimore, Maryland 21216

   ANTHONY W. DEERING, 1/28/45, Director, Chairman of the Board, President, and
   Chief Executive Officer, The Rouse Company, real estate developers, Columbia,
   Maryland; Address: 10275 Little Patuxent Parkway, Columbia, Maryland 21044

   F. PIERCE LINAWEAVER, 8/22/34, President, F. Pierce Linaweaver & Associates,
   Inc.; Consulting Environmental & Civil Engineers; formerly (1987-1991)
   Executive Vice President, EA Engineering, Science, and Technology, Inc., and
   President, EA Engineering, Inc., Baltimore, Maryland; Address: Green Spring
   Station, 2360 West Joppa Road, Suite 224, Lutherville, Maryland 21093

   JOHN G. SCHREIBER, 10/21/46, Owner/President, Schreiber Investments, Inc., a
   real estate investment company; Director, AMLI Residential Properties Trust
   and Urban Shopping Centers, Inc.; Partner, Blackstone Real Estate Partners,
   L.P.; Director and formerly Executive Vice President, JMB Realty Corporation,
   a national real estate investment manager and developer; Address: Centaur
   Capital Partners, One Westminster Place, Lake Forest, IL 60045

   Tax-Efficient Funds


   DONALD W. DICK, JR., 1/27/43, Principal, EuroCapital Advisors, LLC, an
   acquisition and management advisory firm; formerly (5/89-6/95) Principal,
   Overseas Partners, Inc., a financial investment firm; formerly  (6/65-3/89)
   Director and Vice President, Consumer Products Division, McCormick & Company,
   Inc., international food processors; Director, Waverly, Inc., Baltimore,
   Maryland; Address: P.O.Box 491, Chilmark, Massachusetts 02535

   DAVID K. FAGIN, 4/9/38, Director, Western Exploration and Development, Ltd.
   (6/97 to present); Director (5/92 to present); formerly: Chairman (5/92 to
   12/97) and Chief Executive Officer (5/92 to 5/96) of Golden Star Resources
   Ltd.; formerly: President, Chief Operating Officer, and Director, Homestake
   Mining Company; (5/86 to 7/91); Address: 1700 Lincoln Street, Suite 4710,
   Denver, Colorado 80203

   HANNE M. MERRIMAN, 11/16/41, Retail Business Consultant; Director, Ann Taylor
   Stores Corporation, Central Illinois Public Service Company, Ameren Corp.,
   Finlay Enterprises, Inc., The Rouse Company, State Farm Mutual Automobile
   Insurance Company and USAirways Group, Inc.; Address: 3201 New Mexico Avenue,
   N.W., Suite 350, Washington, D.C. 20016

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


<PAGE>

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

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


                                    Officers

   HENRY H. HOPKINS, 12/23/42, Vice President-Vice President, Price-Fleming and
   T. Rowe Price Retirement Plan Services, Inc.; Director and Managing Director,
   T. Rowe Price; Vice President and Director, T. Rowe Price Investment
   Services, Inc., T. Rowe Price Services, Inc. and T. Rowe Price Trust Company

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

   JOSEPH A. CARRIER, 12/30/60, Treasurer-Vice President, T. Rowe Price and T.
   Rowe Price Investment Services, Inc.

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

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

   California and State Tax-Free Trusts

  *  WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
   Director, T. Rowe Price; Chartered Financial Analyst


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



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

   MARY J. MILLER, 7/19/55, President-Managing Director, T. Rowe Price

   JANET G. ALBRIGHT, 3/31/57, Vice President-Vice President, T. Rowe Price


   PATRICE BERCHTENBREITER ELY, 1/13/53, Vice President-Vice President, T. Rowe
   Price

   LINDA A. BRISSON, 7/8/59, Vice President-Vice President, T. Rowe Price


   JOSEPH K. LYNAGH, 6/9/58, Vice President-Assistant Vice President, T. Rowe
   Price

   KONSTANTINE B. MALLAS, 5/26/63, Vice President-Vice President, T. Rowe Price


   EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price


   State Tax-Free Trust Only


   JEREMY N. BAKER, 2/27/68, Vice President-Assistant Vice President, T. Rowe
   Price

   PATRICIA S. DEFORD, 9/29/57, Vice President-Vice President, T. Rowe Price

   ROBERT A. DONAHUE, 11/8/64, Vice President-Assistant Vice President, T. Rowe
   Price; (1998) formerly Director of Policy Evaluation, District of Columbia
   Public Schools

   CHARLES B. HILL, 9/22/61, Vice President-Vice President, T. Rowe Price

   MARCY M. LASH, 1/30/63, Vice President-Assistant Vice President, T. Rowe
   Price; (1998) formerly Assistant Vice President, underwriting, at Connie Lee
   Insurance Company


<PAGE>

   HUGH D. MCGUIRK, 7/6/60, Vice President-Vice President, T. Rowe Price


   C. STEPHEN WOLFE II, 4/5/59, Vice President-Vice President, T. Rowe Price

   Tax-Efficient Funds

  *  JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst


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


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

   MARY J. MILLER, 7/19/55, Executive Vice President-Managing Director, T. Rowe
   Price


   DONALD J. PETERS, 7/3/59, Executive Vice President-Vice President, T. Rowe
   Price

   STEPHEN W. BOESEL, 12/28/44, Vice President-Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company

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

   JILL L. HAUSER, 6/23/58, Vice President-Vice President, T. Rowe Price

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

   HUGH D. MCGUIRK, 7/6/60, Vice President-Vice President, T. Rowe Price

   LARRY J. PUGLIA, 8/25/60, Vice President-Managing Director, T. Rowe Price;
   Chartered Financial Analyst

   WILLIAM T. REYNOLDS, 5/26/48, Vice President-Director and Managing Director,
   T. Rowe Price; Chartered Financial Analyst

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

   ARTHUR S. VARNADO, 6/1/60, Vice President-Vice President, T. Rowe Price

   MARK R. WEIGMAN, 7/30/62, Vice President-Vice President, T. Rowe Price and T.
   Rowe Price Trust Company; Chartered Financial Analyst

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

   Tax-Exempt Money Fund

  *  WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
   Director, T. Rowe Price; Chartered Financial Analyst


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



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

   PATRICE BERCHTENBREITER ELY, 1/13/53, President-Vice President, T. Rowe Price


<PAGE>

   JANET G. ALBRIGHT, 3/31/57, Vice President-Vice President, T. Rowe Price

   JOSEPH K. LYNAGH, 6/9/58, Vice President-Vice President, T. Rowe Price

   MARY J. MILLER, 7/19/55, Vice President-Managing Director, T. Rowe Price

   EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price

   Tax-Free High Yield Fund

  *  WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
   Director, T. Rowe Price; Chartered Financial Analyst


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



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

   MARY J. MILLER, 7/19/55, President-Managing Director, T. Rowe Price

   PATRICIA S. DEFORD, 9/29/57, Vice President-Vice President, T. Rowe Price

   CHARLES B. HILL, 9/22/61, Vice President-Vice President, T. Rowe Price


   MARCY M. LASH, 1/30/63, Vice President-Assistant Vice President, T. Rowe
   Price; (1998) formerly Assistant Vice President, underwriting, at Connie Lee
   Insurance Company

   KONSTANTINE B. MALLAS, 5/26/63, Vice President-Vice President, T. Rowe Price

   HUGH D. MCGUIRK, 7/6/60, Vice President-Vice President, T. Rowe Price

   EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price

   C. STEPHEN WOLFE II, 4/5/59, Vice President-Vice President, T. Rowe Price

   Tax-Free Income Fund

  *  WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
   Director, T. Rowe Price; Chartered Financial Analyst


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



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

   MARY J. MILLER, 7/19/55, President-Managing Director, T. Rowe Price

   JANET G. ALBRIGHT, 3/31/57, Vice President-Vice President, T. Rowe Price

   JEREMY N. BAKER, 2/27/68, Vice President-Assistant Vice President, T. Rowe
   Price

   PATRICE BERCHTENBREITER ELY, 1/13/53, Vice President-Vice President, T. Rowe
   Price

   PATRICIA S. DEFORD, 9/29/57, Vice President-Vice President, T. Rowe Price

   CHARLES B. HILL, 9/22/61, Vice President-Vice President, T. Rowe Price


   MARCY M. LASH, 1/30/63, Vice President-Assistant Vice President, T. Rowe
   Price; (1998) formerly Assistant Vice President, underwriting, at Connie Lee
   Insurance Company


<PAGE>

   KONSTANTINE B. MALLAS, 5/26/63, Vice President-Vice President, T. Rowe Price

   HUGH D. MCGUIRK, 7/6/60, Vice President-Vice President, T. Rowe Price

   EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price

   C. STEPHEN WOLFE II, 4/5/59, Vice President-Vice President, T. Rowe Price

   Tax-Free Intermediate Bond Fund


  *  WILLIAM T. REYNOLDS, 5/26/48, Director-Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst


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



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

   CHARLES B. HILL, 9/22/61, President-Vice President, T. Rowe Price

   MARY J. MILLER, 7/19/55, Executive Vice President-Managing Director, T. Rowe
   Price

   PATRICIA S. DEFORD, 9/29/57, Vice President-Vice President, T. Rowe Price


   ROBERT A. DONAHUE, 11/8/64, Vice President-Assistant Vice President, T. Rowe
   Price; (1998) formerly Director of Policy Evaluation, District of Columbia
   Public Schools

   ERIC N. MADER, 12/20/68, Vice President-Employee, T. Rowe Price; (1998)
   formerly Special Assistant to the CFO, District of Columbia Public Schools


   KONSTANTINE B. MALLAS, 5/26/63, Vice President-Vice President, T. Rowe Price

   HUGH D. MCGUIRK, 7/6/60, Vice President-Vice President, T. Rowe Price

   EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price

   Tax-Free Short-Intermediate Fund

  *  WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
   Director, T. Rowe Price; Chartered Financial Analyst


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



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

   MARY J. MILLER, 7/19/55, President-Managing Director, T. Rowe Price

   CHARLES B. HILL, 9/22/61, Executive Vice President-Vice President, T. Rowe
   Price

   JANET G. ALBRIGHT, 3/31/57, Vice President-Vice President, T. Rowe Price

   PATRICE BERCHTENBREITER ELY, 1/13/53, Vice President-Vice President, T. Rowe
   Price

   PATRICIA S. DEFORD, 9/29/57, Vice President-Vice President, T. Rowe Price

   KONSTANTINE B. MALLAS, 5/26/63, Vice President-Vice President, T. Rowe Price

   HUGH D. MCGUIRK, 7/6/60, Vice President-Vice President, T. Rowe Price


<PAGE>

   EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price

   C. STEPHEN WOLFE II, 4/5/59, Vice President-Vice President, T. Rowe Price


                               Compensation Table

   The funds do not pay pension or retirement benefits to their independent
   officers or directors/trustees. Also, any director/trustee of a fund who is
   an officer or employee of T. Rowe Price or Price-Fleming does not receive any
   remuneration from the fund.

<TABLE>
<CAPTION>
Name of Person,                   Aggregate Compensation from               Total Compensation from Fund and
Position                          Fund(a)                                   Fund Complex Paid to Directors/
---------------------------       ----------------------------------------  Trustees(b)
------------------------------------------------------------------------------------------------------------------------
                                                                            ----------------------------------------------
<S>                               <S>                                       <C>
California Tax-Free Bond Fund
Calvin W. Burnett, Trustee                         $1,486                                      $65,000
Anthony W. Deering, Trustee                         1,328                                       80,000
F. Pierce Linaweaver, Trustee                       1,486                                       67,000
John G. Schriber, Trustee                           1,486                                       67,000
--------------------------------------------------------------------------------------------------------------------------
California Tax-Free Money Fund
Calvin W. Burnett, Trustee                         $1,355                                      $65,000
Anthony W. Deering, Trustee                         1,281                                       80,000
F. Pierce Linaweaver, Trustee                       1,355                                       67,000
John G. Schriber, Trustee                           1,355                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Free Fund
Calvin W. Burnett, Trustee                         $1,350                                      $65,000
Anthony W. Deering, Trustee                         1,281                                       80,000
F. Pierce Linaweaver, Trustee                       1,350                                       67,000
John G. Schriber, Trustee                           1,350                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Georgia Tax-Free Bond Fund
Calvin W. Burnett, Trustee                         $1,314                                      $65,000
Anthony W. Deering, Trustee                         1,272                                       80,000
F. Pierce Linaweaver, Trustee                       1,314                                       67,000
John G. Schriber, Trustee                           1,314                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Maryland Short-Term Tax-Free Bond Fund
Calvin W. Burnett, Trustee                         $1,383                                      $65,000
Anthony W. Deering, Trustee                         1,296                                       80,000
F. Pierce Linaweaver, Trustee                       1,383                                       67,000
John G. Schriber, Trustee                           1,383                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Maryland Tax-Free Bond Fund
Calvin W. Burnett, Trustee                         $2,363                                      $65,000
Anthony W. Deering, Trustee                         1,618                                       80,000
F. Pierce Linaweaver, Trustee                       2,363                                       67,000
John G. Schriber, Trustee                           2,363                                       67,000
--------------------------------------------------------------------------------------------------------------------------
New Jersey Tax-Free Bond Fund
Calvin W. Burnett, Trustee                         $1,374                                      $65,000
Anthony W. Deering, Trustee                         1,291                                       80,000
F. Pierce Linaweaver, Trustee                       1,374                                       67,000
John G. Schriber, Trustee                           1,374                                       67,000
--------------------------------------------------------------------------------------------------------------------------
New York Tax-Free Bond Fund
Calvin W. Burnett, Trustee                         $1,468                                      $65,000
Anthony W. Deering, Trustee                         1,335                                       80,000
F. Pierce Linaweaver, Trustee                       1,468                                       67,000
John G. Schriber, Trustee                           1,468                                       67,000
--------------------------------------------------------------------------------------------------------------------------
New York Tax-Free Money Fund
Calvin W. Burnett, Trustee                         $1,365                                      $65,000
Anthony W. Deering, Trustee                         1,284                                       80,000
F. Pierce Linaweaver, Trustee                       1,365                                       67,000
John G. Schriber, Trustee                           1,365                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Virginia Short-Term Tax-Free Bond Fund
Calvin W. Burnett, Trustee                         $1,275                                      $65,000
Anthony W. Deering, Trustee                         1,260                                       80,000
F. Pierce Linaweaver, Trustee                       1,275                                       67,000
John G. Schriber, Trustee                           1,275                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Virginia Tax-Free Bond Fund
Calvin W. Burnett, Trustee                         $1,548                                      $65,000
Anthony W. Deering, Trustee                         1,349                                       80,000
F. Pierce Linaweaver, Trustee                       1,548                                       67,000
John G. Schriber, Trustee                           1,548                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Tax-Efficient Balanced Fund
Donald W. Dick, Jr., Director(c)                   $1,008                                      $82,000
David K. Fagin, Director                            1,020                                       65,000
Hanne M. Merriman, Director                         1,020                                       65,000
Hubert D. Vos, Director                             1,020                                       66,000
Paul M. Wythes, Director                            1,008                                       80,000
--------------------------------------------------------------------------------------------------------------------------
Tax-Efficient Growth Fund
Donald W. Dick, Jr., Director(c)                   $  604                                      $82,000
David K. Fagin, Director                              615                                       65,000
Hanne M. Merriman, Director                           611                                       65,000
Hubert D. Vos, Director                               611                                       66,000
Paul M. Wythes, Director                              604                                       80,000
--------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Money Fund
Calvin W. Burnett, Director                        $1,962                                      $65,000
Anthony W. Deering, Director                        1,480                                       80,000
F. Pierce Linaweaver, Director                      1,962                                       67,000
John G. Schriber, Director                          1,962                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Tax-Free High Yield Fund
Calvin W. Burnett, Director                        $2,619                                      $65,000
Anthony W. Deering, Director                        1,695                                       80,000
F. Pierce Linaweaver, Director                      2,619                                       67,000
John G. Schriber, Director                          2,619                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Tax-Free Income Fund
Calvin W. Burnett, Director                        $2,763                                      $65,000
Anthony W. Deering, Director                        1,750                                       80,000
F. Pierce Linaweaver, Director                      2,763                                       67,000
John G. Schriber, Director                          2,763                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Tax-Free Intermediate Bond Fund
Calvin W. Burnett, Director                        $1,373                                      $65,000
Anthony W. Deering, Director                        1,289                                       80,000
F. Pierce Linaweaver, Director                      1,373                                       67,000
John G. Schriber, Director                          1,373                                       67,000
--------------------------------------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate Fund
Calvin W. Burnett, Director                        $1,713                                      $65,000
Anthony W. Deering, Director                        1,402                                       80,000
F. Pierce Linaweaver, Director                      1,713                                       67,000
John G. Schriber, Director                          1,713                                       67,000
--------------------------------------------------------------------------------------------------------------------------
</TABLE>





<PAGE>



<PAGE>

 (a) Amounts in this column are based on accrued compensation from March 1,
   1999 to February 29, 2000.

 (b) Amounts in this column are based on compensation received from January 1,
   1999, to December 31, 1999. The T. Rowe Price complex included 88 funds as of
   December 31, 1999.

   All Funds

   The fund's Executive Committee, consisting of the fund's interested
   directors/trustees, has been authorized by its respective Board of
   Directors/Trustees to exercise all powers of the Board to manage the funds in
   the intervals between meetings of the Board, except the powers prohibited by
   statute from being delegated.



 PRINCIPAL HOLDERS OF SECURITIES
 -------------------------------------------------------------------------------
   As of the date of the prospectus, the officers and directors/trustees of the
   fund, as a group, owned less than 1% of the outstanding shares of the fund.

   As of May 31, 2000, the following shareholders beneficially owned more than
   5% of the outstanding shares of the fund:

   New York Tax-Free Money Fund: Coleman M. Brandt and Grace L. Brandt JT TEN,
   330 West 72nd Street, Apt. 10A, New York, New York 10023-2649.

   Tax-Efficient Balanced Fund: TRP Finance, Inc., 802 West Street, Suite 301,
   Wilmington, Delaware 19801-1526.

   Tax-Exempt Money Fund-PLUS Class: Larry J. Neiterman and Elin W. Neiterman JT
   TEN, 8 Red Oak Drive, Sudbury, Massachusetts 01776-2826; George W. Mead, 700
   Belle Isle, Wisconsin Rapids, Wisconsin 54494-4174.


<PAGE>

   Tax-Free Short-Intermediate Fund: Charles Schwab & Co. Inc. reinvest account,
   Attn.: Mutual Fund Dept., 101 Montgomery Street, San Francisco, California
   94104-4122.

   Virginia Short-Term Tax-Free Bond Fund: National Financial Services for the
   exclusive benefit of our customers, 200 Liberty, One Financial Center, 4th
   Floor, New York, New York 10005-3500.



 INVESTMENT MANAGEMENT SERVICES
 -------------------------------------------------------------------------------
   Services
   Under the Management Agreement, T. Rowe Price provides the fund with
   discretionary investment services. Specifically, T. Rowe Price is responsible
   for supervising and directing the investments of the fund in accordance with
   the fund's investment objectives, program, and restrictions as provided in
   its prospectus and this Statement of Additional Information. T. Rowe Price is
   also responsible for effecting all security transactions on behalf of the
   fund, including the negotiation of commissions and the allocation of
   principal business and portfolio brokerage. In addition to these services, T.
   Rowe Price provide the fund with certain corporate administrative services,
   including: maintaining the fund's corporate existence and corporate records;
   registering and qualifying fund shares under federal laws; monitoring the
   financial, accounting, and administrative functions of the fund; maintaining
   liaison with the agents employed by the fund such as the fund's custodian and
   transfer agent; assisting the fund in the coordination of such agents'
   activities; and permitting T. Rowe Price's employees to serve as officers,
   directors/trustees, and committee members of the fund without cost to the
   fund.

   The Management Agreement also provides that T. Rowe Price, its
   directors/trustees, officers, employees, and certain other persons performing
   specific functions for the fund will only be liable to the fund for losses
   resulting from willful misfeasance, bad faith, gross negligence, or reckless
   disregard of duty.

   Management Fee
   The fund pays T. Rowe Price a fee ("Fee") which consists of two components: a
   Group Management Fee ("Group Fee") and an Individual Fund Fee ("Fund Fee").
   The Fee is paid monthly to T. Rowe Price on the first business day of the
   next succeeding calendar month and is calculated as described next.

   The monthly Group Fee ("Monthly Group Fee") is the sum of the daily Group Fee
   accruals ("Daily Group Fee Accruals") for each month. The Daily Group Fee
   Accrual for any particular day is computed by multiplying the Price Funds'
   group fee accrual as determined below ("Daily Price Funds' Group Fee
   Accrual") by the ratio of the Price 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:
<TABLE>
<CAPTION>
<S>                                    <C>     <C>               <C>     <C>               <C>     <C>
                                       0.480%  First $1 billion  0.360%  Next $2 billion   0.310%  Next $16 billion
                                       ------------------------------------------------------------------------------
                                       0.450%  Next $1 billion   0.350%  Next $2 billion   0.305%  Next $30 billion
                                       ------------------------------------------------------------------------------
                                       0.420%  Next $1 billion   0.340%  Next $5 billion   0.300%  Next $40 billion
                                       ------------------------------------------------------------------------------
                                       0.390%  Next $1 billion   0.330%  Next $10 billion  0.295%  Thereafter
                                       ------------------------------------------------------------------------------
                                       0.370%  Next $1 billion   0.320%  Next $10 billion
</TABLE>


   For the purpose of calculating the Group Fee, the Price Funds include all the
   mutual funds distributed by Investment Services, (excluding the T. Rowe Price
   Spectrum Funds, and any institutional, index, 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 individual Fund Fee
   Rate and


<PAGE>

   multiplying this product by the net assets of the fund for that day, as
   determined in accordance with the fund's prospectus as of the close of
   business on the previous business day on which the fund was open for
   business. The individual fund fees of each fund are listed in the following
   chart:

<TABLE>
<CAPTION>
<S>                                     <C>
California Tax-Free Bond Fund                 0.10%
California Tax-Free Money Fund                0.10
Florida Intermediate Tax-Free Fund            0.05
Georgia Tax-Free Bond Fund                    0.10
Maryland Tax-Free Bond Fund                   0.10
Maryland Short-Term Tax-Free Bond Fund        0.10
New Jersey Tax-Free Bond Fund                 0.10
New York Tax-Free Bond Fund                   0.10
New York Tax-Free Money Fund                  0.10
Virginia Tax-Free Bond Fund                   0.10
Virginia Short-Term Tax-Free Bond Fund        0.10
Tax-Efficient Balanced Fund                   0.20
Tax-Efficient Growth Fund                     0.30
Tax-Exempt Money Fund                         0.10
Tax-Free High Yield Fund                      0.30
Tax-Free Income Fund                          0.15
Tax-Free Intermediate Bond Fund               0.05
Tax-Free Short-Intermediate Fund              0.10
</TABLE>



   The following chart sets forth the total management fees, if any, paid to T.
   Rowe Price by each fund, during the last three years:
<TABLE>
<CAPTION>
                       Fund                             2000         1999          1998
                       ----                             ----         ----          ----
<S>                                                  <C>          <C>          <C>
California Tax-Free Bond                             $  932,000   $  878,000    $  744,000
California Tax-Free Money                               344,000      333,000       263,000
Florida Intermediate Tax-Free                           352,000      343,000       302,000
Georgia Tax-Free Bond                                   191,000      157,000       108,000
Maryland Tax-Free Bond                                4,357,000    4,157,000     3,659,000
Maryland Short-Term Tax-Free Bond                       532,000      468,000       488,000
New Jersey Tax-Free Bond                                506,000      462,000       352,000
New York Tax-Free Bond                                  863,000      818,000       670,000
New York Tax-Free Money                                 384,000      348,000       281,000
Virginia Tax-Free Bond                                1,171,000    1,081,000       895,000
Virginia Short-Term Tax-Free Bond                        19,000        5,000            0(a)
Tax-Efficient Balanced                                  200,000       14,000            0(b)
Tax-Efficient Growth                                    192,000          0(b)           0(b)
Tax-Exempt Money                                      2,774,000    3,176,000     2,989,000
Tax-Exempt Money Fund-PLUS Class                         55,000        2,000            0(b)
Tax-Free High Yield                                   7,823,000    8,119,000     7,051,000
Tax-Free Income                                       6,600,000    6,800,000     6,428,000
Tax-Free Intermediate Bond                              455,000      438,000       391,000
Tax-Free Short-Intermediate                           1,811,000    1,895,000     1,856,000
--------------------------------------------------------------------------------------------
</TABLE>


  (a) Due to effect of expense limitations discussed below, the fund did
     not pay T. Rowe Price an investment management fee.

  (b) Prior to commencement of operations.


<PAGE>

   Limitation on Fund Expenses
   The Management Agreement between the fund and T. Rowe Price provides that the
   fund will bear all expenses of its operations not specifically assumed by T.
   Rowe Price.

   For the purpose of determining whether a fund is entitled to reimbursement,
   the expenses of a fund are calculated on a monthly basis. If a fund is
   entitled to reimbursement, that month's advisory fee will be reduced or
   postponed, with any adjustment made after the end of the year.

   The following chart sets forth expense ratio limitations and the periods for
   which they are effective. For each, T. Rowe Price has agreed to bear any fund
   expenses which would cause the fund's ratio of expenses to average net assets
   to exceed the indicated percentage limitations. The expenses borne by T. Rowe
   Price are subject to reimbursement by the fund through the indicated
   reimbursement date, provided no reimbursement will be made if it would result
   in the fund's expense ratio exceeding its applicable limitation.

   No reimbursements may be made for the California and New York Funds unless
   approved by shareholders.


   California Tax-Free Money Fund, Georgia Tax-Free Bond Fund, Maryland
   Short-Term Tax-Free Bond Fund, New York Tax-Free Money Fund, Tax-Efficient
   Balanced Fund, Tax-Efficient Growth Fund, Tax-Exempt Money Fund-PLUS Class,
   and Virginia Short-Term Tax-Free Bond Fund


<TABLE>
<CAPTION>
                                                                       Expense       Reimbursement
                    Fund                        Limitation Period      -------       -------------
                    ----                        -----------------       Ratio            Date
                                                                        -----            ----
                                                                      Limitation
                                                                      ----------
<S>                                           <S>                     <C>         <S>
                                                                          0
                                                                          .
                                              March 1, 1999 -             55
California Tax-Free Money(a)                  February 28, 2001           %       February 28, 2003
                                                                          0.
                                              March 1, 1999 -             65
Georgia Tax-Free Bond(b)                      February 28, 2001           %       February 28, 2003
                                                                          0
                                                                          .
                                              March 1, 1999 -             60
Maryland Short-Term Tax-Free Bond(c)          February 28, 2001           %       February 28, 2003
                                                                          0
                                                                          .
                                              March 15, 1999 -            5
New York Tax-Free Money(d)                    February 28, 2001           5%      February 28, 2003
                                                                          1
                                                                          .
                                              March 1, 1999 -             00
Tax-Efficient Balanced(e)                     February 28, 2001           %       February 28, 2003
                                                                          1.
                                                                          1
                                              July 30, 1999 -             0
Tax-Efficient Growth                          February 28, 2001           %       February 28, 2003
                                              May 1, 2000 - April
Tax-Exempt Money Fund-PLUS Class(f)           30, 2001                  1.00%     April 30, 2002
                                                                          0
                                              March 1, 2000 -             .
Virginia Short-Term Tax-Free Bond(g)          February 28, 2000           6       February 29, 2004
                                                                          0%
-----------------------------------------------------------------------------------------------------
</TABLE>



 (a) The California Tax-Free Money Fund previously operated under a 0.55%
  limitation that expired February 28, 1999. The reimbursement period for this
  limitation extends through February 28, 2001.

 (b) The Georgia Tax-Free Bond Fund previously operated under a 0.65% limitation
  that expired February 28, 1999. The reimbursement period for this limitation
  extends through February 28, 2001.

 (c) The Maryland Short-Term Tax-Free Bond Fund previously operated under a
  0.60% limitation that expired February 28, 1999. The reimbursement period for
  this limitation extends through February 28, 2001.

 (d) The New York Tax-Free Money Fund previously operated under a 0.55%
  limitation that expired February 28, 1999. The reimbursement period for this
  limitation extends through February 28, 2001.

 (e) The Tax-Efficient Balanced Fund previously operated under a 1.00%
  limitation that expired February 28, 1999. The reimbursement period for this
  limitation extends through February 28, 2001.


 (f) The Tax-Exempt Money Fund-PLUS Class previously operated under a 1.00%
  limitation that expired April 30, 2000. The reimbursement period for this
  limitation extends through April 30, 2001.

 (g) The Virginia Short-Term Tax-Free Bond Fund previously operated under a
  0.60% limitation that expired February 29, 2000. The reimbursement period for
  this limitation extends through February 28, 2002.

   Florida Intermediate Tax-Free, New Jersey Tax-Free Bond, and Tax-Free
  Intermediate Bond Funds

   The Florida Intermediate Tax-Free Fund previously operated under a 0.60%
   limitation that expired February 28, 1999. The reimbursement period for this
   limitation extends through February 28, 2001.

   The New Jersey Tax-Free Bond Fund previously operated under a 0.65%
   limitation that expired February 28, 1999. The reimbursement period for this
   limitation extends through February 28, 2001.

   The Tax-Free Intermediate Bond Fund previously operated under a 0.65%
   limitation that expired February 28, 1998. The reimbursement period for this
   limitation extends through February 29, 2000.


<PAGE>

   California Tax-Free Money and New York Tax-Free Money Funds


   Pursuant to the California Money Fund's present expense limitation, $80,000,
   of management fees were not accrued for the year ended February 29, 2000.
   Additionally, $188,000 of unaccrued management fees related to a previous
   expense limitation remain subject to reimbursement through February 28, 2001.

   Pursuant to the New York Money Fund's present expense limitations, $70,000 of
   management fees were not accrued for the year ended February 29, 2000.
   Additionally, $177,000 of unaccrued management fees related to a previous
   expense limitation remain subject to reimbursement through February 28, 2001.


   Florida Intermediate Tax-Free Fund

   Pursuant to a previous expense limitation, $6,000 of unaccrued management
   fees were repaid during the year ended February 29, 2000.

   Georgia Tax-Free Bond Fund

   Pursuant to the present expense limitation, $61,000 of management fees were
   not accrued by the fund for the year ended February 29, 2000. Additionally,
   $158,000 of unaccrued management fees related to a previous expense
   limitation are subject to reimbursement through February 28, 2001.

   Maryland Short-Term Tax-Free Bond Fund


   Pursuant to a previous expense limitation, $2,000 of management fees were not
   accrued by the fund for the year ended February 29, 2000. Additionally,
   $7,000 of unaccrued management fees related to a previous expense limitation
   are subject to reimbursement through February 28, 2001.

   New Jersey Tax-Free Bond Fund


   Pursuant to the previous expense limitation, $17,000 of unaccrued 1998-1999
   fees were repaid during the year ended February 29, 2000, and $8,000 remains
   subject to reimbursement through February 28, 2001.

   Virginia Short-Term Tax-Free Bond Fund


   Pursuant to the previous expense limitation, $96,000 of management fees were
   not accrued for the year ended February 29, 2000, and $97,000 remain
   unaccrued from a prior period.

   Tax-Efficient Balanced Fund


   Pursuant to the present expense limitation, $6,000 of management fees were
   not accrued by the fund for the year ended February 29, 2000. Additionally,
   $200,000 of unaccrued management fees and expenses related to a previous
   limitation remain subject to reimbursement through February 28, 2001.

   Tax-Efficient Growth Fund

   Pursuant to the present expense limitation, $32,000 of management fees were
   not accrued by the fund for the year ended February 29, 2000.

   Tax-Free Intermediate Bond Fund

   Pursuant to the previous expense limitation, $23,000 of unaccrued fees were
   repaid during the year ended February 29, 2000.

   Management Related Services
   As noted above, the Management Agreement spells out the expenses to be paid
   by the fund. In addition to the Management Fee, the fund pays for the
   following: shareholder service expenses; custodial, accounting, legal, and
   audit fees; costs of preparing and printing prospectuses and reports sent to
   shareholders; registration fees and expenses; proxy and annual meeting
   expenses (if any); and director/trustee fees and expenses.

   T. Rowe Price Services, Inc., a wholly owned subsidiary of T. Rowe Price,
   acts as the fund's transfer and dividend disbursing agent and provides
   shareholder and administrative services. Services for certain types of
   retirement plans are provided by T. Rowe Price Retirement Plan Services,
   Inc., also a wholly owned subsidiary.


<PAGE>

   The address for each is 100 East Pratt St., Baltimore, MD 21202.
   Additionally, T. Rowe Price, under a separate agreement with the funds,
   provides accounting services to the funds.

   The funds paid the expenses shown in the following table for the fiscal year
   ended February 29, 2000, to T. Rowe Price and its affiliates.

<TABLE>
<CAPTION>
              Fund                  Transfer Agent and       Accounting
              ----                  ------------------       ----------
                                   Shareholder Services       Services
                                   --------------------       --------
<S>                                <C>                    <C>
California Tax-Free Bond                $  122,000            $ 77,000
California Tax-Free Money                   69,000              70,000
Florida Intermediate Tax-Free               54,000              70,000
Georgia Tax-Free Bond                       52,000              70,000
Maryland Short-Term Tax-Free Bond           74,000              70,000
Maryland Tax-Free Bond                     478,000              86,000
New Jersey Tax-Free Bond                    86,000              70,000
New York Tax-Free Bond                     138,000              77,000
New York Tax-Free Money                     64,000              70,000
Virginia Short-Term Tax-Free Bond           25,000              65,000
Virginia Tax-Free Bond                     165,000              70,000
Tax-Efficient Balanced                      46,000              64,000
Tax-Efficient Growth                        67,000              37,000
Tax-Exempt Money                         2,888,000             105,000
Tax-Exempt Money Fund-PLUS Class             9,000               2,000
Tax-Free High Yield                        615,000             116,000
Tax-Free Income                            582,000             116,000
Tax-Free Intermediate Bond                 101,000              70,000
Tax-Free Short-Intermediate                209,000              95,000
--------------------------------------------------------------------------
</TABLE>





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

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

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

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


<PAGE>

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



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

   Tax-Efficient Balanced and Tax-Efficient Growth Funds

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

   All Funds


 SERVICES BY OUTSIDE PARTIES
 -------------------------------------------------------------------------------
   The shares of some fund shareholders are held in omnibus accounts maintained
   by various third parties, including retirement plan sponsors, insurance
   companies, banks and broker-dealers. The fund has adopted an administrative
   fee payment ("AFP") program that authorizes the fund to make payments to
   these third parties. The payments are made for transfer agent, recordkeeping
   and other administrative services provided by, or on behalf of, the third
   parties with respect to such shareholders and the omnibus accounts. Under the
   AFP program, the funds paid the amounts set forth below to various third
   parties in 1999.



 CODE OF ETHICS
 -------------------------------------------------------------------------------
   The fund's investment adviser (T. Rowe Price) has a written Code of Ethics
   which requires all Access Persons to obtain prior clearance before engaging
   in personal securities transactions. In addition, all Access Persons must
   report their personal securities transactions within 10 days of their
   execution. Access Persons will not be permitted to effect transactions in a
   security: if there are pending client orders in the security; the security
   has been purchased or sold by a client within seven calendar days; the
   security is being considered for purchase for a client; or the security is
   subject to internal trading restrictions. In addition, Access Persons are
   prohibited from profiting from short-term trading (e.g., purchases and sales
   involving the same security within 60 days). Any person becoming an Access
   Person must file a statement of personal securities holdings within 10 days
   of this date. All Access Persons are required to file an annual statement
   with respect to their personal securities holdings. Any material violation of
   the Code of Ethics is reported to the Board of the fund. The Board also
   reviews the administration of the Code of Ethics on an annual basis.


<PAGE>

 PORTFOLIO TRANSACTIONS
 -------------------------------------------------------------------------------
   Investment or Brokerage Discretion
   Decisions with respect to the purchase and sale of portfolio securities on
   behalf of the fund are made by T. Rowe Price. T. Rowe Price is also
   responsible for implementing these decisions, including the negotiation of
   commissions and the allocation of portfolio brokerage and principal business.
   The fund's purchases and sales of fixed income portfolio securities are
   normally done on a principal basis and do not involve the payment of a
   commission although they may involve the designation of selling concessions.
   That part of the discussion below relating solely to brokerage commissions
   would not normally apply to the fund (other than Tax-Efficient Balanced and
   Tax-Efficient Growth Funds to the extent they purchase equity securities).
   However, it is included because T. Rowe Price does manage a significant
   number of common stock portfolios (including the equity portion of the
   Tax-Efficient Balanced and Tax-Efficient Growth Funds) which do engage in
   agency transactions and pay commissions and because some research and
   services resulting from the payment of such commissions may benefit the fund.


                      How Brokers and Dealers Are Selected

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

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

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


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

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


<PAGE>

       Descriptions of Research Services Received From Brokers and Dealers

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

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

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


              Commissions to Brokers Who Furnish Research Services

   Certain brokers and dealers who provide quality brokerage and execution
   services also furnish research services to T. Rowe Price. With regard to the
   payment of brokerage commissions, T. Rowe Price has adopted a brokerage
   allocation policy embodying the concepts of Section 28(e) of the Securities
   Exchange Act of 1934, which permits an investment adviser to cause an account
   to pay commission rates in excess of those another broker or dealer would
   have charged for effecting the same transaction, if the adviser determines in
   good faith that the commission paid is reasonable in relation to the value of
   the brokerage and research services provided. The determination may be viewed
   in terms of either the particular transaction involved or the overall
   responsibilities of the adviser with respect to the accounts over which it
   exercises investment discretion. Accordingly, while T. Rowe Price cannot
   readily determine the extent to which commission rates or net prices charged
   by broker-dealers reflect the value of their research services, T. Rowe Price
   would expect to assess the reasonableness of commissions in light of the
   total brokerage and research services provided by each particular broker. T.
   Rowe Price may receive research, as defined in Section 28(e), in connection
   with selling concessions and designations in fixed price offerings in which
   the funds participate.


                         Internal Allocation Procedures

   T. Rowe Price has a policy of not precommitting a specific amount of business
   to any broker or dealer over any specific time period. Historically, the
   majority of brokerage placement has been determined by the needs of a
   specific transaction such as market-making, availability of a buyer or seller
   of a particular security, or specialized execution skills. However, T. Rowe
   Price does have an internal brokerage allocation procedure for that portion
   of its discretionary client brokerage business where special needs do not
   exist, or where the business may be allocated among several brokers or
   dealers which are able to meet the needs of the transaction.


<PAGE>

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


                                  Miscellaneous

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

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

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

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

   To the extent possible, T. Rowe Price intends to recapture solicitation fees
   paid in connection with tender offers through Investment Services, the fund's
   distributor. At the present time, T. Rowe Price does not recapture
   commissions or underwriting discounts or selling group concessions in
   connection with taxable securities acquired in underwritten offerings. T.
   Rowe Price does, however, attempt to negotiate elimination of all or a
   portion of the selling group concession or underwriting discount when
   purchasing tax-exempt municipal securities on behalf of its clients in
   underwritten offerings.


                            Trade Allocation Policies

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


<PAGE>

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


                  Transactions With Related Brokers and Dealers

   As provided in the Investment Management Agreement between the fund and T.
   Rowe Price, T. Rowe Price is responsible not only for making decisions with
   respect to the purchase and sale of the fund's portfolio securities, but also
   for implementing these decisions, including the negotiation of commissions
   and the allocation of portfolio brokerage and principal business. It is
   expected that, from time to time, T. Rowe Price may place orders for the
   fund's portfolio transactions with broker-dealer affiliates of Robert Fleming
   Holdings Limited ("RF"), an affiliate of Price-Fleming. RF, 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 International Holdings Limited, a
   wholly owned subsidiary of Jardine Fleming Group Limited ("JF"). JF is owned
   by RF.

   The Board of Directors/Trustees of the fund has authorized T. Rowe Price to
   utilize certain affiliates of RF and JF in the capacity of broker in
   connection with the execution of the fund's portfolio transactions. Other
   affiliates of RF and JF also may be used. Although it does not believe that
   the fund's use of these brokers would be subject to Section 17(e) of the 1940
   Act, the Board of Directors/Trustees of the fund has agreed that the
   procedures set forth in Rule 17e-1 under that Act will be followed when using
   such brokers.


                                      Other

   The funds engaged in portfolio transactions involving broker-dealers in the
   following amounts for the fiscal years ended February 29, 2000, February 28,
   1999, and 1998:
<TABLE>
<CAPTION>
            Fund                    2000            1999             1998
            ----                    ----            ----             ----
<S>                            <C>             <C>             <C>
California Tax-Free Bond       $  399,657,000  $  302,677,000   $  289,794,000
California Tax-Free Money         529,005,000     515,251,000      506,606,000
Florida Intermediate Tax-Free     164,457,000     141,767,000      142,932,000
Georgia Tax-Free Bond             128,761,000      73,638,000       97,029,000
Maryland Tax-Free Bond          1,074,813,000     837,338,000      918,045,000
Maryland Short-Term Tax-Free
Bond                              208,764,000     191,989,000      221,540,000
New Jersey Tax-Free Bond          246,768,000     158,774,000      161,209,000
New York Tax-Free Bond            557,693,000     445,461,000      354,373,000
New York Tax-Free Money           445,916,000     553,482,000      444,785,000
Virginia Tax-Free Bond            501,953,000     492,844,000      563,466,000
Virginia Short-Term Tax-Free
Bond                               54,221,000      40,289,000       56,461,000
Tax-Efficient Balanced             35,978,000      51,569,000       39,110,000
Tax-Efficient Growth              190,748,000            0(a)              0(a)
Tax-Exempt Money                3,074,940,000   3,124,018,000    3,600,294,000
Tax-Free High Yield             2,863,124,000   2,000,100,000    1,755,491,000
Tax-Free Income                 2,483,560,000   1,941,518,000    2,257,818,000
Tax-Free Intermediate Bond        233,442,000     153,826,000      272,682,000
Tax-Free Short-Intermediate       940,315,000     642,536,000    1,149,079,000
-------------------------------------------------------------------------------
</TABLE>


  (a) Prior to commencement of operations.




<PAGE>

   The following amounts consisted of principal transactions as to which the
   funds have no knowledge of the profits or losses realized by the respective
   broker-dealers for the fiscal years ended February 29, 2000, February 28,
   1999, and 1998:
<TABLE>
<CAPTION>
            Fund                    2000            1999             1998
            ----                    ----            ----             ----
<S>                            <C>             <C>             <C>
California Tax-Free Bond       $  363,741,000  $  251,425,000   $  253,929,000
California Tax-Free Money         529,005,000     510,210,000      503,591,000
Florida Intermediate Tax-Free     157,690,000     129,590,000      128,653,000
Georgia Tax-Free Bond             111,145,000      60,945,000       85,009,000
Maryland Tax-Free Bond            936,693,000     708,876,000      793,036,000
Maryland Short-Term Tax-Free
Bond                              202,708,000     188,399,000      193,471,000
New Jersey Tax-Free Bond          210,964,000     140,671,000      136,223,000
New York Tax-Free Bond            509,250,000     383,633,000      299,419,000
New York Tax-Free Money           445,916,000     542,945,000      441,384,000
Virginia Tax-Free Bond            453,295,000     419,010,000      518,159,000
Virginia Short-Term Tax-Free
Bond                               53,091,000      35,660,000       55,291,000
Tax-Efficient Balanced             27,426,000      37,355,000       27,555,000
Tax-Efficient Growth              108,589,000            0(a)              0(a)
Tax-Exempt Money                3,074,134,000   3,089,301,000    3,586,230,000
Tax-Free High Yield             2,557,197,000   1,644,317,000    1,527,098,000
Tax-Free Income                 2,190,578,000   1,651,454,000    1,959,351,000
Tax-Free Intermediate Bond        221,818,000     143,749,000      249,144,000
Tax-Free Short-Intermediate       917,005,000     603,036,000    1,083,550,000
-------------------------------------------------------------------------------
</TABLE>


  (a) Prior to commencement of operations.



   The following amounts involved trades with brokers acting as agents or
   underwriters for the fiscal years ended February 29, 2000, February 28, 1999,
   and 1998:
<TABLE>
<CAPTION>
              Fund                     2000          1999           1998
              ----                     ----          ----           ----
<S>                                <C>           <C>           <C>
California Tax-Free Bond           $ 35,916,000  $ 51,252,000   $ 35,865,000
California Tax-Free Money                     0     5,041,000      3,016,000
Florida Intermediate Tax-Free         6,767,000    12,177,000     14,279,000
Georgia Tax-Free Bond                17,616,000    12,693,000     12,020,000
Maryland Tax-Free Bond              138,120,000   128,462,000    125,009,000
Maryland Short-Term Tax-Free Bond     6,056,000     3,590,000     28,069,000
New Jersey Tax-Free Bond             35,804,000    18,103,000     24,987,000
New York Tax-Free Bond               48,443,000    61,828,000     54,954,000
New York Tax-Free Money                       0    10,537,000      3,401,000
Virginia Tax-Free Bond               48,658,000    73,834,000     45,307,000
Virginia Short-Term Tax-Free Bond     1,130,000     4,629,000      1,170,000
Tax-Efficient Balanced                8,552,000    14,214,000     11,555,000
Tax-Efficient Growth                 82,159,000          0(a)            0(a)
Tax-Exempt Money                        806,000    34,717,000     14,064,000
Tax-Free High Yield                 305,927,000   355,783,000    228,393,000
Tax-Free Income                     292,982,000   290,064,000    298,468,000
Tax-Free Intermediate Bond           11,624,000    10,077,000     23,538,000
Tax-Free Short-Intermediate          23,310,000    39,500,000     65,529,000
-----------------------------------------------------------------------------
</TABLE>


  (a) Prior to commencement of operations.


<PAGE>

   The following amounts involved trades with brokers acting as agents or
   underwriters, in which such brokers received total commissions, including
   discounts received in connection with underwritings for the fiscal years
   ended February 29, 2000, February 28, 1999, and 1998:
<TABLE>
<CAPTION>
                       Fund                             2000         1999          1998
                       ----                             ----         ----          ----
<S>                                                  <C>          <C>          <C>
California Tax-Free Bond                             $  228,000   $  273,000    $  206,000
California Tax-Free Money                                      0      10,000         2,000
Florida Intermediate Tax-Free                            40,000       48,000        59,000
Georgia Tax-Free Bond                                    80,000       51,000        74,000
Maryland Tax-Free Bond                                  660,000      545,000       680,000
Maryland Short-Term Tax-Free Bond                        45,000       16,000       106,000
New Jersey Tax-Free Bond                                151,000       88,000       176,000
New York Tax-Free Bond                                  280,000      353,000       362,000
New York Tax-Free Money                                        0       1,000        24,000
Virginia Tax-Free Bond                                  238,000      346,000       271,000
Virginia Short-Term Tax-Free Bond                        14,000       17,000         6,000
Tax-Efficient Balanced                                   50,000       47,000        33,000
Tax-Efficient Growth                                     41,000          0(a)           0(a)
Tax-Exempt Money                                          8,000      131,000        32,000
Tax-Free High Yield                                   2,301,000    2,152,000     1,655,000
Tax-Free Income                                       1,409,000    1,488,000     1,747,000
Tax-Free Intermediate Bond                               46,000       49,000       112,000
Tax-Free Short-Intermediate                             110,000      147,000       289,000
--------------------------------------------------------------------------------------------
</TABLE>


  (a) Prior to commencement of operations.



   Of all such portfolio transactions, none were placed with firms which
   provided research, statistical, or other services to T. Rowe Price in
   connection with the management of the funds, or in some cases, to the funds.

   The portfolio turnover rate for each fund for the fiscal years ended February
   29, 2000, February 28, 1999, and 1998, was as follows:
<TABLE>
<CAPTION>
                        Fund                             2000         1999          1998
                        ----                             ----         ----          ----
<S>                                                   <C>          <C>          <C>
California Tax-Free Bond                                 40.8%        27.2%         35.0%
California Tax-Free Money                                 N/A          N/A           N/A
Florida Intermediate Tax-Free                            30.9         26.9          25.0
Georgia Tax-Free Bond                                    48.5         19.9          49.0
Maryland Tax-Free Bond                                   29.2         15.4          19.2
Maryland Short-Term Tax-Free Bond                        41.4         46.4          60.4
New Jersey Tax-Free Bond                                 50.2         25.5          34.3
New York Tax-Free Bond                                   77.5         55.4          55.0
New York Tax-Free Money                                   N/A          N/A         N/A
Virginia Tax-Free Bond                                   48.1         47.3          64.3
Virginia Short-Term Tax-Free Bond                        39.3         22.5          75.0
Tax-Efficient Balanced                                   40.0         19.8          12.5
Tax-Efficient Growth                                     23.4         0(a)          0(a)
Tax-Exempt Money                                          N/A          N/A           N/A
Tax-Free High Yield                                      57.4         38.9          24.4
Tax-Free Income                                          44.3         34.1          36.3
Tax-Free Intermediate Bond                               47.6         24.3          56.1
Tax-Free Short-Intermediate                              49.7         39.9          76.8
---------------------------------------------------------------------------------------------
</TABLE>




<PAGE>

    (a) Prior to commencement of operations.



 PRICING OF SECURITIES
 -------------------------------------------------------------------------------
   Fixed income securities are generally traded in the over-the-counter market.
   With the exception of the Money Funds, investments in securities are stated
   at fair value using a bid-side valuation as furnished by dealers who make
   markets in such securities or by an independent pricing service, which
   considers yield or price of bonds of comparable quality, coupon, maturity,
   and type, as well as prices quoted by dealers who make markets in such
   securities. Securities held by the Money Funds are valued at amortized cost.

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

   Securities or other assets for which the above valuation procedures are
   deemed not to reflect fair value will be appraised at prices deemed best to
   reflect their fair value. Such determinations will be made in good faith by
   or under the supervision of officers of each fund as authorized by the Board
   of Directors/Trustees.

   Tax-Efficient Balanced and Tax-Efficient Growth Funds

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

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

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

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


         Maintenance of Money Fund's Net Asset Value Per Share at $1.00

   It is the policy of the fund to attempt to maintain a net asset value of
   $1.00 per share by using the amortized cost method of valuation permitted by
   Rule 2a-7 under the 1940 Act. Under this method, securities are valued by
   reference to the fund's acquisition cost as adjusted for amortization of
   premium or accumulation of discount rather than by reference to their market
   value. Under Rule 2a-7:

   (a) The Board of Directors/Trustees must establish written procedures
       reasonably designed, taking into account current market conditions and
       the fund's investment objectives, to stabilize the fund's net asset


<PAGE>

       value per share, as computed for the purpose of distribution, redemption
       and repurchase, at a single value;

   (b) The fund must (i) maintain a dollar-weighted average portfolio maturity
       appropriate to its objective of maintaining a stable price per share,
       (ii) not purchase any instrument with a remaining maturity greater than
       397 days, and (iii) maintain a dollar-weighted average portfolio maturity
       of 90 days or less;

   (c) The fund must limit its purchase of portfolio instruments, including
       repurchase agreements, to those U.S. dollar-denominated instruments which
       the fund's Board of Directors/Trustees determines present minimal credit
       risks, and which are eligible securities as defined by Rule 2a-7; and

   (d) The Board of Directors/Trustees must determine that (i) it is in the best
       interest of the fund and its shareholders to maintain a stable net asset
       value per share under the amortized cost method; and (ii) the fund will
       continue to use the amortized cost method only so long as the Board of
       Directors/Trustees believes that it fairly reflects the market based net
       asset value per share.

   Although the fund believes that it will be able to maintain its net asset
   value at $1.00 per share under most conditions, there can be no absolute
   assurance that it will be able to do so on a continuous basis. If the fund's
   net asset value per share declined, or was expected to decline, below $1.00
   (rounded to the nearest one cent), the Board of Directors/Trustees of the
   fund might temporarily reduce or suspend dividend payments in an effort to
   maintain the net asset value at $1.00 per share. As a result of such
   reduction or suspension of dividends, an investor would receive less income
   during a given period than if such a reduction or suspension had not taken
   place. Such action could result in an investor receiving no dividend for the
   period during which he holds his shares and in his receiving, upon
   redemption, a price per share lower than that which he paid. On the other
   hand, if the fund's net asset value per share were to increase, or were
   anticipated to increase above $1.00 (rounded to the nearest one cent), the
   Board of Directors/Trustees of the fund might supplement dividends in an
   effort to maintain the net asset value at $1.00 per share.



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

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


<PAGE>

 DIVIDENDS AND DISTRIBUTIONS
 -------------------------------------------------------------------------------
   Unless you elect otherwise, the fund's annual capital gain distribution and,
   for the Tax-Efficient Balanced and Tax-Efficient Growth Funds, the annual
   dividend, if any, will be reinvested on the reinvestment date using the NAV
   per share of that date. The reinvestment date may precede the payment date by
   as much as one day although the exact timing is subject to change and can be
   as great as 10 days.



 TAX STATUS
 -------------------------------------------------------------------------------
   The fund intends to qualify as a "regulated investment company" under
   Subchapter M of the Code.

   Generally, dividends paid by the funds are not eligible for the
   dividends-received deduction applicable to corporate shareholders. For tax
   purposes, it does not make any difference whether dividends and capital gain
   distributions are paid in cash or in additional shares. Each fund must
   declare by its year-end dividends equal to at least 90% of net tax-exempt
   income (as of its year-end) to permit pass-through of tax-exempt income to
   shareholders. Each fund must also declare dividends by December 31 of each
   year equal to at least 98% of capital gains (as of October 31) in order to
   avoid a federal excise tax, and distribute within 12 months 100% of taxable
   income, if any, and capital gains (as of its tax year-end) to avoid federal
   income tax.

   At the time of your purchase, the fund's net asset value may reflect
   undistributed capital gains or net unrealized appreciation of securities held
   by the fund. A subsequent distribution to you of such amounts, although
   constituting a return of your investment, would be taxable as a capital gain
   distribution. For federal income tax purposes, the fund is permitted to carry
   forward its net realized capital losses, if any, for eight years and realize
   net capital gains up to the amount of such losses without being required to
   pay taxes on, or distribute, such gains.

   If, in any taxable year, the fund should not qualify as a regulated
   investment company under the code: (i) the fund would be taxed at normal
   corporate rates on the entire amount of its taxable income, if any, without
   deduction for dividends or other distributions to shareholders; and (ii) the
   fund's distributions to the extent made out of the fund's current or
   accumulated earnings and profits would be taxable to shareholders as ordinary
   dividends (regardless of whether they would otherwise have been considered
   capital gain dividends).

   The funds (other than Tax-Efficient Growth Fund) may acquire bonds after
   initial issuance at a price less than the principal amount of such bonds
   ("market discount bonds"). Gain on the disposition of such bonds is treated
   as taxable ordinary income to the extent of accrued market discount. Such
   gains cannot be offset by losses on the sale of other securities but must be
   distributed to shareholders annually and taxed as ordinary income.

   Each year, the funds will mail you information on the tax status of dividends
   and distributions.

   All Funds (other than Tax-Efficient Balanced and Tax-Efficient Growth Funds)

   The funds anticipate that substantially all of the dividends to be paid by
   each fund will be exempt from federal income taxes. If any portion of a
   fund's dividends is not exempt from federal income taxes, you will receive a
   Form 1099-DIV stating the taxable portion. The funds will also advise you of
   the percentage of your dividends, if any, which should be included in the
   computation of alternative minimum tax. Social Security recipients who
   receive interest from tax-exempt securities may have to pay taxes on a
   portion of their Social Security benefit.

   Because the interest on municipal securities is tax exempt, any interest on
   money you borrow that is directly or indirectly used to purchase fund shares
   is not deductible. (See Section 265(2) of the Internal Revenue Code.)
   Further, entities or persons who are "substantial users" (or persons related
   to "substantial users") of facilities financed by industrial development
   bonds should consult their tax advisers before purchasing shares of a fund.
   The income from such bonds may not be tax exempt for such substantial users.


<PAGE>

   Tax-Efficient Growth Fund

   A portion of the dividends paid by certain funds may be eligible for the
   dividends-received deduction applicable to corporate shareholders. Long-term
   capital gain distributions paid from these funds are never eligible for the
   dividend received 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 by December 31 of
   each year equal to at least 98% of ordinary income (as of December 31) and
   capital gains (as of October 31) in order to avoid a federal excise tax and
   distribute within 12 months 100% of ordinary income and capital gains (as of
   its tax year-end) to avoid a federal income tax.

   Florida Intermediate Tax-Free Fund

   Although Florida does not have a state income tax, it does impose an
   intangible personal property tax (intangibles tax) on assets, including
   shares of mutual funds. This tax is based on the net asset value of shares
   owned on January 1.

   Under Florida law, shares of the fund will be entirely exempt from the
   intangibles tax if on January 1, at least 90% of the fund's portfolio of
   assets is invested in certain exempt Florida securities, U.S. government
   securities, certain short-term cash investments, or other exempt securities.
   If, on January 1, less than 90% of the fund's portfolio of assets is invested
   in these tax-exempt securities, only that portion of a share's net asset
   value represented by U.S. government securities will be exempt from the
   intangibles tax. Because the fund will make every effort to have its
   portfolio invested exclusively in exempt Florida municipal obligations (and
   other qualifying investments) on January 1, shares of the fund should be
   exempt from the intangibles tax. However, under certain circumstances, the
   fund may invest in securities other than Florida municipal obligations and
   there can be no guarantee that such non-exempt investments would not be in
   the fund's portfolio on January 1. In such cases, all or a portion of the
   value of the fund's shares may be subject to the intangibles tax, and a
   portion of the fund's income may be subject to federal income taxes.

   Tax-Efficient Balanced and Tax-Efficient Growth Funds


                        Taxation of Foreign Shareholders

   The Code provides that dividends from net income will be subject to U.S. tax.
   For shareholders who are not engaged in a business in the U.S., this tax
   would be imposed at the rate of 30% upon the gross amount of the dividends in
   the absence of a Tax Treaty providing for a reduced rate or exemption from
   U.S. taxation. Distributions of net long-term capital gains realized by the
   fund are not subject to tax unless the foreign shareholder is a nonresident
   alien individual who was physically present in the U.S. during the tax year
   for more than 182 days.


                      Passive Foreign Investment Companies

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

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


<PAGE>

                        Foreign Currency Gains and Losses

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



 YIELD INFORMATION
 -------------------------------------------------------------------------------
   Money Funds

   The fund's current and historical yield for a period is calculated by
   dividing the net change in value of an account (including all dividends
   accrued and dividends reinvested in additional shares) by the account value
   at the beginning of the period to obtain the base period return. This base
   period return is divided by the number of days in the period, then multiplied
   by 365 to arrive at the annualized yield for that period. The fund's
   annualized compound yield for such period is compounded by dividing the base
   period return by the number of days in the period, and compounding that
   figure over 365 days.

  The Money Funds' current and compound yields for the seven days ended
     February 29, 2000, were:
<TABLE>
<CAPTION>
          Fund                Current Yield        Compound Yield
          ----                -------------        --------------
<S>                        <C>                  <C>
California Tax-Free Money         2.19%                2.21%
New York Tax-Free Money           3.25                 3.31
Tax-Exempt Money                  3.36                 3.41
</TABLE>




   Bond Funds

   An income factor is calculated for each security in the portfolio based upon
   the security's market value at the beginning of the period and yield as
   determined in conformity with regulations of the SEC. The income factors are
   then totaled for all securities in the portfolio. Next, expenses of the fund
   for the period, net of expected reimbursements, are deducted from the income
   to arrive at net income, which is then converted to a per share amount by
   dividing net income by the average number of shares outstanding during the
   period. The net income per share is divided by the net asset value on the
   last day of the period to produce a monthly yield which is then annualized.
   If applicable, a taxable-equivalent yield is calculated by dividing this
   yield by one minus the effective federal, state, and/or city or local income
   tax rates. Quoted yield factors are for comparison purposes only, and are not
   intended to indicate future performance or forecast the dividend per share of
   the fund.


<PAGE>

   The yield of each fund calculated under the above-described method for the
   month ended February 29, 2000, was:
<TABLE>
<CAPTION>
<S>                                     <C>
California Tax-Free Bond Fund                  5.07%
Florida Intermediate Tax-Free Fund             4.55
Georgia Tax-Free Bond Fund                     5.11
Maryland Tax-Free Bond Fund                    5.18
Maryland Short-Term Tax-Free Bond Fund         4.17
New Jersey Tax-Free Bond Fund                  5.16
New York Tax-Free Bond Fund                    5.25
Virginia Tax-Free Bond Fund                    5.15
Virginia Short-Term Tax-Free Bond Fund         4.10
Tax-Free High Yield Fund                       5.85
Tax-Free Income Fund                           5.23
Tax-Free Intermediate Bond Fund                4.61
Tax-Free Short-Intermediate Fund               4.48
</TABLE>




   The tax-equivalent yields (assuming a federal tax bracket of 31.0%) for each
   fund for the same period were as follows:
<TABLE>
<CAPTION>
<S>                                        <C>
California Tax-Free Bond Fund(a)                  8.10%
Florida Intermediate Tax-Free Fund(b)             6.74
Georgia Tax-Free Bond Fund(c)                     7.87
Maryland Tax-Free Bond Fund(d)                    8.14
Maryland Short-Term Tax-Free Bond Fund(d)         6.56
New Jersey Tax-Free Bond Fund(e)                  7.99
New York Tax-Free Bond Fund(f)                    8.52
Virginia Tax-Free Bond Fund(g)                    7.92
Virginia Short-Term Tax-Free Bond Fund(g)         6.31
Tax-Free High Yield Fund                          8.48
Tax-Free Income Fund                              7.58
Tax-Free Intermediate Bond Fund                   6.68
Tax-Free Short-Intermediate Fund                  6.49
---------------------------------------------------------------
</TABLE>


         (a) Assumes a state tax bracket of 9.3%.

         (b) Assumes an intangibles tax rate of 0.15%.

         (c) Assumes a state tax bracket of 6.0%.

         (d) Assumes a state tax bracket of 4.85% and a local tax bracket
            of 2.91%.

         (e) Assumes a state tax bracket of 6.37%.

         (f) Assumes a state tax bracket of 6.85% and a local tax bracket
            of 3.83%.

         (g) Assumes a state tax bracket of 5.75%.




<PAGE>

   The tax-equivalent yields (assuming a federal tax bracket of 28.0%) for each
   fund for the same period were as follows:
<TABLE>
<CAPTION>
<S>                                        <C>
California Tax-Free Bond Fund(a)                  7.76%
Florida Intermediate Tax-Free Fund(b)             6.47
Georgia Tax-Free Bond Fund(c)                     7.55
Maryland Tax-Free Bond Fund(d)                    7.80
Maryland Short-Term Tax-Free Bond Fund(d)         6.28
New Jersey Tax-Free Bond Fund(e)                  7.59
New York Tax-Free Bond Fund(f)                    8.16
Virginia Tax-Free Bond Fund(g)                    7.58
Virginia Short-Term Tax-Free Bond Fund(g)         6.04
Tax-Free High Yield Fund                          8.13
Tax-Free Income Fund                              7.26
Tax-Free Intermediate Bond Fund                   6.40
Tax-Free Short-Intermediate Fund                  6.22
---------------------------------------------------------------
</TABLE>


         (a) Assumes a state tax bracket of 9.3%.

         (b) Assumes an intangibles tax rate of 0.15%.

         (c) Assumes a state tax bracket of 6.0%.

         (d) Assumes a state tax bracket of 4.85% and a local tax bracket
            of 2.91%.

         (e) Assumes a state tax bracket of 5.525%.

         (f) Assumes a state tax bracket of 6.85% and a local tax bracket
            of 3.83%.

         (g) Assumes a state tax bracket of 5.75%.



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

                            Total Return Performance

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


<PAGE>

<TABLE>
<CAPTION>
                  Cumulative Performance Percentage Change
                               1 Yr.   5 Yrs.   10 Yrs.   % Since    Inception
            Fund               -----   ------   -------   -------    ---------
            ----               Ended    Ended    Ended   Inception     Date
                               -----    -----    -----   ---------     ----
                              2/29/00  2/29/00  2/29/00   2/29/00
                              -------  -------  -------   -------
<S>                           <C>      <C>      <C>      <C>        <S>
California Tax-Free Bond      -2.94%   30.96%   90.35%    121.47%    09/15/86
Florida Intermediate
Tax-Free                      -1.32    26.02    --         38.68     03/31/93
Georgia Tax-Free Bond         -3.46    30.24    --         43.25     03/31/93
Maryland Short-Term Tax-Free
Bond                           1.16    21.49    --         31.21     01/29/93
Maryland Tax-Free Bond        -2.98    29.01    86.46     111.70     03/31/87
New Jersey Tax-Free Bond      -4.06    28.34    --         71.74     04/30/91
New York Tax-Free Bond        -4.47    29.00    90.72     129.98     08/28/86
Virginia Short-Term Tax-Free
Bond                           1.48    21.85    --         24.63     11/30/94
Virginia Tax-Free Bond        -3.16    30.10    --         72.69     04/30/91
Tax-Efficient Balanced        10.42    --       --         45.28     06/30/97
Tax-Efficient Growth          --       --       --         --        07/30/99
Tax-Free High Yield           -5.41    28.63    90.37     225.40     03/01/85
Tax-Free Income               -3.42    28.82    89.99     359.19     10/26/76
Tax-Free Intermediate Bond    -1.37    27.31    --         47.24     11/30/92
Tax-Free Short-Intermediate    0.67    23.58    62.00     137.67     12/23/83
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
                   Average Annual Compound Rates of Return
                               1 Yr.   5 Yrs.   10 Yrs.   % Since    Inception
            Fund               -----   ------   -------   -------    ---------
            ----               Ended    Ended    Ended   Inception     Date
                               -----    -----    -----   ---------     ----
                              2/29/00  2/29/00  2/29/00   2/29/00
                              -------  -------  -------   -------
<S>                           <C>      <C>      <C>      <C>        <S>
California Tax-Free Bond      -2.94%    5.54%    6.65%     6.09%     09/15/86
Florida Intermediate
Tax-Free                      -1.32     4.73    --         4.84      03/31/93
Georgia Tax-Free Bond         -3.46     5.43    --         5.33      03/31/93
Maryland Short-Term Tax-Free
Bond                           1.16     3.97    --         3.91      01/29/93
Maryland Tax-Free Bond        -2.98     5.23     6.43      5.98      03/31/87
New Jersey Tax-Free Bond      -4.06     5.12    --         6.31      04/30/91
New York Tax-Free Bond        -4.47     5.22     6.67      6.36      08/28/86
Virginia Short-Term Tax-Free
Bond                           1.48     4.03    --         4.29      11/30/94
Virginia Tax-Free Bond        -3.16     5.40    --         6.38      04/30/91
Tax-Efficient Balanced        10.42    --       --        15.03      06/30/97
Tax-Efficient Growth          --       --       --        --         07/30/99
Tax-Free High Yield           -5.41     5.16     6.65      8.19      03/01/85
Tax-Free Income               -3.42     5.20     6.63      6.75      10/26/76
Tax-Free Intermediate Bond    -1.37     4.95    --         5.48      11/30/92
Tax-Free Short-Intermediate    0.67     4.33     4.94      5.49      12/23/83
-------------------------------------------------------------------------------
</TABLE>




                         Outside Sources of Information

   From time to time, in reports and promotional literature: (1) the fund's
   total return performance, ranking, or any other measure of the fund's
   performance may be compared to any one or combination of the following: (a) a
   broad-based index; (b) other groups of mutual funds, including T. Rowe Price
   funds, tracked by independent research firms ranking entities, or financial
   publications; (c) indices of securities comparable to


<PAGE>

   those in which the fund invests; (2) the Consumer Price Index (or any other
   measure for inflation, government statistics, such as GNP may be used to
   illustrate investment attributes of the fund or the general economic,
   business, investment, or financial environment in which the fund operates;
   (3) various financial, economic, and market statistics developed by brokers,
   dealers, and other persons may be used to illustrate aspects of the fund's
   performance; (4) the effect of tax-deferred compounding on the fund's
   investment returns, or on returns in general in both qualified and
   nonqualified retirement plans or any other tax advantage product, may be
   illustrated by graphs, charts, etc.; and (5) the sectors or industries in
   which the fund invests may be compared to relevant indices or surveys in
   order to evaluate the fund's historical performance or current or potential
   value with respect to the particular industry or sector.


                               Other Publications

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


                           Other Features and Benefits

   The fund is a member of the T. Rowe Price family of funds and may help
   investors achieve various long-term investment goals, which include, but are
   not limited to, 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 and/or Investment Services may be made available.


                       No-Load Versus Load and 12b-1 Funds

   Many mutual funds charge sales fees to investors or use fund assets to
   finance distribution activities. These fees are in addition to the normal
   advisory fees and expenses charged by all mutual funds. There are several
   types of fees charged which vary in magnitude and which may often be used in
   combination. A sales charge (or "load") can be charged at the time the fund
   is purchased (front-end load) or at the time of redemption (back-end load).
   Front-end loads are charged on the total amount invested. Back-end loads or
   "redemption fees" are charged either on the amount originally invested or on
   the amount redeemed. 12b-1 plans allow for the payment of marketing and sales
   expenses from fund assets. These expenses are usually computed daily as a
   fixed percentage of assets.

   The fund is a no-load fund which imposes no sales charges or 12b-1 fees.
   No-load funds are generally sold directly to the public without the use of
   commissioned sales representatives. This means that 100% of your purchase is
   invested for you.


                               Redemptions in Kind

   The fund has filed a notice of election under Rule 18f-1 of the 1940 Act.
   This permits the fund to effect redemptions in kind as set forth in its
   prospectus.

   In the unlikely event a shareholder were to receive an in kind redemption of
   portfolio securities of the fund, it would be the responsibility of the
   shareholder to dispose of the securities. The shareholder would be at risk
   that the value of the securities would decline prior to their sale, that it
   would be difficult to sell the securities and that brokerage fees could be
   incurred.


<PAGE>

 CAPITAL STOCK
 -------------------------------------------------------------------------------
   Tax-Efficient Balanced, Tax-Efficient Growth, Tax-Exempt Money, Tax-Free High
   Yield, Income, Intermediate Bond, and Short-Intermediate Funds

   Currently, the T. Rowe Price Tax-Efficient Funds, Inc., which consists of two
   series, Tax-Efficient Balanced Fund and Tax-Efficient Growth Fund, the T.
   Rowe Price Tax-Exempt Money Fund, Inc., T. Rowe Price Tax-Free High Yield
   Fund, Inc., T. Rowe Price Tax-Free Income Fund, Inc., T. Rowe Price Tax-Free
   Intermediate Bond Fund, Inc., and the T. Rowe Price Tax-Free
   Short-Intermediate Fund, Inc. are all organized as Maryland corporations.

   The fund's Charter authorizes the Board of Directors/Trustees to classify and
   reclassify any and all shares which are then unissued, including unissued
   shares of capital stock into any number of classes or series, each class or
   series consisting of such number of shares and having such designations, such
   powers, preferences, rights, qualifications, limitations, and restrictions,
   as shall be determined by the Board subject to the 1940 Act and other
   applicable law. The shares of any such additional classes or series might
   therefore differ from the shares of the present class and series of capital
   stock and from each other as to preferences, conversions or other rights,
   voting powers, restrictions, limitations as to dividends, qualifications or
   terms or conditions of redemption, subject to applicable law, and might thus
   be superior or inferior to the capital stock or to other classes or series in
   various characteristics. The Board of Directors/Trustees may increase or
   decrease the aggregate number of shares of stock or the number of shares of
   stock of any class or series that the fund has authorized to issue without
   shareholder approval.

   Except to the extent that the fund's Board of Directors/Trustees might
   provide by resolution that holders of shares of a particular class are
   entitled to vote as a class on specified matters presented for a vote of the
   holders of all shares entitled to vote on such matters, there would be no
   right of class vote unless and to the extent that such a right might be
   construed to exist under Maryland law. The Charter contains no provision
   entitling the holders of the present class of capital stock to a vote as a
   class on any matter. Accordingly, the preferences, rights, and other
   characteristics attaching to any class of shares, including the present class
   of capital stock, might be altered or eliminated, or the class might be
   combined with another class or classes, by action approved by the vote of the
   holders of a majority of all the shares of all classes entitled to be voted
   on the proposal, without any additional right to vote as a class by the
   holders of the capital stock or of another affected class or classes.

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


<PAGE>

 ORGANIZATION OF THE FUNDS
 -------------------------------------------------------------------------------
   California and State Tax-Free Trusts

   Currently, the T. Rowe Price California Tax-Free Income Trust consists of two
   series, California Tax-Free Bond Fund and California Tax-Free Money Fund, and
   the T. Rowe Price State Tax-Free Income Trust consists of nine series,
   Florida Intermediate Tax-Free Fund, Georgia Tax-Free Bond Fund, Maryland
   Short-Term Tax-Free Bond Fund, Maryland Tax-Free Bond Fund, New Jersey
   Tax-Free Bond Fund, New York Tax-Free Bond Fund, New York Tax-Free Money
   Fund, Virginia Short-Term Tax-Free Bond Fund, and Virginia Tax-Free Bond Fund
   each of which represents a separate class of each Trust's shares and has
   different objectives and investment policies.

   For tax and business reasons, the Funds were organized as Massachusetts
   Business Trusts, and are registered with the SEC under the 1940 Act as
   diversified, open-end investment companies, commonly known as "mutual fund."

   The Declaration of Trust permits the Board of Trustees to issue an unlimited
   number of full and fractional shares of a single class. The Declaration of
   Trust also provides that the Board of Trustees may issue additional series or
   classes of shares. Each share represents an equal proportionate beneficial
   interest in the fund. In the event of the liquidation of the fund, each share
   is entitled to a pro-rata share of the net assets of the fund.

   Shareholders are entitled to one vote for each full share held (and
   fractional votes for fractional shares held) and will vote in the election of
   or removal of trustees (to the extent hereinafter provided) and on other
   matters submitted to the vote of shareholders. There will normally be no
   meetings of shareholders for the purpose of electing trustees unless and
   until such time as less than a majority of the trustees holding office have
   been elected by shareholders, at which time the trustees then in office will
   call a shareholders' meeting for the election of trustees. Pursuant to
   Section 16(c) of the 1940 Act, holders of record of not less than two-thirds
   of the outstanding shares of the fund may remove a trustee by a vote cast in
   person or by proxy at a meeting called for that purpose. Except as set forth
   above, the trustees shall continue to hold office and may appoint successor
   trustees. Voting rights are not cumulative, so that the holders of more than
   50% of the shares voting in the election of trustees can, if they choose to
   do so, elect all the trustees of the Trust, in which event the holders of the
   remaining shares will be unable to elect any person as a trustee. No
   amendments may be made to the Declaration of Trust without the affirmative
   vote of a majority of the outstanding shares of the Trust.

   Shares have no preemptive or conversion rights; the right of redemption and
   the privilege of exchange are described in the prospectus. Shares are fully
   paid and nonassessable, except as set forth below. The Trust may be
   terminated (i) upon the sale of its assets to another diversified, open-end
   management investment company, if approved by the vote of the holders of
   two-thirds of the outstanding shares of the Trust, or (ii) upon liquidation
   and distribution of the assets of the Trust, if approved by the vote of the
   holders of a majority of the outstanding shares of the Trust. If not so
   terminated, the Trust will continue indefinitely.

   Under Massachusetts law, shareholders could, under certain circumstances, be
   held personally liable for the obligations of the fund. However, the
   Declaration of Trust disclaims shareholder liability for acts or obligations
   of the fund and requires that notice of such disclaimer be given in each
   agreement, obligation or instrument entered into or executed by the fund or a
   Trustee. The Declaration of Trust provides for indemnification from fund
   property for all losses and expenses of any shareholder held personally
   liable for the obligations of the fund. Thus, the risk of a shareholder
   incurring financial loss on account of shareholder liability is limited to
   circumstances in which the fund itself would be unable to meet its
   obligations, a possibility which T. Rowe Price believes is remote. Upon
   payment of any liability incurred by the fund, the shareholders of the fund
   paying such liability will be entitled to reimbursement from the general
   assets of the fund. The Trustees intend to conduct the operations of the fund
   in such a way so as to avoid, as far as possible, ultimate liability of the
   shareholders for liabilities of such fund.


<PAGE>

 FEDERAL REGISTRATION OF SHARES
 -------------------------------------------------------------------------------
   The fund's shares are registered for sale under the 1933 Act. Registration of
   the fund's shares is not required under any state law, but the fund is
   required to make certain filings with and pay fees to the states in order to
   sell its shares in the states.



 LEGAL COUNSEL
 -------------------------------------------------------------------------------
   Swidler Berlin Shereff Friedman, LLP, whose address is The Chrysler Building,
   405 Lexington Avenue, New York, New York 10174, is legal counsel to the fund.



 INDEPENDENT ACCOUNTANTS
 -------------------------------------------------------------------------------
   PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
   Maryland 21201, are the independent accountants to the funds.

   The financial statements of the funds for the year ended February 29, 2000,
   and the report of independent accountants are included in each fund's Annual
   Report for the year ended February 29, 2000. A copy of each Annual Report
   accompanies this Statement of Additional Information. The following financial
   statements and the report of independent accountants appearing in each Annual
   Report for the year ended February 29, 2000, are incorporated into this
   Statement of Additional Information by reference:

<TABLE>
<CAPTION>
                          ANNUAL REPORT REFERENCES:
                                   CALIFORNIA TAX-  CALIFORNIA TAX-  GEORGIA
                                   FREE MONEY       FREE BOND        TAX-FREE
                                   ----------       ---------        BOND
                                                                     ----
<S>                                <C>              <C>              <C>
Financial Highlights                     10               11            9
Statement of Net Assets, February
29, 2000                                12-16            17-24        10-14
Statement of Operations, year
ended
February 29, 2000                        25               25            15
Statement of Changes in Net
Assets, years ended
February 29, 2000 and February
28, 1999                                 26               26            16
Notes to Financial Statements,
February 29, 2000                       27-29            27-29        17-19
Report of Independent Accountants        30               30            20
</TABLE>



<TABLE>
<CAPTION>
                                      NEW JERSEY  FLORIDA       NEW YORK TAX-
                                      TAX-FREE    INTERMEDIATE  FREE MONEY
                                      BOND        TAX-FREE      ----------
                                      ----        --------
<S>                                   <C>         <C>           <C>
Financial Highlights                      8            8             10
Statement of Net Assets, February
29, 2000                                 9-14         9-12          12-15
Statement of Operations, year ended
February 29, 2000                         15           13            22
Statement of Changes in Net Assets,
years ended
February 29, 2000 and February 28,
1999                                      16           14            23
Notes to Financial Statements,
February 29, 2000                       17-19        15-17          24-26
Report of Independent Accountants         20           18            27
</TABLE>





<PAGE>

<TABLE>
<CAPTION>
                                       NEW YORK       VIRGINIA       VIRGINIA
                                       TAX-FREE BOND  SHORT-TERM     TAX-FREE
                                       -------------  TAX-FREE BOND  BOND
                                                      -------------  ----
<S>                                    <C>            <C>            <C>
Financial Highlights                        11              9           10
Statement of Net Assets, February 29,
2000                                       16-21          11-13       14-20
Statement of Operations, year ended
February 29, 2000                           22             21           21
Statement of Changes in Net Assets,
years ended
February 29, 2000 and February 28,
1999                                        23             22           22
Notes to Financial Statements,
February 29, 2000                          24-26          23-25       23-25
Report of Independent Accountants           27             26           26
</TABLE>



<TABLE>
<CAPTION>
                                                  MARYLAND       MARYLAND
                                                  SHORT-TERM     TAX-FREE BOND
                                                  TAX-FREE BOND  -------------
                                                  -------------
<S>                                               <C>            <C>
Financial Highlights                                   10             11
Statement of Net Assets, February 29, 2000            12-16          17-28
Statement of Operations, year ended
February 29, 2000                                      29             29
Statement of Changes in Net Assets, years ended
February 29, 2000 and February 28, 1999                30             30
Notes to Financial Statements, February 29, 2000      31-33          31-33
Report of Independent Accountants                      34             34
</TABLE>



<TABLE>
<CAPTION>
                                          TAX-EXEMPT  TAX-FREE HIGH  TAX-FREE
                                          MONEY       YIELD          INCOME
                                          -----       -----          ------
<S>                                       <C>         <C>            <C>
Financial Highlights                          2             2           2
Statement of Net Assets, February 29,
2000                                         4-16         3-23         3-21
Statement of Operations, year ended
February 29, 2000                             17           24           22
Statement of Changes in Net Assets,
years ended
February 29, 2000 and February 28, 1999       18           25           23
Notes to Financial Statements, February
29, 2000                                    19-21         26-28       24-26
Report of Independent Accountants             22           29           27
</TABLE>



<TABLE>
<CAPTION>
                                 TAX-FREE      TAX-EFFICIENT  TAX-FREE SHORT-
                                 INTERMEDIATE  BALANCED       INTERMEDIATE
                                 BOND          --------       ------------
                                 ----
<S>                              <C>           <C>            <C>
Financial Highlights                  2             17               2
Statement of Net Assets,
February 29, 2000                    3-9           19-30           3-11
Statement of Operations, year
ended
February 29, 2000                     10            38              12
Statement of Changes in Net
Assets, years ended
February 29, 2000 and February
28, 1999                              11            39              13
Notes to Financial Statements,
February 29, 2000                   12-14          40-43           14-16
Report of Independent                 1
Accountants                           5             44              17
</TABLE>





<PAGE>

<TABLE>
<CAPTION>
                                                                TAX-EFFICIENT
                                                                GROWTH
                                                                ------
<S>                                                             <C>
Financial Highlights                                                 18
Portfolio of Investments, February 29, 2000                         31-36
Statement of Assets and Liabilities, February 29, 2000               37
Statement of Operations, period from July 30, 1999
(commencement of operations) to February 29, 2000                    38
Statement of Changes in Net Assets, period from July 30, 1999
(commencement of operations) to February 29, 2000                    39
Notes to Financial Statements, February 29, 2000                    40-43
Report of Independent Accountants                                    44
</TABLE>



<TABLE>
<CAPTION>
                                                  TAX-EXEMPT
                                                  MONEY FUND-
                                                  PLUS CLASS
                                                  ----------
<S>                                               <C>
Financial Highlights                                   3
Statement of Net Assets, February 29, 2000            4-16
Statement of Operations, year ended
February 29, 2000                                      17
Statement of Changes in Net Assets, years ended
February 29, 2000 and February 28, 1999                18
Notes to Financial Statements, February 29, 2000     19-21
Report of Independent Accountants                      22
</TABLE>





 RATINGS OF MUNICIPAL DEBT SECURITIES
 -------------------------------------------------------------------------------

                         Moody's Investors Service, Inc.

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

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

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

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

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

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


<PAGE>

   Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
   there may be present elements of danger with respect to principal or
   interest.

   Ca-Bonds rated Ca represent obligations which are speculative in a high
   degree. Such issues are often in default or have other marked short-comings.

   C-Bonds rated C represent the lowest-rated, and have extremely poor prospects
   of attaining investment standing.


                          Standard & Poor's Corporation

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

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

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

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

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

   D-In default.


                                Fitch IBCA, Inc.

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

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

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

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

   BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
   with respect to the issuer's capacity to repay interest and repay principal
   in accordance with the terms of the obligation for bond issues


<PAGE>

   not in default. BB indicates the lowest degree of speculation and C the
   highest degree of speculation. The rating takes into consideration special
   features of the issue, its relationship to other obligations of the issuer,
   and the current and prospective financial condition and operating performance
   of the issuer.



 RATINGS OF MUNICIPAL NOTES AND VARIABLE RATE SECURITIES
 -------------------------------------------------------------------------------
   Moody's Investors Service, Inc. VMIG1/MIG-1 the best quality. VMIG2/MIG-2
   high quality, with margins of protection ample though not so large as in the
   preceding group. VMIG3/MIG-3 favorable quality, with all security elements
   accounted for, but lacking the undeniable strength of the preceding grades.
   Market access for refinancing, in particular, is likely to be less well
   established. VMIG4/MIG-4 adequate quality but there is specific risk.

   Standard & Poor's Corporation SP-1 very strong or strong capacity to pay
   principal and interest. Those issues determined to possess overwhelming
   safety characteristics will be given a plus (+) designation. SP-2
   satisfactory capacity to pay interest and principal. SP-3 speculative
   capacity to pay principal and interest.

   Fitch IBCA, Inc. F-1+ exceptionally strong credit quality, strongest degree
   of assurance for timely payment. F-1 very strong credit quality. F-2 good
   credit quality, having a satisfactory degree of assurance for timely payment.
   F-3 fair credit quality, assurance for timely payment is adequate but adverse
   changes could cause the securities to be rated below investment grade. F-5
   weak credit quality, having characteristics suggesting a minimal degree of
   assurance for timely payment.



 RATINGS OF COMMERCIAL PAPER
 -------------------------------------------------------------------------------
   Moody's Investors Service, Inc. P-1 superior capacity for repayment. P-2
   strong capacity for repayment. P-3 acceptable capacity for repayment of
   short-term promissory obligations.

   Standard & Poor's Corporation A-1 highest category, degree of safety
   regarding timely payment is strong. Those issues determined to possess
   extremely strong safety characteristics are denoted with a plus sign (+)
   designation. A-2 satisfactory capacity to pay principal and interest. A-3
   adequate capacity for timely payment, but are vulnerable to adverse effects
   of changes in circumstances than higher-rated issues. B and C speculative
   capacity to pay principal and interest.

   Fitch IBCA, Inc. F-1+ exceptionally strong credit quality, strongest degree
   of assurance for timely payment. F-1 very strong credit quality. F-2 good
   credit quality, having a satisfactory degree of assurance for timely payment.
   F-3 fair credit quality, assurance for timely payment is adequate but adverse
   changes could cause the securities to be rated below investment grade. F-5
   weak credit quality, having characteristics suggesting a minimal degree of
   assurance for timely payment.