<PAGE>


                              Registration Nos. 002-57265/811-2684


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM N-1A


REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933          /X/



         Post-Effective Amendment No. 49                          /X/


REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940/X/


         Amendment No. 28                                         /X/


                    T. ROWE PRICE TAX-FREE INCOME FUND, INC.
                    ----------------------------------------
                Exact Name of Registrant as Specified in Charter


              100 East Pratt Street, Baltimore, Maryland 21202

              ----------------------------------------------------
                     Address of Principal Executive Offices

                                  410-345-2000
                                  ------------
               Registrant's Telephone Number, Including Area Code

                                Henry H. Hopkins
                100 East Pratt Street, Baltimore, Maryland 21202
                ------------------------------------------------
                     Name and Address of Agent for Service


      Approximate Date of Proposed Public Offering September 27, 2002

                                                   ----------------------

         It is proposed that this filing will become effective (check
         appropriate box):

/ /      Immediately upon filing pursuant to paragraph (b)

/X/      On September 27, 2002, pursuant to paragraph (b)

/ /      60 days after filing pursuant to paragraph (a)(1)
//       On (date), pursuant to paragraph (a)(1)
/ /      75 days after filing pursuant to paragraph (a)(2)
/ /      On (date) pursuant to paragraph (a)(2) of Rule 485

         If appropriate, check the following box:

/ /      This post-effective amendment designates a new effective date for a
         previously filed post-effective amendment.

<PAGE>


SUBJECT TO COMPLETION

         Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.

         The Registration Statement of the T. Rowe Price Tax-Free

Income Fund, Inc. (the "REGISTRANT") on Form N-1A (File Nos. 002-
57265/811-2684) is hereby amended under the Securities Act of 1933 to register a
new class of shares for the Registrant.

<PAGE>

PROSPECTUS
September 30, 2002
T. ROWE PRICE

Tax-Free Income Fund--
Advisor Class

 A municipal bond fund for investors seeking income exempt from federal income
 taxes. This class of shares is sold only through financial intermediaries.

SUBJECT TO COMPLETION
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
(R)
 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 Income Fund, Inc.
  T. Rowe Price Tax-Free Income Fund--Advisor Class
Prospectus

September 30, 2002

<TABLE>
<CAPTION>
<S>      <C>  <C>                                       <C>
              ABOUT THE
1             FUND
              Objective, Strategy, Risks, and Expenses    1

              -----------------------------------------------
              Other Information About the                 5
              Fund
              -----------------------------------------------
              Some Characteristics of                     6
              Municipal Securities
              -----------------------------------------------
              Some Basics of
              Fixed-Income                                8
               Investing
              -----------------------------------------------


              INFORMATION
              ABOUT
              ACCOUNTS IN T. ROWE
2             PRICE FUNDS
              Pricing Shares and Receiving               10
              Sale Proceeds
              -----------------------------------------------
              Useful Information on
              Distributions                              11
              and Taxes
              -----------------------------------------------
              Transaction Procedures and                 14
              Special Requirements
              -----------------------------------------------


              MORE ABOUT THE
3             FUND
              Organization and Management                16

              -----------------------------------------------
              Understanding Performance Information      18

              -----------------------------------------------
              Investment Policies and Practices          19

              -----------------------------------------------
              Financial Highlights                       29

              -----------------------------------------------


              INVESTING WITH T. ROWE PRICE
4
              Account Requirements                       31
              and Transaction Information
              -----------------------------------------------
              Purchasing Additional Shares               32

              -----------------------------------------------
              Exchanging and Redeeming                   32
              Shares
              -----------------------------------------------
              Rights Reserved by the Funds               32

              -----------------------------------------------
              T. Rowe Pric
              e
               P                                         34
              rivacy Policy
              -----------------------------------------------
</TABLE>


 Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc., and its affiliates managed $148.8 billion, including $8 billion in
municipal fixed-income assets, for more than eight million individual and
institutional investor accounts as of June 30, 2002.
 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 FUND
 OBJECTIVE, STRATEGY, RISKS, AND EXPENSES
 ----------------------------------------------------------
   A word about the fund's name and structure. Tax-Free Income Fund - Advisor
   Class is a share class of T. Rowe Price Tax-Free Income Fund. The Advisor
   Class is not a separate mutual fund. It is sold only through brokers,
   dealers, banks, insurance companies, and other financial intermediaries that
   provide various distribution and administrative services.


 What is the fund's objective?

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


 What is the fund's principal investment strategy?

   The 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.

   Investment decisions reflect the manager's 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 to provide higher yield and greater appreciation potential.
   Conversely, shorter maturities may be favored if rates are expected to rise.
   And if our economic outlook is positive, we may take advantage of the fund's
   "basket" for noninvestment-grade bonds. From time to time, the 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 fund may sell holdings for a variety of reasons, such as
   to adjust 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 and swaps, in
   keeping with fund objectives.


 What are the main risks of investing in the fund?

   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
<PAGE>

   opposite directions.) Generally, the longer the maturity of a fund or
   security, the greater its interest rate risk.

   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 the fund's holdings will have
   their credit ratings downgraded or will default (fail to make scheduled
   interest or principal payments), potentially reducing the fund's income level
   and share price.

   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 fund 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.

  . 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  To the extent the fund uses futures, swaps, and other
   derivatives, it is exposed to additional volatility and potential losses.

   As with any mutual fund, there can be no guarantee the fund will achieve its

   objective.


   . The share price and income level of the fund will fluctuate with changing
     market conditions and interest rate levels. When you sell your shares, you
     may lose money.


 How can I tell if the fund is appropriate for me?

   Consider your investment goals, your time horizon for achieving them, and
   your tolerance for risk. The fund 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 through an
   intermediary and you can accept the possibility of share price declines in an
   effort to achieve income exempt from fed-
<PAGE>

   eral income tax, the fund could be an appropriate part of your overall
   investment strategy. If you are investing for principal stability and
   liquidity, you should consider a money market fund.

   The fund is inappropriate for tax-deferred accounts, such as IRAs.


   . The fund should not represent your complete investment program or be used
     for short-term trading purposes.


 How has the fund performed in the past?

   Tax-Free Income Fund-Advisor Class began operations on September 30, 2002,
   and does not have a full calendar year of performance history. As a point of
   comparison, however, the following bar chart and table show calendar year
   returns for the oldest existing class of the Tax-Free Income Fund. Because
   the Tax-Free Income Fund-Advisor Class is expected to have higher expenses
   than the oldest existing class of the Tax-Free Income Fund, its performance,
   had it existed over the periods shown, would have been lower. The oldest
   existing class of the Tax-Free Income Fund and the Tax-Free Income
   Fund-Advisor Class share the same portfolio. Shares of each class of the fund
   are offered in separate prospectuses.

   The bar chart 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 how fund performance compares with that of a
   comparable market index. Fund past returns (before and after taxes) are not
   necessarily an indication of future performance.

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

   In addition, the average annual total return table shows hypothetical
   after-tax returns to suggest how taxes paid by the shareholder may influence
   returns. Actual after-tax returns depend on each investor's situation and may
   differ from those shown. After-tax returns are not relevant if the shares are
   held in a tax-deferred account, such as a 401(k) or IRA. During periods of
   fund losses, the post-liquidation after-tax return may exceed the fund's
   other returns because the loss generates a tax benefit that is factored into
   the result.
<PAGE>


<TABLE>
<CAPTION>
                                     Calendar Year Total Returns
             Fund              "92"       "93"    "94"    "95"   "96"     "97"    "98"    "99"    "00"    "01"
 ----------------------------------------------------------------------------------------------------------
 <S>                           <C>      <C>    <C>   <C>    <C>    <C>   <C>   <C>    <C>   <C>
  Tax-Free Income         9.38   12.77   -5.47  17.69   3.27    9.33   5.98   -3.91  12.29  4.39
 ----------------------------------------------------------------------------------------------------------
</TABLE>

Tax-Free Income               Quarter ended    Total return
 Best quarter                               3/31/95           6.85%
 Worst quarter                             3/31/94          -5.70%

            The Tax-Free Income Fund's return for the six months
            ended 6/30/02 was 4.25%.

<TABLE>
 Table 1  Average Annual Total Returns
<CAPTION>
                                        Periods ended December 31, 2001
                                        1 year     5 years     10 years
 ------------------------------------------------------------------------------
 <S>                                   <C>        <C>         <C>         <S>
  Tax-Free Income Fund
  Returns before taxes                   4.39%      5.47%       6.34%
  Returns after taxes on
  distributions                          4.39       5.44        6.25
  Returns after taxes on
  distributions and sale of fund
  shares                                 4.65       5.43        6.19
  Lehman Brothers Municipal Bond
  Index                                  5.13       5.98        6.63
  Lipper General Municipal Debt Funds    3.90       4.78        5.85
  Average
 ------------------------------------------------------------------------------
</TABLE>


 Returns are based on changes in principal value, reinvested dividends, and
 capital gain distributions, if any. Returns before taxes do not reflect effects
 of any income or capital gains taxes. All after-tax returns are calculated
 using the historical highest individual federal marginal income tax and capital
 gains rates. They do not reflect the impact of state and local taxes. Returns
 after taxes on distributions reflect the taxed return on the payment of
 dividends and capital gains. Returns after taxes on distributions and sale of
 fund shares assume the shares were sold at period-end, and, therefore, are also
 adjusted for any capital gains or losses incurred by the shareholder. Market
 indexes do not include expenses, which are deducted from fund returns, or
 taxes.


 What fees or expenses will I pay?

   The numbers in the next table provide an estimate of how much it will cost to
   operate the Advisor Class for a year. These are costs you pay indirectly
   because they are deducted from net assets before the daily share price is
   calculated.
<PAGE>

<TABLE>
 Table 2  Fees and Expenses of the Advisor Class*
<CAPTION>
                                                        Annual fund operating expenses
                                                 (expenses that are deducted from fund assets)
 ----------------------------------------------------------------------------------------------------
 <S>                                             <C>                                            <S>
  Management fee                                                    0.47%
                                                 -----------------------------------------------
  Distribution and service (12b-1) fees                             0.25%
                                                 -----------------------------------------------
  Other expenses                                                    0.29%/a/
                                                 -----------------------------------------------
  Total annual fund operating expenses                              1.01%
                                                 -----------------------------------------------
  Fee waiver/reimbursement                                          0.11%/b/
                                                 -----------------------------------------------
  Net expenses                                                      0.90%/b/
 ----------------------------------------------------------------------------------------------------
</TABLE>


 * Redemption proceeds of less than $5,000 sent by wire are subject to a $5 fee
   paid to the fund.

 /a/                Other expenses are estimated.

 /b/To limit the class's expenses during its initial period of operations, T.
   Rowe Price is contractually obligated to bear any expenses (other than
   management fees and certain other portfolio level expenses) through June 30,

   2004, that would cause the class's ratio of expenses to average net assets to
   exceed 0.90%. Expenses paid or assumed under this agreement are subject to
   reimbursement to T. Rowe Price by the fund whenever the class's expense ratio
   is below 0.90%; however, no reimbursement will be made after June 30, 2006,
   or if it would result in the expense ratio exceeding 0.90%. Any amounts
   reimbursed will have the effect of increasing fees otherwise paid by the
   class.


   Example.  The following table gives you an idea of how expense ratios may
   translate into dollars and helps you to compare the cost of investing in this
   class 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, the expense limitation currently in place is not renewed,
   you invest $10,000, earn a 5% annual return, and hold the investment for the
   following periods and then redeem:

<TABLE>
<CAPTION>
      1 year      3 years      5 years       10 years
    ----------------------------------------------------
    <S>         <C>          <C>          <C>
       $92         $287         $498          $1,108
    ----------------------------------------------------
</TABLE>




 OTHER INFORMATION ABOUT THE FUND
 ----------------------------------------------------------

 What are the fund's potential rewards?

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

   The fund should provide higher income and volatility than 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.
<PAGE>

 How does the portfolio manager try to reduce risk?

   Consistent with the 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 the 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.


 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 fund may purchase as well as types of management
   practices the fund 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.


 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 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. However, fund capital gain distributions are taxable to
   you. (Please see Useful Information on Distributions and Taxes -Taxes on Fund
   Distributions.)


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

 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.The portion of income subject to the
   AMT will be reported annually to shareholders. (Please see Useful Information
   on Distributions and Taxes -Tax Information.)

   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 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 3  Taxable-Equivalent Yields
<CAPTION>
  If your                                    A tax-free yield of
  federal tax                      1%    2%    3%    4%    5%    6%     7%
  rate is:                                equals a taxable yield of:
 <S>                               <C>   <C>   <C>   <C>   <C>   <C>   <C>    <S>
  27%                              1.4%  2.7%  4.1%  5.5%  6.9%  8.2%   9.6%
                                   -------------------------------------------
  30%                              1.4   2.9   4.3   5.7   7.1   8.6   10.0
                                   -------------------------------------------
  35%                              1.5   3.1   4.6   6.2   7.7   9.2   10.8
                                   -------------------------------------------
  38.6%                            1.6   3.3   4.9   6.5   8.1   9.8   11.4
 ----------------------------------------------------------------------------------
</TABLE>


<PAGE>

 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. A fund's total return is the result of reinvested
   distributions from income and capital gains and the change in share price for
   a given period. Income is always a positive contributor to total return and
   can either enhance a rise in share price or help offset a price decline.


 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.


 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. Each of these numbers 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
<PAGE>

   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 prices 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 4.

<TABLE>
 Table 4  How Interest Rates May Affect Bond Prices
<CAPTION>
                                         Price per $1,000 of a Municipal Bond if Interest Rates:
  Bond maturity   Coupon                          Increase                                    Decrease
                                   1 percent                    2 percent             1 percent      2 percent
 <S>             <S>      <C>                          <C>                          <C>            <C>            <S>
  1 year          1.50%              $990                         $981                 $1,010         $1,020
                          ----------------------------------------------------------------------------------------
  3 years         2.48                972                          944                  1,029          1,059
                          ----------------------------------------------------------------------------------------
  5 years         3.09                955                          913                  1,047          1,097
                          ----------------------------------------------------------------------------------------
  10 years        4.01                922                          851                  1,086          1,180
                          ----------------------------------------------------------------------------------------
  20 years        4.97                884                          786                  1,137          1,300
                          ----------------------------------------------------------------------------------------
  30 years        5.15                864                          754                  1,171          1,386
 ----------------------------------------------------------------------------------------------------------------------
</TABLE>


 The table reflects yields on AAA rated municipals as of June 30, 2002. 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?

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

  . 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).

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

 INFORMATION ABOUT ACCOUNTS IN T. ROWE PRICE FUNDS
   As a T. Rowe Price shareholder, you will want to know about the following
   policies and procedures that apply to all Advisor Class accounts.



 PRICING SHARES AND RECEIVING SALE PROCEEDS
 ----------------------------------------------------------

 How and when shares are priced

   The share price (also called "net asset value" or NAV per share) for each
   class of shares 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 each class's proportionate share of the
   balance, called net assets, is divided by the number of shares outstanding of
   that class. Market values are used to price stocks and bonds.

   The securities of funds investing in foreign markets are usually valued on
   the basis of the most recent closing market prices at 4 p.m. ET. Most foreign
   markets close before that time. For securities primarily traded in the Far
   East, for example, the most recent closing prices may be as much as 15 hours
   old at 4 p.m. Normally, developments that could affect the values of
   portfolio securities that occur between the close of the foreign market and 4
   p.m. ET will not be reflected in a fund NAV. However, if a fund determines
   that such developments are so significant that they will, in its judgment,
   clearly and materially affect the value of the fund's securities, the fund
   may adjust the previous closing prices to reflect what it believes to be the
   fair value of the securities as of 4 p.m. ET. A fund may fair value
   securities in other situations, for example, when a particular foreign market
   is closed but the fund is open.


 How your purchase, sale, or exchange price is determined

   Advisor Class shares are intended for purchase and may be held only through
   various third-party intermediaries including brokers, dealers, banks,
   insurance companies, retirement plan recordkeepers, and others. Consult your
   intermediary to find out about how to purchase, sell, or exchange your
   shares, cut-off times, and other applicable procedures for these
   transactions. The intermediary may charge a fee for its services.

   The fund may have an agreement with your intermediary that permits the
   intermediary to accept orders on behalf of the fund until 4 p.m. ET. In such
   cases, if your order is received by the intermediary in good form by 4 p.m.
   ET and transmitted to the fund and paid for in accordance with the agreement,
   it will be priced at the next NAV computed after the intermediary received
   your order.
<PAGE>

   Note: The time at which transactions and shares are priced and the time until
   which orders are accepted by the fund or an intermediary 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 proceeds are received
   Normally, the fund transmits proceeds to intermediaries for redemption orders
   received in good form on either the next or third business day after receipt,
   depending on the arrangement with the intermediary. Under certain
   circumstances and when deemed to be in the fund's best interests, proceeds
   may not be sent for up to seven calendar days after receipt of the redemption
   order. You must contact your intermediary about procedures for receiving your
   redemption proceeds.



 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. Reinvesting distributions results in compounding, that is, receiving
   income dividends and capital gain distributions on a rising number of shares.

   No interest will accrue on amounts represented by uncashed distribution or
   redemption checks.

   Income dividends
  . The funds declare and pay dividends (if any) quarterly for the Equity Income
   Fund-Advisor Class; declare daily and pay monthly for the High Yield
   Fund-Advisor Class, International Bond Fund-Advisor Class, New Income
   Fund-Advisor Class, and Tax-Free Income Fund-Advisor Class; and declare and
   pay annually for all other Advisor Classes.
  . A portion of fund dividends (other than High Yield Fund-Advisor Class and
   International Stock Fund-Advisor Class) may be eligible for the 70% deduction
   for dividends received by corporations to the extent the funds' income
   consists of dividends paid by U.S. corporations.

   Capital gains payments
  . A capital gain or loss is the difference between the purchase and sale price
   of a security.
<PAGE>

  . 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. If a second distribution is necessary,
   it is paid the following year. A capital gain payment is normally a taxable
   distribution.


 Tax Information

   You should contact your intermediary for the tax information that will be
   sent to you and reported to the IRS.

   If you invest in the fund through a tax-deferred retirement account, you will
   not be subject to tax on dividends and distributions from the fund or the
   sale of fund shares if those amounts remain in the tax-deferred account.

   If you invest in the fund through a taxable account, you need to be aware of
   the possible tax consequences when:

  . You sell fund shares, including an exchange from one fund to another.
  . The fund makes a distribution to your account.

   Note: The regular monthly income dividends you receive from the Tax-Free
   Income Fund-Advisor Class are expected to be exempt from federal income
   taxes. 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 the Tax-Free Income Fund-Advisor Class 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 this 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.

   Note: If you realize a loss on the sale or exchange of Tax-Free Income
   Fund-Advisor Class shares held six months or less, your capital loss is
   reduced by the tax-exempt dividends received on those shares.

   Taxes on fund distributions
   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%. If you realized a loss on
   the sale or
<PAGE>

   exchange of fund shares that you held six months or less, your short-term
   loss must 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.
   Gains and losses from the sale of foreign currencies and the foreign currency
   gain or loss resulting from the sale of a foreign debt security can increase
   or decrease an ordinary income dividend. Net foreign currency losses may
   cause monthly or quarterly dividends to be reclassified as a return of
   capital.

   If the fund qualifies and elects to pass through nonrefundable foreign taxes
   paid to foreign governments during the year, your portion of such taxes will
   be reported to you as taxable income. However, you may be able to claim an
   offsetting credit or deduction on your tax return for those amounts. There
   can be no assurance that a fund will be able to meet the requirements to pass
   through foreign income taxes paid.

   Note: Gains and losses 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 the Tax-Free Income
   Fund-Advisor Class invests in these securities, the likelihood of a taxable
   gain distribution will be increased.

   Tax consequences of hedging
   For funds investing in foreign securities, distributions resulting from the
   sale of certain foreign currencies, currency contracts, and debt securities
   are taxed as ordinary income. Net foreign currency losses may cause monthly
   or quarterly dividends to be reclassified as a return of capital. Entering
   into certain options, futures, swaps, and forward foreign exchange contracts
   and transactions may result in the application of the mark-to-market and
   straddle provisions of the Internal Revenue Code. These provisions could
   result in a fund being required to distribute gains on such transactions even
   though it did not close the contracts during the year or receive cash to pay
   such distributions. A fund may not be able to reduce its distributions for
   losses on such transactions to the extent of unrealized gains in offsetting
   positions.


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

   Tax effect of buying shares before a capital gain or dividend 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. Such distributions can occur even in
   a year when the fund has a negative return.
<PAGE>

 TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
 ----------------------------------------------------------
 Purchase Conditions for Intermediaries

   Nonpayment
   If the fund receives a check or ACH transfer that does not clear or the
   payment is not received in a timely manner, your purchase may be canceled.
   Any losses or expenses incurred by the fund or transfer agent will be the
   responsibility of the intermediary. The fund and its agents have the right to
   reject or cancel any purchase, exchange, or redemption due to nonpayment.

   U.S. dollars
   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 an intermediary sells shares that it just purchased and paid for by check
   or ACH transfer, the fund will process the redemption but will generally
   delay sending the proceeds for up to 10 calendar days to allow the check or
   transfer to clear. (The 10-day hold does not apply to purchases paid for by
   bank wire.)

   Redemptions over $250,000
   Large redemptions 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 $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 or market timing in your account or accounts controlled by
   you can disrupt management of the fund and raise its expenses. To deter such
   activity, each fund has adopted the following excessive trading policy.

   You can make one purchase and one sale or one sale and one purchase 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 may be barred
   indefinitely and without further notice from further purchases of the T. Rowe
   Price funds. Systematic purchases and redemptions are exempt from this
   policy. Transactions accepted by intermediaries in violation of this
   excessive trading policy or from persons believed to be market timers are
   subject to rejection or cancellation by the funds.
<PAGE>

 Signature Guarantees

   An intermediary may need to obtain a signature guarantee in certain
   situations and should consult its T. Rowe Price Financial Institution
   Services representative.

   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 FUND
 ORGANIZATION AND MANAGEMENT
 ----------------------------------------------------------

 How is the fund organized?

   The fund was incorporated in Maryland in 1976 and is a "diversified, open-end
   investment company," or mutual fund. Mutual funds pool money received from
   shareholders of each class into a single portfolio and invest it to try to
   achieve specified objectives. In 2002, the fund issued a separate class of
   shares known as the Advisor Class.


   . Shareholders benefit from T. Rowe Price's 65 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 income and capital gain distributions of
   the class.

   The income dividends for Tax-Free Income Fund-Advisor Class shares will
   generally differ from those of the Tax-Free Income Fund shares to the extent
   that the expense ratio of Tax-Free Income Fund-Advisor Class shares differs.

  . 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. Shareholders of each class have exclusive
   voting rights on

   matters affecting only that class.


 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>

 Who runs the fund?

   General Oversight
   The fund is governed by a Board of Directors that meets regularly to review
   the fund's investments, performance, expenses, and other business affairs.
   The Board elects the fund's officers. The 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 the fund's portfolio managers.

   Portfolio Management
   The fund has an Investment Advisory Committee with the following members:
   Mary J. Miller, Chairman, Charles B. Hill, Alan D. Levenson, Konstantine B.
   Mallas, Hugh D. McGuirk, and Stephen P. Richter. The committee chairman has
   day-to-day responsibility for managing the portfolio and works with the
   committee in developing and executing the fund's investment program. Ms.
   Miller has been chairman of the committee since 1997. She joined T. Rowe
   Price in 1983 and has been managing investments since 1987.

   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%*           First $50 billion

    0.305%            Next $30 billion

    0.300%            Next $40 billion

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


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


   The 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 $92 billion


   at February 28, . 2002, the group fee was 0.32%. .  The individual fund fee
   is 0.15%.
<PAGE>

 Distribution, Shareholder Servicing, and Recordkeeping Fees

   Tax-Free Income Fund-Advisor Class has adopted a 12b-1 plan under which it
   pays a fee at the rate of up to 0.25% of its daily net assets per year to
   various intermediaries for distribution and servicing of its shares. These
   payments may be more or less than the costs incurred by the intermediaries.
   Because the fees are paid from the Advisor Class net assets on an ongoing
   basis, they will increase the cost of your investment and, over time, could
   result in your paying more than with other types of sales charges. The
   Advisor Class may also separately compensate intermediaries at a rate of up
   to 0.10% of daily net assets per year for various recordkeeping and transfer
   agent services they perform.



 UNDERSTANDING PERFORMANCE INFORMATION
 ----------------------------------------------------------
   This section should help you understand the terms used to describe fund
   performance.


 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.


 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.
<PAGE>

 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
   share price on the last day of the base period. The SEC yield-also called the
   standardized yield-may differ from the dividend yield.



 INVESTMENT POLICIES AND PRACTICES
 ----------------------------------------------------------
   This section takes a detailed look at some of the types of 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 changed without shareholder approval. However, significant
   changes are discussed with shareholders in fund reports. Fund investment
   restrictions and policies apply 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, fund investments in residual interest bonds are limited to 10% of
   total assets. 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 other fund investments.

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

   . 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, the fund may invest in any type
   of municipal security or instrument (including certain potentially high-risk
   deriva

   tives 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  The 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 the fund.

   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 fund 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 fund relies 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)
   is included in the alternative minimum tax (AMT) calculation. 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. For
   further information, please see Useful Information on Distributions and Taxes
   -Tax Information.

   Fundamental policy  Under normal market conditions, the fund will not
   purchase any security if, as a result, less than 80% of the fund's 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.
<PAGE>

   Operating policy  During periods of abnormal market conditions, for temporary
   defensive purposes, the fund may invest without limit in high-quality,
   short-term securities whose income is subject to federal income tax.

   Operating policy  Fund investments will not be made in AMT securities.

   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:

   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 fund 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.

   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. If a put feature terminates
   prior to being exercised, the fund may be forced to hold the longer-term
   security, which could experience substantially more volatility.

   Securities With Credit Enhancements
   Fund securities can have the following features:

  . 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
<PAGE>

   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.

   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 fund. 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
   A derivative is a financial instrument whose value is derived from an
   underlying security, such as a stock or bond, or from a market benchmark such
   as an interest rate index. Many types of investments representing a wide
   range of risks and potential rewards are derivatives, including conventional
   instruments such as futures and options, as well as more exotic investments
   such as swaps and structured notes. Investment managers have used derivatives
   for many years.

   We invest in derivatives only if the expected risks and rewards are
   consistent with the fund's objective, policies, and overall risk profile as
   described in this prospectus. We use derivatives in situations where they may
   enable the fund to increase yield, hedge against a decline in principal,
   invest in other asset classes more efficiently, or adjust duration.

   The fund 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 a long-term (over 15-year maturity)
   investment-grade bond.

   Derivatives and synthetics in which the fund may invest include:

  . Interest Rate Futures  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,
<PAGE>

   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; to serve as a cash management tool; and
   to adjust portfolio duration.

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

   Operating policy  Initial margin deposits on futures and premiums on options
   used for non-hedging purposes will not equal more than 5% of net asset value.

  . Residual Interest Bonds  (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.
   Fund investments will be made 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  Fund investments in residual interest bonds are limited to
   10% of total assets.

  . 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. Fund investments will be made
   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  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.
<PAGE>

   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  Fund investments in embedded interest rate swaps and caps
   are limited to 10% of total assets.

  . Swaps  The fund may enter into interest rate, index, total return, and
   credit swap agreements. The fund may also enter into options on swap
   agreements or swap options. All of these agreements are considered
   derivatives and, in certain cases, high-risk derivatives. Swap agreements are
   two-party contracts under which the fund and a counterparty, such as a broker
   or dealer, agree to exchange the returns (or differentials in rates of
   return) earned or realized on particular predetermined investments or
   indices. Swaps and swap options can be used for a variety of purposes,
   including: to manage fund exposure to changes in interest rates and credit
   quality; as an efficient means of adjusting fund overall exposure to certain
   markets; to enhance income or total return; to protect the value of portfolio
   securities; to serve as a cash management tool; and to adjust portfolio
   duration.

   There are risks in the use of swaps and swap options. Swaps could result in
   losses if interest rate or credit quality changes are not correctly
   anticipated by the fund. Total return swaps could result in losses if the
   reference index, security, or investments do not perform as anticipated by
   the fund. Credit default swaps could result in losses if the fund does not
   correctly evaluate the creditworthiness of the company on which the credit
   default swap is based. Swaps and swap options may not always be successful
   hedges; using them could lower fund total return and the other party to a
   swap agreement could default on its obligations or refuse to cash out the
   fund's investment at a reasonable price, which could turn an expected gain
   into a loss.

   Operating policies  The fund will not enter into a swap agreement with any
   single counterparty if the net amount owed or to be received under existing
   contracts with that party would exceed 5% of total assets, or if the net
   amount owed or to be received by the fund under all outstanding swap
   agreements will exceed 10% of total assets. The total market value of
   securities covering call or put options may not exceed 25% of total assets.
   No more than 5% of total assets will be committed to premiums when purchasing
   call or put options.

   Private Placements
   The 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
<PAGE>

   higher than comparable public securities to compensate the investor for their
   limited marketability.

   Operating policy  Fund investments in illiquid securities, including
   unmarketable private placements, are limited to 15% of net assets.


 Types of Investment Management Practices

   Reserve Position
   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, paying expenses, and in the timing of new
   investments; can help in structuring the 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 fund may not
   achieve its investment objectives.

   When-Issued Securities and Forwards
   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,
   the fund will maintain cash or high-grade marketable securities held by its
   custodian equal in value to its commitment for these securities. Interest is
   not earned 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.

   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 assets.
<PAGE>

   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 total
   assets. Fund purchases of additional securities will not be made when
   borrowings exceed 5% of total assets.

   Portfolio Turnover
   Turnover is an indication of frequency of trading. The 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 the fund's investment program, its portfolio turnover rate may
   exceed 100%. A high turnover rate may increase transaction costs, result in
   additional capital gain distributions, and reduce fund total return. The
   fund's portfolio turnover rates are shown in the Financial Highlights table.

   Sector Concentration
   It is possible that the 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
   health care bonds.

   High-Yield, High-Risk Bonds
   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.

   Operating policy  The fund may invest up to 5% of total assets in below
   investment-grade securities.

   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.
<PAGE>

   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 5 shows the rating scale used by the major rating agencies, and Table 6

   provides an explanation of quality ratings. T. Rowe Price considers publicly
   available ratings but emphasizes its own credit analysis when selecting
   investments.

<TABLE>
 Table 5  Ratings of Municipal Debt Securities
<CAPTION>
 <S>                                          <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>

<TABLE>
 Table 6  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 principal, which is
                                                   unlikely to be affected by reasonably
                                                   foreseeable events.
                                        -----------------------------------------------------
                                         AA        Very high quality; obligor's ability to
                                                   pay interest and 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 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 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 pay 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>

 FINANCIAL HIGHLIGHTS
 ----------------------------------------------------------
   Tax-Free Income Fund-Advisor Class first issued shares on September 30, 2002,
   and therefore has no financial history. As a point of comparison, however,
   Table 7 provides historical information about the Tax-Free Income Fund
   because Tax-Free Income Fund-Advisor Class has the same management program
   and investment portfolio. (Prior to the inception of Tax-Free Income
   Fund-Advisor Class, Tax-Free Income Fund had no other share class.) This
   information is based on a single share of the Tax-Free Income Fund
   outstanding throughout each of its fiscal years.

   This table is part of the Tax-Free Income 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 table represent the rate that an investor would have earned or
   lost on an investment in the fund (assuming reinvestment of all dividends and
   distributions). The financial statements in the annual report were audited by
   the fund's independent accountants, PricewaterhouseCoopers LLP.

   Had the Tax-Free Income Fund-Advisor Class existed during the period
   reflected in the table, some financial information would be different because
   of its higher anticipated expense ratio.
<PAGE>

<TABLE>
 Table 7  Financial Highlights
<CAPTION>
                                      Year ended February 28
                             1998     1999    2000/*/    2001     2002
 ------------------------------------------------------------------------------
 <S>                        <C>      <C>      <C>       <C>      <C>      <C>

  Net asset value,
  beginning of period       $ 9.59   $ 9.95   $ 9.94    $ 9.10   $ 9.72
  Income From Investment Operations
  Net investment income       0.52     0.50     0.49      0.49     0.48
                            ----------------------------------------------
  Net gains or losses on
  securities (both            0.36     0.03    (0.83)     0.62     0.09
  realized and unrealized)
                            ----------------------------------------------
  Total from investment
  operations                  0.88     0.53    (0.34)     1.11     0.57
  Less Distributions
  Dividends (from net        (0.52)   (0.50)   (0.49)    (0.49)   (0.48)
  investment income)
                            ----------------------------------------------
  Distributions (from           --    (0.04)   (0.01)       --       --
  capital gains)
                            ----------------------------------------------
  Total distributions        (0.52)   (0.54)   (0.50)    (0.49)   (0.48)
                            ----------------------------------------------
  Net asset value,          $ 9.95   $ 9.94   $ 9.10    $ 9.72   $ 9.81
  end of period
                            ----------------------------------------------
  Total return                9.37%    5.48%   (3.42%)   12.55%    5.99%
  Ratios/Supplemental Data
  Net assets, end of        $1,396   $1,483   $1,311    $1,403   $1,442
  period (in millions)
                            ----------------------------------------------
  Ratio of expenses to        0.55%    0.55%    0.55%     0.54%    0.54%
  average net assets
                            ----------------------------------------------
  Ratio of net income to      5.31%    5.06%    5.24%     5.25%    4.95%
  average net assets
                            ----------------------------------------------
  Portfolio turnover rate     36.3%    34.1%    44.3%     28.6%    28.2%
 ------------------------------------------------------------------------------
</TABLE>


 /*/       Year ended February 29.
<PAGE>

 INVESTING WITH T. ROWE PRICE
 ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
 ----------------------------------------------------------
Tax Identification
Number
The intermediary must provide us with its certified Social Security or tax
identification number (TIN). Otherwise, federal law requires the funds to
withhold a percentage (currently 30%) of dividends, capital gain distributions,
and redemptions, and may subject the intermediary or account holder to an IRS
fine. If this information is not received within 60 days after the account is
established, the account may be redeemed at the fund's NAV on the redemption
date.

The information in
this section is for use
by intermediaries only. Shareholders should contact their intermediary for
information regarding the intermediary's policies on purchasing, exchanging, and
redeeming fund shares as well as initial and subsequent investment minimums.
All initial and subsequent investments by intermediaries must be made by bank
wire.

Opening a New Account
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts

Intermediaries should call Financial Institution Services for an account number
and assignment to a dedicated service representative and give the following wire
information to their 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 below. Intermediaries must also enter into a separate agreement with the
fund or its agent.

via U.S. Postal Service
T. Rowe Price Financial Institution Services
P.O. Box 17603
Baltimore, MD 21297-1603
<PAGE>

via private carriers/overnight services
T. Rowe Price Financial Institution Services
Mail Code: OM-17603
4515 Painters Mill Road
Owings Mills, MD 21117-4842



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

By Wire
Intermediaries should call Financial Institution Services or use the wire
instructions listed in Opening a New Account.



 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. Intermediaries should call
their Financial Institution Services representative.

Redemptions
Unless otherwise indicated, redemption proceeds will be wired to the
intermediary's designated bank. Intermediaries should contact their Financial
Institution Services representative.



 RIGHTS RESERVED BY THE FUNDS
 ----------------------------------------------------------
T. Rowe Price funds and their agents reserve the following rights: (1) to refuse
any purchase or exchange order; (2) 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
intermediary within five business days of the trade or if the written
confirmation has not been received by the shareholder, whichever is sooner; (3)
to cease offering fund shares at any time to all or certain groups of investors;
(4) to freeze any account
<PAGE>

and suspend account services when notice has been received of a dispute between
the registered or beneficial account owners or there is reason to believe a
fraudulent transaction may occur; (5) to otherwise modify the conditions of
purchase and any services at any time; and (6) to act on instructions reasonably
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 T. Rowe Price funds 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 a fund, except upon approval of the fund's management.
<PAGE>

 T. ROWE PRICE PRIVACY POLICY
 ----------------------------------------------------------
 In the course of doing business with T. Rowe Price, you share personal and
 financial information with us. We treat this information as confidential and
 recognize the importance of protecting access to it.

 You may provide information when communicating or transacting with us in
 writing, electronically, or by phone. For instance, information may come from
 applications, requests for forms or literature, and your transactions and
 account positions with us. On occasion, such information may come from consumer
 reporting agencies and those providing services to us.

 We do not sell information about current or former customers to any third
 parties, and we do not disclose it to third parties unless necessary to process
 a transaction, service an account, or as otherwise permitted by law. We may
 share information within the T. Rowe Price family of companies in the course of
 providing or offering products and services to best meet your investing needs.
 We may also share that information with companies that perform administrative
 or marketing services for T. Rowe Price, with a research firm we have hired, or
 with a business partner, such as a bank or insurance company with whom we are
 developing or offering investment products. When we enter into such a
 relationship, our contracts restrict the companies' use of our customer
 information, prohibiting them from sharing or using it for any purposes other
 than those for which they were hired.

 We maintain physical, electronic, and procedural safeguards to protect your
 personal information. Within T. Rowe Price, access to such information is
 limited to those who need it to perform their jobs, such as servicing your
 accounts, resolving problems, or informing you of new products or services.
 Finally, our Code of Ethics, which applies to all employees, restricts the use
 of customer information and requires that it be held in strict confidence.

 This Privacy Policy applies to the following T. Rowe Price family of companies:
 T. Rowe Price Associates, Inc.; T. Rowe Price Advisory Services, Inc.; T. Rowe
 Price Investment Services, Inc.; T. Rowe Price Savings Bank; T. Rowe Price
 Trust Company; and the T. Rowe Price Funds.
<PAGE>

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

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.
                                                      1940 Act File No. 811-2684
                                                                E245-040 9/30/02

<PAGE>

  STATEMENT OF ADDITIONAL INFORMATION

   The date of this Statement of Additional Information is July 1, 2002, revised
   to September 30, 2002.


         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
              Maryland Tax-Free Money Fund
              New Jersey Tax-Free Bond Fund
              New York Tax-Free Bond Fund
              New York Tax-Free Money 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-Efficient Multi-Cap 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 Income Fund-Advisor Class

         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

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

   For convenience, the term "director" is used to refer to both directors of
   funds that are corporations and to trustees of funds that are Massachusetts
   business trusts.


   This Statement of Additional Information is not a prospectus but should be
   read in conjunction with the appropriate fund prospectus dated July 1, 2002
   (or September 30, 2002 for the Tax-Free Income Fund-Advisor Class), which may
   be obtained from T. Rowe Price Investment Services, Inc. ("Investment
   Services").

   Each fund's (other than the Tax-Free Income Fund-Advisor Class's) financial
   statements for the fiscal period ended February 28, 2002, 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 and
   they will be sent to you at no charge. Please read them carefully.

                                                             C03-043 9/30/02

<PAGE>


<TABLE>
<CAPTION>
                              TABLE OF CONTENTS
                              -----------------
                        Page                                             Page
                        ----                                             ----
<S>                     <S>   <C>  <S>                                   <S>
Capital Stock             87       Pricing of Securities                     78

------------------------------     --------------------------------------------
Code of Ethics            71       Principal Holders of Securities           64

------------------------------     --------------------------------------------
Custodian                 71       Ratings of Commercial Paper               94

------------------------------     --------------------------------------------
Distributor for the       70       Ratings of Municipal Debt Securities      92
Funds
------------------------------     --------------------------------------------
Dividends and             80       Ratings of Municipal Notes and            94
Distributions                      Variable Rate Securities
------------------------------     --------------------------------------------
Federal Registration      89       Risk Factors                               3
of Shares
------------------------------     --------------------------------------------
Independent               90       Risk Factors Associated with a             5
Accountants                        California Portfolio
------------------------------     --------------------------------------------
Investment Management     65       Risk Factors Associated with a             8
Services                           Florida Portfolio
------------------------------     --------------------------------------------
Investment Objectives      2       Risk Factors Associated with a            10
and Policies                       Georgia Portfolio
------------------------------     --------------------------------------------
Investment Performance    84       Risk Factors Associated with a            12
                                   Maryland Portfolio
------------------------------     --------------------------------------------
Investment Program        20       Risk Factors Associated with a New        13
                                   Jersey Portfolio
------------------------------     --------------------------------------------
Investment                41       Risk Factors Associated with a New        15
Restrictions                       York Portfolio
------------------------------     --------------------------------------------
Legal Counsel             89       Risk Factors Associated with a            17
                                   Virginia Portfolio
------------------------------     --------------------------------------------
Management of the                  Risk Factors Associated with
Funds                              Tax-Efficient Growth and
                                   Tax-Efficient Multi-Cap Growth Funds
                          44       and the Equity Portion of                 20
                                   Tax-Efficient Balanced Fund
------------------------------     --------------------------------------------
Net Asset Value per       80       Services by Outside Parties               69
Share
------------------------------     --------------------------------------------
Organization of the       88       Tax Status                                80
Funds
------------------------------     --------------------------------------------
Portfolio Management      27       Yield Information                         82
Practices
------------------------------     --------------------------------------------
Portfolio Transactions    72

------------------------------     --------------------------------------------
</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.

   Shareholder approval is required to substantively change fund objectives.
   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 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")
                  T. Rowe Price International, Inc. ("T. Rowe Price
   International")


                                       2

<PAGE>

 RISK FACTORS
 -------------------------------------------------------------------------------
   Reference is also made to the sections entitled "Investment Program" 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 and Tax-Efficient Multi-Cap Growth
   Funds)

   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 any particular investor. 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 funds 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 and Tax-Efficient Multi-Cap Growth Funds will normally invest
   primarily 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 and Tax-Efficient Multi-Cap Growth
   Funds)


                              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.


                                       3

<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, 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 funds' Board of Directors
   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 ("NRSROs") 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. 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.

   Non-Money Funds

   Because of their investment policies, these funds may not be suitable or
   appropriate for any particular investor. 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 Non-Money Funds' investment programs permit
   the purchase of investment-grade securities that do not meet the high-quality
   standards of the Money Funds. Since investors generally perceive that there
   are greater


                                       4

<PAGE>

   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
   Non-Money 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 funds 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 funds invest in such bonds, achievement of their investment objectives
   will be more dependent on T. Rowe Price's credit analysis than would be the
   case if the funds 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.

   California Tax-Free Bond and California Tax-Free Money Funds


               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 $32.0
   billion in long-term debt in 2001. 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 March 1, 2002, the State of California had approximately $24.5 billion
   in outstanding general obligation bonds secured by the state's revenue and
   taxing power. An additional $5.4 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 14% of the state's
   outstanding general obligation 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 2002, the state
   issued $5.7 billion in short-term notes for this purpose; during fiscal 2001
   no short-term notes were needed. California also operates a commercial paper
   program, which it uses to finance construction projects. $0.6 billion of
   commercial paper was outstanding as of April 4, 2002. The state supports $6.2
   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.


                                       5

<PAGE>

   Economy  California's economy is the largest among the 50 states and one of
   the largest in the world. Its 2001 population of 35 million represents 12% of
   the U.S. total. The state's per capita personal income in 2000 exceeded the
   U.S. average by 9%. The State of California has benefited from its focus on
   the high technology sector during 1999 and 2000, but suffered through the
   high technology slowdown that began in the spring of 2001.

   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. From 1994 to 2000,
   the state was in a steady recovery, exhibiting significant job growth and
   gains in personal income. Growth has stalled in 2001 coincident with the
   "tech bust"; however, job losses and unemployment levels were moderate in
   comparison to California's early 1990s recession. The fallout from the "tech
   bust" manifested itself in much lower personal income tax receipts at the
   state level as capital gains, bonuses, and option income dropped off. 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 was estimated at
   $20 billion. Significant federal aid was 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; in the early
   1990s 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.

   Proposition 218, the "Right to Vote on Taxes Act," was approved by 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


                                       6

<PAGE>

   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.

   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 trend of economic recovery from 1996-2000, the state's
   financial condition improved considerably during this period. Fiscal year
   2000 closed with an unrestricted general fund budgetary reserve balance of
   $7.1 billion. Fiscal year 2001 was closed with an unrestricted general fund
   budgetary reserve of $5.4 billion. Much of this cushion was the result of
   explosive growth in income tax receipts on capital gains and bonus and stock
   option income. The combination of a slowing economy, falling equity markets,
   and the state's progressive income tax structure have created a large budget
   gap for fiscal years 2002 and 2003. The Governor's Mid-May 2002 Budget
   Revision has closed this $23.6 billion gap through spending reductions, fund
   transfers, deferrals, a bond securitization of tobacco settlement receipts,
   and increased taxes and fees. The state's unrestricted reserve is projected
   to drop to $0.5 billion at the end of fiscal 2003 (0.6% of revenues). In
   November 2001, Moody's downgraded the state's general obligation bonds to A1
   from Aa3; in April 2001, S&P downgraded the state's general obligations to A+
   from AA. Fitch maintains the state's general obligation bonds at AA. All
   three rating agencies carry a negative outlook on the state of California. In
   addition, the state is suffering through an electricity crisis brought about
   by a flawed attempt at deregulating the electricity industry. The state has
   spent approximately $6 billion buying electricity on behalf of its corporate
   utilities. A revenue bond issue of as much as $13.4 billion is expected to
   come to market in fall 2002, to reimburse the state for its electricity
   purchases as well as to buy power on a going-forward basis under long-term
   contracts. This revenue bond is expected to be paid off through higher user
   rates for electricity. 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 are vulnerable to cutbacks
   in funding during recessionary periods. 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 2000 and 2001.

   Sectors  Certain areas of potential investment concentration present unique
   risks. In 2001, $20 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 that 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


                                       7

<PAGE>

   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
   may be put 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. Inadequate rate relief caused the state to commence buying
   electricity in January 2001, as detailed above. Rates were recently increased
   by the California Public Utilities Commission (retroactive to April 1, 2001).

   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.

   Florida Intermediate Tax-Free Fund


                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 that 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 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 revenues 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 2001,
   Florida's state and local governments issued approximately $10.6 billion of
   debt, an increase of almost 25% from the previous year. Debt issued in 2001
   was for a wide variety of public purposes, including transportation, housing,
   education, health care, and utilities.

   As of April 15, 2002, the State of Florida had about $14.9 billion of
   outstanding general obligation bonds secured by the state's full faith and
   credit and unlimited taxing power. General bonded debt service accounted for
   a modest 3.1% of all governmental expenditures in fiscal year 2001.
   Additionally, the state has another $4.1 billion in outstanding bonds which
   are secured by limited state taxes and revenues. The state's General
   Obligation debt is rated Aa2 by Moody's, AA+ by S&P, and AA by Fitch as of
   May 1, 2002. Moody's changed its outlook on Florida to negative based on the
   economic slowdown that the state is experiencing as a result of the 2001
   national recession. S&P and Fitch affirmed their stable outlook on the
   state's credit. Debt issued by the state may only be used to fund capital
   outlay projects. Florida is not authorized to issue debt to fund operations.

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

   Economy  Florida's population totals approximately 16 million residents,
   making it the nation's fourth most populous state. Because of continued
   in-migration from other states throughout the 1990s, Florida's population
   increased at a faster rate than national average. Florida's labor force
   experienced expansion from calendar year 1991 through 2000. During this same
   period, job growth throughout the state improved on an annual basis and
   resulted in the state reaching its lowest unemployment rate of just over 3.7%
   in calendar year 2000. However, the national recession of 2001 has led to a
   slowdown in Florida's economy reflecting the state's strong ties to global
   tourism. In 2000, the number of out-of-state visitors increased to over 71
   million, but because of the September 11, 2001, terrorists attack and its
   negative impact on air travel, the state's


                                       8

<PAGE>

   tourism for 2001 is estimated to be well below its 2000 mark. Early 2002
   transportation indicators suggest that business and leisure air travel has
   began to climb. Restored confidence in air travel and resumed strength in the
   global economies should again stimulate expansion of the tourism market
   throughout Florida.

   Florida's employment base continues to be bolstered by the services, trade,
   and government sectors that employ 34%, 17%, and 16% respectively of the
   state's labor force. The services and trade sectors play a prominent role in
   Florida's economy because of the state's global tourism appeal. From 1991 to
   2001, the state's unprecedented job growth led to its lowest unemployment
   rate of just over 3.7%. The 2001 national recession and the state's economic
   slowdown increased its unemployment rate to 5% which is still below the
   national unemployment rate of 5.8%. The state's per capita effective buying
   income levels remain average compared to national income levels.

   Legislative  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 in the future. If such a tax were to
   be imposed, there is no assurance that interest earned on Florida municipal
   debt offerings 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, U.S. government securities, certain short-term cash investments,
   or other tax exempt securities. In recent years, the Florida Legislature
   began efforts to gradually reduce the intangibles tax. In its 2000 session,
   the Florida Legislature passed legislation which reduced the intangibles
   personal property tax rate to its current level of 1 mill or $.01 per
   thousand dollars. The 2001 Florida Legislature did not cut the tax rate on
   the intangibles tax, however it did raise the exemption amount to $250,000
   per person from $20,000. This means up to a $500,000 exemption for married
   couples. Additionally, the Legislature granted the same exemption to
   non-natural Florida residents. However, because the state is experiencing
   revenue shortfalls as a result of the 2001 national recession, the
   implementation of the intangibles tax reduction has been deferred until July
   1, 2003.

   The Florida Constitution limits the total ad valorem property tax that may be
   levied by each county, municipality, and school district to ten mills or 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.

   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 use
   tax for greater than 84% of its general fund revenues. As evidenced by the
   state's fiscal 2002 revenue shortfalls of an estimated $1.3 billion, this
   structure could potentially result in some volatility to the state's
   finances. However, the state has sound fiscal management and has re-balanced
   its fiscal 2002 budget through a combination of expenditure reductions,
   utilization of its Working Capital Fund and trust fund, and the deferment of
   its intangibles tax reduction. The state ended fiscal year 2001 with balanced
   financial operations, bringing its unreserved general fund balances to a high
   of around $2.1 billion, or 12.5% of expenditures. The unreserved general fund
   balance enables the state to meet its constitutional budget stabilization
   reserve requirement of 5% of revenues and its goal to maintain a working
   capital reserve.

   The state's geographic location renders it vulnerable to natural disasters
   such as hurricanes. While these events can be devastating, the impact can
   sometimes stimulate the economy. For example, the state's finances received a
   substantial boost in fiscal year 1993 resulting from increased economic
   activity associated with rebuilding efforts after Hurricane Andrew, which hit
   south Florida on August 24, 1992. In 1996 Florida settled a lawsuit with the
   tobacco industry in which 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 around
   $13 billion over 25 years. This money will be used for children's


                                       9

<PAGE>

   health coverage, to reimburse the state for smoking related medical expenses,
   and for state enforcement efforts in reducing sales of tobacco products. As
   of June 30, 2001, settlement collections of $2.5 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. This revenue cap excludes revenue to pay certain expenditures,
   including debt service. The limitation should not pose an onerous burden to
   the state's financial performance. However, demand for governmental services
   continues to increase with increases in population.

   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 the length of
   hospital stays, a phenomenon that 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. Because of the high proportion
   of elderly residents in Florida, 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 that have
   exposure to or participate in nuclear power plants that could affect 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. Sold through various governmental conduits, these issues
   are backed solely by the revenues pledged by the respective borrowing
   corporations. No government support is implied.

   Georgia Tax-Free Bond Fund


                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
   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 $2.1 billion in
   municipal bonds between January and April of 2002, a 179% increase from the
   same period a year ago. As of May 20, 2002, the state was rated Aaa by
   Moody's and AAA by S&P and Fitch. The state's rating outlook was stable for
   each rating agency.

   The State of Georgia currently has net direct obligations of approximately
   $6.6 billion. In 1973, a Constitutional Amendment authorizing the issuance of
   state general obligation ("GO") bonds was implemented. Since the
   implementation of the amendment, 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. Georgia's
   Constitution permits the state to issue bonds for two types of public
   purposes: (1) general obligation debt and (2) guaranteed revenue debt. The
   Georgia Constitution imposes certain debt limits and controls. The state's GO
   debt service cannot exceed 10% of total revenue receipts less refunds of the
   state treasury. The state's GO bonds must have a maximum maturity of 25
   years. On May 1, 2002, 69% of the state's debt was scheduled to be amortized
   in 10 years or less. Maximum GO debt service requirements are well below the
   legal limit at 3.4% of fiscal year 2001 treasury receipts.


                                       10

<PAGE>

   The state established "debt affordability" limits which provides that
   outstanding debt will not exceed 2.7% of personal income or that maximum
   annual debt service will not exceed 5% of the prior year's revenues. The
   state's near-term debt offerings are projected to maintain its total debt
   within these levels.

   In addition to the GO and appropriation-backed debt described above,
   commencing in fiscal year 2002 until about 2007, the Georgia State Road &
   Tollway Authority is projected to sale between $8 billion to $10 billion of
   revenue bonds to fund the Governor's Road Improvement Program. This program
   is being implemented to relieve road and highway congestion throughout the
   state. Although the bonds are being issued by the Georgia State Road &
   Tollway Authority, the state's full faith and credit is pledged towards the
   repayment of the bonds.

   Economy  The State of Georgia is the tenth most populous state with a
   population of approximately 8.2 million residents, increasing over 26% from
   1990 to 2000. The state remains the fastest growing state on the eastern
   seaboard. The state's economy underwent strong expansion between 1990 and
   2000 including strong job growth in the services, high technology, and air
   transportation sectors. The recent recession that started in 2001 has slowed
   Georgia's economy and has it performing at the pace of the national economy.
   The services sector continues as the state's leading employment sector at
   27.1% of its total employment. The state's other leading employment sectors
   include the trade sector at 17.4%, government at 15.4%, and manufacturing at
   14.3%. The Atlanta metropolitan statistical area continues to serve as the
   state's economic center capturing approximately 55% of the state's
   employment. This area includes Atlanta, the state's capitol, and 20
   surrounding counties. The next largest metropolitan area is the
   Columbus-Muscogee area.

   The state's moderate cost of living and research centers provided by its
   colleges and universities continue to attract a very skilled labor force. At
   the beginning of 2001, the state's unemployment rate was at its 30-year low
   of just 3.6%. However, the onset of the 2001 recession has increased the
   state's unemployment rate to 4.2% with ultimate projections of around 6% by
   the end of 2002. The state's per capita income levels are slightly below the
   U.S. average at 94.4%. The state's income levels show more favorably when
   taking into account costs of living and quality of life indicators.

   Financial  The creditworthiness of the portfolio is largely dependent on the
   financial strength of the State of Georgia and its localities. The state's
   strong economic performance has translated into its strong financial
   performance and the accumulation of substantial reserves.

    At the close of fiscal year 2000, the state had almost $1.32 billion of
   unreserved general fund reserves or about 6.9% of expenditures. In addition
   to this healthy unreserved general fund balance, the state had a revenue
   shortfall reserve of about $551 million and a reserve for Mid-year
   Adjustments of around $138 million. Such strong reserve levels allow
   financing flexibility and provide very strong safeguards against short-term
   economic swings. Unaudited fiscal year 2001 financial operations suggests a
   surplus of $770 million. Through the first nine months of fiscal year 2002,
   the state's revenue collections are down 5.7% and have been impacted by the
   slowing economy. The governor has mandated that state agencies cut 2.5% of
   their budgets for the fiscal year. The state does not anticipate utilizing
   its shortfall reserves to cure the pending deficit.

   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.

   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 the length of hospital
   stays, a phenomenon that 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


                                       11

<PAGE>

   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 that have
   exposure to or participate in nuclear power plants that could affect 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. Sold through various governmental conduits, these issues
   are backed solely by the revenues pledged by the respective borrowing
   corporations. No governmental support is implied.

   Maryland Short-Term Tax-Free Bond, Maryland Tax-Free Bond, and Maryland
   Tax-Free Money Funds


                RISK FACTORS ASSOCIATED WITH A MARYLAND PORTFOLIO
   The funds' 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 obligation bonds and debt issued by
   state agencies, 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 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 2001 Comprehensive Annual
   Financial Report ("CAFR") dated June 30, 2001, that it has approximately $3.5
   billion in general obligation bonds outstanding and an additional $1.8
   billion in other long-term debt. As of May 17, 2002, 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  The Maryland Board of Revenue Estimates reported on December 14,
   2001, that according to several measures the state's economy had outperformed
   the nation over the past twelve months during the nationwide slowdown. The
   slowdown is apparent in reduced employment and personal income growth.
   However, the extent of the reduction has not been as severe in Maryland as in
   other states. One reason for this is Maryland's limited exposure to the
   manufacturing sector, which has been hard hit by current economic conditions.


                                       12

<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 2001 concluded with a general fund operating surplus and the
   general fund balance rose to a healthy $2.5 billion. In March 2002, the Board
   revised its forecast for fiscal year 2002 general fund revenues down by about
   2% compared to fiscal year 2001. The decline is attributable to the economic
   slowdown and specifically to a significant decline in capital gains revenues.
   The decline also reflects the last installment of the state's 10% income tax
   reduction.

   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 grew 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 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
   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 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.

   New Jersey Tax-Free Bond Fund


               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 obligation bonds and debt issued by
   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.

   Debt As of May 17, 2002, general obligation debt of the State is rated Aa2 by
   Moody's, AA+ by S&P, and AA by Fitch. Over the past several months, New
   Jersey's credit rating has been lowered by Moody's and Fitch from Aa1 and
   AA+, respectively. Moody's outlook is negative and S&P has placed its rating
   on Credit Watch with negative implications. This suggests that additional
   downgrades may occur. All three rating agencies have expressed concern over
   the extent of the State's revenue shortfall during the national economic
   slowdown. The downgrades also reflect the belief that the State will need
   several years to return to budget stability.

   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 2001 CAFR dated June 30,
   2001, that it has approximately $3.5 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


                                       13

<PAGE>

   has also contracted with the Authority to provide annual appropriations for
   payment of debt service on certain other bonds. As of June 30, 2001, the
   amounts outstanding were $86.1 million and $694.5 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.

   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  The New Jersey economy enjoyed another strong year in 2000, but the
   outlook for the national economy as well as for the state is for lower rates
   of growth going forward. For example, employment ad personal income growth
   are projected to decline in 2001 and in 2002. New Jersey reports that its
   current budgetary imbalance is attributable in part to this economic
   slowdown, exacerbated by the events of September 11.

   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. Weakness in
   the state's financial strength has caused Moody's and Fitch to downgrade the
   state's credit rating to Aa2 and AA, respectively. The 2003 budget, which is
   Governor McGreevey's first budget, reports that the state is facing a $5.3
   billion shortfall. This is a very high 22% of the total projected fiscal year
   2003 budget. Governor McGreevey has proposed various actions to remedy the
   deficit including budget cuts and utilizing Rainy Day funds.

   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.


                                       14

<PAGE>

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


                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 more geographically diversified. In
   addition to State of New York general obligation bonds and debt issued by
   state agencies, 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.

   The funds' ability to maintain credit quality 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
   the late 1990s because of the strong national economy, a robust financial
   services sector, and vigilant spending control.

   On September 11, 2001, hijackers flew two passenger jetliners into the World
   Trade Center. The attack destroyed the World Trade Center, damaged other
   buildings, and caused significant loss of life. Business activity was
   disrupted and residents in the vicinity were displaced. The economic impact
   on the state and especially New York City has been substantial. In response
   to the events of September 11, the U.S. Congress passed emergency
   supplemental legislation authorizing $40 billion to cover increased security
   costs and to support the recovery effort in the states of New York,
   Pennsylvania, and Virginia. Congress and the President appropriated $10
   billion of this amount. New York City has received a portion of the financial
   assistance from the Federal Emergency Management Agency.

   New York State

   The State of New York disclosed in its fiscal year 2001 CAFR dated March 31,
   2001, that it has approximately $4.3 billion in general obligation bonds
   outstanding. In addition, the state has entered into lease purchase
   agreements as well as contractual obligation financing arrangements with
   certain municipal entities to finance various capital projects. The state has
   also entered into arrangements for the purchase of equipment and real
   property through the issuance of certificates of participation. As of March
   31, 2001, the total amount outstanding of these other forms of debt was $25
   billion. As of May 17, 2002, general obligation debt of the state is rated AA
   by both S&P and Fitch and A2 by Moody's.

   Certain authorities are more heavily reliant on annual direct state support
   such as the Urban Development Authority ("UDC") - now the Empire State
   Development Corporation ("ESDC"). In February 1975, the UDC defaulted on
   approximately $1 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.

   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 approximately $5 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. As of March 31, 2001, $4.7
   billion of LGAC debt is outstanding.

   To a large degree, the risk of the portfolio is dependent on the financial
   strength of the State of New York and its localities. The state's economy had
   been showing signs of reduced growth due to the national economic slowdown
   when the events of September 11 occurred. Subsequently, the state's economy
   showed greater


                                       15

<PAGE>

   weakness and its budget gap worsened. The state has reported that a shortfall
   in the fiscal year 2002 budget was closed through the use of reserves,
   administrative cuts, and legislative actions. The state's Department of
   Budget reported in the "Annual Information Statement" dated January 31, 2002,
   that the state faced a budget gap of over $5 billion in fiscal year 2003. The
   Governor proposed to close the gap with spending reductions, use of reserves,
   and other actions. The financial plan projects a closing balance in the
   general fund of $710 million at the end of 2002-03. Economic growth is
   projected to generally improve in calendar year 2002, but the state's
   economic recovery is expected to lag the nation as it has in past economic
   recoveries.

   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.

   According to the New York State Department of Budget's "Supplement to the
   Annual Information Statement" dated April 5, 2002, the city issued a
   financial plan in June 2001 that projected a balanced budget for fiscal year
   2002 and budget gaps of $2.8 billion in fiscal year 2003, $2.6 billion in
   fiscal year 2004, and $2.2 billion in fiscal year 2005. After the September
   11 attack, the new projected budget gaps are $4.8 billion in fiscal year
   2003, $5 billion in fiscal year 2004, and $5.4 billion in fiscal year 2005.
   The Mayor's executive budget proposes balancing the fiscal year 2003 budget
   gap through agency actions ($1.8 billion), federal and state subsidies ($800
   million), payroll savings from benefit cuts and attrition ($600 million), and
   a one-time borrowing by the New York City Transitional Finance Agency ($1.5
   billion). Based on an independent analysis of the economy and the city's
   budget, the City Comptroller reported in May 2002 that the projected fiscal
   year 2003 budget gap has increased to $6 billion and that the city is
   unlikely to receive the full $800 million in federal and state subsidies.

   As of May 15, 2002, general obligation debt of the city is rated A by S&P, A+
   by Fitch, and A2 by Moody's. Moody's placed its credit rating on negative
   outlook in November 2001 due to the economic and financial uncertainty
   created by the September 11 attack.

   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.

   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


                                       16

<PAGE>

   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 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.

   Virginia Tax-Free Bond Fund


                RISK FACTORS ASSOCIATED WITH A VIRGINIA 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 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 $5.8
   billion of municipal bonds in 2001, 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 2001
   was for a wide variety of public purposes, including transportation, housing,
   education, health care, and industrial development.

   As of June 30, 2001, the Commonwealth of Virginia had $1.0 billion of
   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 approximately 90% of the debt service is actually met from
   revenue-producing capital projects such as universities and toll roads.

   The Commonwealth also supports $2.8 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 $8.3 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 7.1
   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 1990s was led by the
   Northern Virginia area outside of Washington, D.C., where approximately 31%
   of the Commonwealth's population is concentrated. The next largest
   metropolitan area is the Norfolk-Virginia Beach-Newport News area, followed


                                       17

<PAGE>

   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 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. While S&P and Fitch
   maintain stable outlooks, Moody's revised its outlook to negative in December
   2001. Moody's outlook change was coincident with Virginia's announcement of a
   sizable budget gap brought about by slowing revenues and rising expenditures.
   Governor Warner and the Virginia Assembly have since closed this budget gap
   by cutting expenditures and allowing transfers from the Revenue Stabilization
   Fund. In addition, the car tax relief program was frozen at 70%. The Revenue
   Stabilization Fund is specifically earmarked to cushion against such a
   slowdown as Virginia has recently experienced.

   The Commonwealth's budget is prepared on a biennial basis. From 1970 through
   2000, 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 in 1992 and in 2001. On
   June 30, 2001, the unreserved general fund balance, including a revenue
   stabilization account, totaled $1.2 billion. Of this $1.2 billion, $716
   million was in a Revenue Stabilization Fund as of June 30, 2001 (representing
   6% of revenues).

   A significant portion of the fund'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
   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 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.

   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.

   All funds

   Puerto Rico  From time to time the funds invest in obligations of the
   Commonwealth of Puerto Rico and its public corporations, which are exempt
   from federal, 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, electric power, and education. As of June 30, 2001,
   public sector debt issued by the Commonwealth and its public corporations
   totaled approximately $26.7 billion. The amount of debt is high according to
   traditional measures for a state or local municipality, but not when
   considering the Commonwealth as a sovereign nation issuing debt for all
   levels of government from national to local. The Commonwealth monitors its
   debt issuance on an ongoing basis by comparing the rate of growth in debt to
   rate of growth in gross product. Growth in debt exceeded growth in gross
   product


                                       18

<PAGE>

   between fiscal years 1996-1998, but fell below it in fiscal years 1999-2000.
   The Commonwealth's constitution limits the amount of principal and interest
   on direct obligations to 15% of the average annual revenues in the two fiscal
   years preceding the current fiscal year. As of May 17, 2002, general
   obligation debt of the Commonwealth is rated Baa1 by Moody's and A by S&P. As
   of July 2001, S&P placed the Commonwealth on Credit Watch with negative
   implications. The reasons for S&P's action are described below.

   The Commonwealth is also responsible for debt associated with its retirement
   systems. As of July 1, 2000, the Commonwealth had an unfunded pension benefit
   obligation of over $7.4 billion. The Commonwealth passed Act No. 305 on
   September 24, 1999, to help reduce the amount of the obligation. Act No. 305
   changed the benefit system for new employees from a defined benefit system to
   a defined contribution system. Defined contribution accounts are funded by
   participant contributions and are not credited with a contribution by the
   Commonwealth. Commonwealth contributions going forward will be used to reduce
   the unfunded pension liability.

   The Commonwealth's economy has experienced steady economic expansion for over
   a decade. Growth is attributed to several factors including a favorable
   trading relationship with the United States, government-sponsored economic
   development programs, increases in the level of federal transfers, the
   relatively low cost of borrowing, and, until recently, the low cost of oil.
   The Commonwealth is vulnerable to an economic downturn in the U.S. because of
   its heavy reliance on trade with the mainland, particularly in manufactured
   goods. About 90% of the Commonwealth's exports are sent to the U.S. and
   manufacturing makes up about 40% of gross product. Nevertheless, the
   longer-term trend has been steady economic improvement. As a result of the
   terrorist attacks in the United States on September 11, the Commonwealth has
   reported that there is uncertainty as to expected level of economic activity
   in the short-term. The Commonwealth's economy is also vulnerable to oil
   prices because of its over-dependence on oil for electric power. To address
   this issue, the Electric Power Authority has entered into purchase power
   contracts to build two cogeneration plants reliant on other fuels. A natural
   gas plant was recently completed and began commercial operations in March
   2000 and a coal facility is scheduled to be completed in 2002. The two plants
   will initially supply about one-third of the Commonwealth's electric power.

   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. Section 936 entitled certain corporations to credit
   income derived from business activities in the Commonwealth against their
   United States corporate income tax. However, federal tax legislation passed
   in 1993 and 1996 decreased the tax benefits and eliminated it altogether
   beginning in the 2006 tax year. At present, it is difficult to forecast what
   short- and long-term effects the phase-out will have on the Puerto Rican
   economy.

   The Commonwealth and the United States are tied to each other politically as
   well as economically. The Commonwealth came under U.S. sovereignty pursuant
   to the Treaty of Paris signed in 1898, which ended the Spanish-American War.
   Puerto Ricans have been citizens of the U.S. since 1917. In 1950, the U.S.
   Congress enacted Public Law 600 which authorized the people of Puerto Rico to
   draft and adopt their own constitution. The constitution was approved in a
   special referendum by the people of Puerto Rico and by the U.S. Congress and
   President. It went into effect in 1952. More recently, the U.S. House of
   Representatives voted in March 1998 in favor of a political status act. A
   referendum held in December of 1998 was intended to resolve whether Puerto
   Rico would preserve its Commonwealth status or transition to becoming a
   state. 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 is apparent that the political status of the Commonwealth
   will remain unclear for the near term.

   In January 2001, Sila Calderon was sworn in for her first term as Governor of
   Puerto Rico. She has been faced with the challenge of balancing the
   Commonwealth's budget. The Commonwealth ended fiscal year 2000 with a large
   deficit and a reduction in the general fund balance from $497 million to $350
   million based on GAAP. Fiscal year 2001 also closed with a deficit and
   another reduction in the general fund balance to $272 million. These general
   fund deficits and reserve drawdowns lead S&P to place the Commonwealth on
   Credit Watch with negative implications. Governor Calderon has outlined a
   comprehensive recovery plan that includes


                                       19

<PAGE>

   reducing expenditures and more closely monitoring available revenues. The
   plan also includes increasing short-term borrowing and refinancing long-term
   debt. S&P has indicated that future action on the Commonwealth's credit
   rating will rely heavily on whether the structural budget gap is eliminated.


       RISK FACTORS ASSOCIATED WITH TAX-EFFICIENT GROWTH AND TAX-EFFICIENT

  MULTI-CAP GROWTH FUNDS 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.

   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
   Yankee bonds). 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.

   All funds (other than Tax-Efficient Growth and Tax-Efficient Multi-Cap Growth
   Funds)


                              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, the 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 the 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.


                                       20

<PAGE>

  . 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
   prerefunded/escrowed to maturity bonds. Another type of municipal bond is
   referred to as an industrial development bond.

  . 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.

  . Prerefunded/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
   "prerefunded" or "escrowed to maturity" and are considered high-quality
   investments. While still tax-exempt, the security is the


                                       21

<PAGE>

   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 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 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 predetermined 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 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 of 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


                                       22

<PAGE>

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


   Bond and Tax-Efficient Balanced Funds


  . Residual Interest Bonds are a type of high-risk derivative. The fund 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, 7- 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 fund may invest in other types of derivative instruments as they become
   available.

   For the purpose of the fund's investment restrictions, the identification of
   the "issuer" of municipal securities which are not general obligation bonds
   is made by the fund's 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.


                                       23

<PAGE>

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

   All funds (other than Tax-Efficient Growth and Tax-Efficient Multi-Cap Growth
   Funds)


                             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. The 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 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, Tax-Efficient Growth, and Tax-Efficient
   Multi-Cap Growth Funds)


                                    Forwards

   The fund 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 fund 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.

   All funds (other than Tax-Efficient Funds)


                  Investment in Taxable Money Market Securities

   Although the fund expects to be solely invested in municipal securities, for
   temporary defensive purposes it 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 ("Fannie Mae"
   or "FNMA"), Government National Mortgage Association ("Ginnie Mae" or
   "GNMA"), Federal Home Loan


                                       24

<PAGE>

   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, banker's acceptances, and other
   short-term debt obligations. Certificates of deposit are short-term
   obligations of commercial banks. A banker's 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.

  . 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, 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.

  . 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 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 transaction costs.
   Of course, there is no guarantee that the strategy will be successful, and
   the fund could lose money if, for


                                       25

<PAGE>

   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 of 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 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 by 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).


                                    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.


                                       26

<PAGE>

   All funds


                        Illiquid or Restricted Securities

   Restricted securities may be sold only in privately negotiated transactions
   or in a public offering with respect to which a registration statement is in
   effect under the Securities Act of 1933 (the "1933 Act"). Where registration
   is required, the fund may be obligated to pay all or part of the registration
   expenses, and a considerable period may elapse between the time of the
   decision to sell and the time the fund may be permitted to sell a security
   under an effective registration statement. If, during such a period, adverse
   market conditions were to develop, the fund might obtain a less favorable
   price than prevailed when it decided to sell. Restricted securities will be
   priced at fair value as determined in accordance with procedures prescribed
   by the fund's Board of Directors. If, through the appreciation of illiquid
   securities or the depreciation of liquid securities, the fund should be in a
   position where more than 15% (10% for Money Funds) 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, will consider whether
   securities purchased under Rule 144A are illiquid and thus subject to the
   fund's restriction of investing no more than 15% (10% for Money Funds) 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
   purchasers; (3) dealer undertakings to make a market; and (4) the nature of
   the security and of marketplace trades (e.g., the time needed to dispose of
   the security, the method of soliciting offers, and the mechanics of
   transfer). The liquidity of Rule 144A securities would be monitored and, if
   as a result of changed conditions it is determined that a Rule 144A security
   is no longer liquid, the fund's holdings of illiquid securities would be
   reviewed to determine what, if any, steps are required to assure that the
   fund does not invest more than 15% (10% for Money Funds) 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.



 PORTFOLIO MANAGEMENT PRACTICES
 -------------------------------------------------------------------------------

                         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. The
   collateral, in turn, is invested in short-term securities. 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
   a portion of the interest on the investment of the collateral. Normally, the
   fund employs an agent to implement its securities lending program and the
   agent receives a fee from the fund for its services. The fund has a right to
   call each loan and obtain the securities within such period of time 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 a possible default by the
   borrower, 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 be made only 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


                                       27

<PAGE>

   consideration to be earned from such loans would justify the risk.
   Additionally, the fund bears the risk that the reinvestment of collateral
   will result in a principal loss. Finally, there is also the risk that the
   price of the securities will increase while they are on loan and the
   collateral will not adequately cover their value.


                         Interfund Borrowing and Lending

   All funds (Borrowing)

   The fund is a party to an exemptive order received from the SEC on December
   8, 1998, amended on November 23, 1999, that permits it to borrow money from
   other funds in the T. Rowe Price complex ("Price Funds"). All loans are set
   at an interest rate between the rates charged on overnight repurchase
   agreements and short-term bank loans. All loans are subject to numerous
   conditions designed to ensure fair and equitable treatment of all
   participating funds. The program is subject to the oversight and periodic
   review of the Boards of Directors of the Price Funds.

   Tax-Efficient Funds (Lending)

   The fund is a party to an exemptive order received from the SEC on December
   8, 1998, amended on November 23, 1999, that permits it to lend money to Price
   Funds. All loans are set at an interest rate between the rates charged on
   overnight repurchase agreements and short-term bank loans. All loans are
   subject to numerous conditions designed to ensure fair and equitable
   treatment of all participating funds. The program is subject to the oversight
   and periodic review of the Boards of Directors of the Price Funds.


                              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. 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 enter into repurchase agreements only 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.")


                              Money Market Reserves


   Tax-Efficient Funds


   The fund may invest its cash reserves primarily in one or more money market
   funds established for the exclusive use of the T. Rowe Price family of mutual
   funds and other clients of T. Rowe Price. Currently, two such money market
   funds are in operation: T. Rowe Price Reserve Investment Fund ("RIF") and T.
   Rowe


                                       28

<PAGE>

   Price Government Reserve Investment Fund ("GRF"), each a series of the T.
   Rowe Price Reserve Investment Funds, Inc. Additional series may be created in
   the future. These funds were created and operate under an Exemptive Order
   issued by the SEC (Investment Company Act Release No. IC-22770, July 29,
   1997).

   Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
   governing money market funds. The RIF invests at least 95% of its total
   assets in prime money market instruments receiving the highest credit rating.
   The GRF invests primarily in a portfolio of U.S. government-backed
   securities, primarily U.S. Treasuries, and repurchase agreements thereon.

   The RIF and GRF provide a very efficient means of managing the cash reserves
   of the fund. While neither RIF nor GRF pays an advisory fee to the investment
   manager, they will incur other expenses. However, the RIF and GRF are
   expected by T. Rowe Price to operate at very low expense ratios. The fund
   will only invest in RIF or GRF to the extent it is consistent with its
   objective and program.

   Neither fund is insured or guaranteed by the FDIC or any other government
   agency. Although the funds seek to maintain a stable net asset value of $1.00
   per share, it is possible to lose money by investing in them.


                              Options on Securities

   Options are another type of potentially high-risk derivative.

   Bond and Money Funds

   The fund has no current intention of investing in options on securities,
   although it reserves the right to do so. Appropriate disclosure would be
   added to the fund's prospectus and Statement of Additional Information when
   and if the fund decides to invest in options.

   Tax-Efficient 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.

   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.


                                       29

<PAGE>

   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 that 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 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 on its primary exchange 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 mean of closing bid and ask
   prices. 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.

   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.


                                       30

<PAGE>

   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 total assets. In
   calculating the 25% limit, the fund will offset the value of securities
   underlying 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. This 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.
   Alternatively, 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 total assets. In
   calculating the 25% limit, the fund will offset the value of securities
   underlying purchased puts and calls on identical securities or currencies
   with identical maturity dates.

   The premium received by the fund for writing covered put 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 on its
   primary exchange 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 mean of the closing bid and ask prices.


                             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


                                       31

<PAGE>

   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 options. The premium paid by the fund when purchasing a put
   option will be recorded as an asset of the fund in the portfolio of
   investments. This asset will be adjusted daily to the option's current market
   value, which will be the latest sale price on its primary exchange 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 mean of closing
   bid and ask prices. 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.

   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.


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<PAGE>

   The fund will not commit more than 5% of its assets to premiums when
   purchasing call and put options. The premium paid by the fund when purchasing
   a call 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 on its primary exchange 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 mean of closing bid and ask prices.


                        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 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 counter-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 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.


                                Futures Contracts

   All funds (other than the Money Funds)

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

   Transactions in Futures
   The bond funds may enter into futures contracts including interest rate
   futures ("futures" or "futures contracts").

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

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


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<PAGE>

   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 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.

   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 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.

   Financial futures are valued daily at closing settlement prices. 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


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<PAGE>

   contract reaches a point at which the margin on deposit does not satisfy
   margin requirements, the broker will require a payment by the fund
   ("variation margin") to restore the margin account to the amount of the
   initial margin.

   Subsequent payments ("mark-to-market payments") 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. If the value of the open futures position increases in the
   case of a sale or decreases in the case of a purchase, the fund will pay the
   amount of the daily change in value to the broker. However, if the value of
   the open futures position decreases in the case of a sale or increases in the
   case of a purchase, the broker will pay the amount of the daily change in
   value to the fund.

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

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

   Tax-Efficient Funds

   For example, the S&P 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


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<PAGE>

   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 in the futures contracts. Final
   determinations of mark-to-market payments 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 mark-to-market and variation
   margin payments. 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 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 or economic events. 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 had 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 mark-to-market and variation margin
   requirements. Such sales of underlying instruments might be, but would not
   necessarily be, at


                                       36

<PAGE>

   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. 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.


                          Options on Futures Contracts

   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 (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. Options on
   futures contracts are valued daily at the latest sale price on their primary
   exchange 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 mean of closing bid and ask prices.


   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.

   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.

   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


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<PAGE>

   fund 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 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.


          Special Risks of Transactions in Options on Futures Contracts

   The risks described under "Special Risks of Transactions in 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 initial margin and maintain mark-to-market payments 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 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 contracts 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 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


                                       38

<PAGE>

   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, boards 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.


                           Foreign Futures and Options

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


                          Foreign Currency Transactions

   Tax-Efficient Funds

   A forward foreign currency exchange contract involves an obligation to
   purchase or sell a specific currency at a future date, which may be any fixed
   number of days from the date of the contract agreed upon by the parties, at a
   price set at the time of the contract. These contracts are principally traded
   in the interbank market conducted directly between currency traders (usually
   large, commercial banks) and their customers. A forward contract generally
   has no deposit requirement, and no commissions are charged at any stage for
   trades. The fund may enter into forward contracts for a variety of purposes
   in connection with the management of the foreign securities portion of its
   portfolio. The fund's use of such contracts would include, but not be limited
   to, the following:

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

   Second, when T. Rowe Price believes that one currency may experience a
   substantial movement against another currency, including the U.S. dollar, it
   may enter into a forward contract to sell or buy the amount of the former
   foreign currency, approximating the value of some or all of the fund's
   portfolio securities denominated in such foreign currency. Alternatively,
   where appropriate, the fund may hedge all or part of its foreign currency
   exposure through the use of a basket of currencies or a proxy currency where
   such currency or currencies act as an effective proxy for other currencies.
   In such a case, the fund may enter into a forward contract where the amount
   of the foreign currency to be sold exceeds the value of the securities
   denominated in such currency. The use of this basket hedging technique may be
   more efficient and economical than


                                       39

<PAGE>

   entering into separate forward contracts for each currency held in the fund.
   The precise matching of the forward contract amounts and the value of the
   securities involved will not generally be possible since the future value of
   such securities in foreign currencies will change as a consequence of market
   movements in the value of those securities between the date the forward
   contract is entered into and the date it matures. The projection of
   short-term currency market movement is extremely difficult, and the
   successful execution of a short-term hedging strategy is highly uncertain.
   Under normal circumstances, consideration of the prospect for relative
   currency values will be incorporated into the longer-term investment
   decisions made with regard to overall diversification strategies. However, T.
   Rowe Price believes that it is important to have the flexibility to enter
   into such forward contracts when it determines that the best interest of the
   fund will be served.

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

   At the maturity of a forward contract, the fund may sell the portfolio
   security and make delivery of the foreign currency, or it may retain the
   security and either extend the maturity of the forward contract (by "rolling"
   that contract forward) or may initiate a new forward contract.

   If the fund retains the portfolio security and engages in an offsetting
   transaction, the fund will incur a gain or a loss (as described below) to the
   extent that there has been movement in forward contract prices. If the fund
   engages in an offsetting transaction, it may subsequently enter into a new
   forward contract to sell the foreign currency. Should forward prices decline
   during the period between the fund's entering into a forward contract for the
   sale of a foreign currency and the date it enters into an offsetting contract
   for the purchase of the foreign currency, the fund will realize a gain to the
   extent the price of the currency it has agreed to sell exceeds the price of
   the currency it has agreed to purchase. Should forward prices increase, the
   fund will suffer a loss to the extent the price of the currency it has agreed
   to purchase exceeds the price of the currency it has agreed to sell.

   The fund's dealing in forward foreign currency exchange contracts will
   generally be limited to the transactions described above. However, the fund
   reserves the right to enter into forward foreign currency contracts for
   different purposes and under different circumstances. Of course, the fund is
   not required to enter into forward contracts with regard to its foreign
   currency-denominated securities and will not do so unless deemed appropriate
   by T. Rowe Price. It also should be realized that this method of hedging
   against a decline in the value of a currency does not eliminate fluctuations
   in the underlying prices of the securities. It simply establishes a rate of
   exchange at a future date. Additionally, although such contracts tend to
   minimize the risk of loss due to a decline in the value of the hedged
   currency, at the same time, they tend to limit any potential gain which might
   result from an increase in the value of that currency.

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


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

   The fund may enter into certain options, futures, foreign exchange contracts
   (Tax-Efficient Funds only), and swaps including options and futures on
   currencies, which will be treated as Section 1256 contracts or straddles.

   Transactions considered Section 1256 contracts will be considered to have
   been closed at the end of the fund's fiscal year, and any gains or losses
   will be recognized for tax purposes at that time. Such gains or losses from
   the normal closing or settlement of such transactions will be characterized
   as 60% long-term capital gain


                                       40

<PAGE>

   (taxable at a maximum rate of 20%) or loss and 40% short-term capital gain or
   loss, regardless of the holding period of the instrument (ordinary income or
   loss for foreign exchange contracts). 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, forward foreign exchange contracts, and swaps, 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 options, futures, or foreign forward exchange
   contracts on currencies is qualifying income for purposes of the 90%
   requirement.

   Entering into certain options, futures contracts, swaps, or foreign forward
   contracts may result in the "constructive sale" of offsetting stocks or debt
   securities of the fund.

   The Internal Revenue Service has issued a notice proposing alternative
   methods for the inclusion or deduction of certain payments made under swap
   contracts. Although not anticipated, it is possible that final rules could
   result in changes to the amounts recorded by the fund, potentially impacting
   the tax results of the fund.

   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 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;


                                       41

<PAGE>

   (2) Commodities Purchase or sell physical commodities, except that the funds
       (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 Multi-Cap Growth, 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, its agencies, or instrumentalities;


   (6) Percent Limit on Share Ownership of Any One Issuer  (California,
       Tax-Efficient Balanced, Tax-Efficient Multi-Cap Growth, 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 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 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.


                                       42

<PAGE>

          . 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.

          . For as long as this staff position is in effect, the fund will not
            invest more than 25% of its total assets in the securities of any
            single foreign governmental issuer. For purposes of this
            restriction, governmental entities are considered separate issuers.

       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;

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


   (2) Equity Securities (All funds except Tax-Efficient 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;


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

   (4) 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;

   (5) Investment Companies Purchase securities of open-end or closed-end
       investment companies except (i) in compliance with the 1940 Act; (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 Funds, securities of
       the T. Rowe Price Reserve Investment or Government Reserve Investment
       Funds;

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

   (7) Mortgaging Mortgage, pledge, hypothecate, or, in any manner, transfer any
       security owned by 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;

   (8) 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;

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

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


                                       43

<PAGE>

   (11) Warrants (Tax-Efficient Funds only) 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.


                                      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 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.

   The fund is governed by a Board of Directors that meets regularly to review
   fund investments, performance, expenses, and other business affairs. The
   Board elects the fund's officers. The Board also is responsible for
   performing various duties imposed on them by the 1940 Act and by the laws of
   Maryland or Massachusetts. The majority of Board members are independent of
   T. Rowe Price and T. Rowe Price International. The directors who are also
   employees or officers of T. Rowe Price are referred to as inside or
   interested directors. Each Board currently has three committees, described in
   the following paragraphs.

   The Committee of Independent Directors, which consists of all of the
   independent directors of the funds, is responsible for selecting candidates
   for election as independent directors to fill vacancies on each fund's Board.
   F. Pierce Linaweaver is chairman of the committee. The committee will
   consider written recommendations from shareholders for possible nominees.
   Shareholders should submit their recommendations to the secretary of the
   funds. The committee held no formal meetings during the last fiscal year.

   The Joint Audit Committee is comprised of David K. Fagin, F. Pierce
   Linaweaver, John G. Schreiber, and Paul M. Wythes, all independent directors.
   The Audit Committee holds two regular meetings during each fiscal year, at
   which time it meets with the independent accountants of the T. Rowe Price
   funds to review: (1) the services provided; (2) the findings of the most
   recent audit; (3) management's response to the findings of the most recent
   audit; (4) the scope of the audit to be performed; (5) the accountants' fees;
   and (6) any accounting or other questions relating to particular areas of the
   T. Rowe Price funds' operations or the operations of parties dealing with the
   T. Rowe Price funds, as circumstances indicate. The Audit Committee for the
   funds met three times in 2001. All members of the committee participated in
   the meetings.

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


                             Independent Directors*

<TABLE>
<CAPTION>
  Name, Date of Birth, and        Term of Office(a)
Number of Portfolios in Fund     and Length of Time            Principal Occupation(s)           Other Directorships of
Complex Overseen by Director           Served                    During Past 5 Years                Public Companies
-------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                      <C>                                    <C>
 Calvin W. Burnett, Ph.D.      Tax-Efficient Funds,     President, Coppin State College        Provident Bank of
 3/16/32                       2001; all other                                                 Maryland
 98 portfolios                 corporations,
                               s
                               ince
                               later of
                               1993
                                or
                               year
                               of incorporation
                               (
                               b
                               )
-------------------------------------------------------------------------------------------------------------------------
 Anthony W. Deering            Tax-Efficient Funds,     Director, Chairman of the Board,       The Rouse Company
 1/28/45                       2001; all other          President, and Chief Executive
 98 portfolios                 corporations, s          Officer, The Rouse Company, real
                               ince                     estate developers
                               later of
                               1983
                                or
                               year
                               of incorporation
                               (
                               b
                               )
-------------------------------------------------------------------------------------------------------------------------
 Donald W. Dick, Jr.           Tax-Efficient Funds,     Principal, EuroCapital Advisors,       None
 1/27/43                       1997; all other          LLC, an acquisition and
 98 portfolios                 corporations, 2001       management advisory firm
-------------------------------------------------------------------------------------------------------------------------
 David K. Fagin                Tax-Efficient Funds,     Director, Dayton Mining                Dayton Mining
 4/9/38                        1997; all other          Corporation (6/98 to present),         Corporation, Golden
 98 portfolios                 corporations, 2001       Golden Star Resources Ltd., and        Star Resources Ltd.,
                                                        Canyon Resources, Corp. (5/00 to       and Canyon Resources,
                                                        present); Chairman and President,      Corp.
                                                        Nye Corporation
-------------------------------------------------------------------------------------------------------------------------
 F. Pierce Linaweaver          Tax-Efficient Funds,     President, F. Pierce Linaweaver &      None
 8/22/34                       2001; all other          Associates, Inc., consulting
 98 portfolios                 corporations, s          environmental & civil engineers
                               ince
                               later of
                               1979
                                or
                               year
                               of incorporation
                               (
                               b
                               )
-------------------------------------------------------------------------------------------------------------------------
 Hanne M. Merriman             Tax-Efficient Funds,     Retail Business Consultant             Ann Taylor Stores
 11/16/41                      1997; all other                                                 Corporation, Ameren
 98 portfolios                 corporations, 2001                                              Corp., Finlay
                                                                                               Enterprises, Inc., The
                                                                                               Rouse Company, and
                                                                                               US Airways Group, Inc.
-------------------------------------------------------------------------------------------------------------------------
 John G. Schreiber             Tax-Efficient Funds,     Owner/President, Centaur Capital       AMLI Residential
 10/21/46                      2001; all other          Partners, Inc., a real estate          Properties Trust, Host
 98 portfolios                 corporations, s          investment company; Senior             Marriott Corporation,
                               ince                     Advisor and Partner, Blackstone        and The Rouse
                               later of                 Real Estate Advisors, L.P.             Company, real estate
                               1992                                                            developers
                                or
                               year
                               of incorporation
                               (
                               b
                               )
-------------------------------------------------------------------------------------------------------------------------
 Hubert D. Vos                 Tax-Efficient Funds,     Owner/President, Stonington            None
 8/2/33                        1997; all other          Capital Corporation, a private
 98 portfolios                 corporations, 2001       investment company
-------------------------------------------------------------------------------------------------------------------------
 Paul M. Wythes                Tax-Efficient Funds,     Founding Partner of Sutter Hill         Teltone Corporation
 6/23/33                       1997; all other          Ventures, a venture capital limited
 98 portfolios                 corporations, 2001       partnership, providing equity
                                                        capital to young high technology
                                                        companies throughout the United
                                                        States
-------------------------------------------------------------------------------------------------------------------------
</TABLE>





                                       44

<PAGE>



                                       45

<PAGE>

 * All information about the directors was current as of December 31, 2001.

 (a) Each director serves until election of a successor.

 (b) See years of incorporation in the following table.

<TABLE>
<CAPTION>
                  Incorporation Years
Corporation                        Year of Incorporation
-----------                        ---------------------
<S>                               <S>
California Tax-Free Funds                  1986
State Tax-Free Funds                       1986
Tax-Exempt Money Fund                      1980
Tax-Free High Yield Fund                   1984
Tax-Free Income Fund                       1976
Tax-Free Intermediate Bond Fund            1992
Tax-Free Short-Intermediate Fund           1983
</TABLE>




                                Inside Directors

<TABLE>
<CAPTION>
<S>                     <C>                <C>                      <C>
 Name, Date of Birth,      Term of Of
    and Number of            fice(a)
  Portfolios in Fund     and Length of     Principal Occupation(s)  Other Directorships
 Complex Overseen by       Time Served       During Past 5 Years    of Public Companies
       Director
------------------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
<S>                    <C>                     <C>                                   <C>
 James A.C. Kennedy    Tax-Efficient Funds,    Director                              None
 8/15/53               1997                    and Vice President
 32 portfolios                                 ,
                                               T. Rowe Price
                                               Associates, Inc.
                                               and

                                               T. Rowe Price Group, Inc.
                                               Director, Tax-Efficient Funds
-----------------------------------------------------------------------------------------------------
</TABLE>






                                       46

<PAGE>

<TABLE>
<CAPTION>
<S>                     <C>                <C>                      <C>
 Name, Date of Birth,      Term of Of
    and Number of            fice(a)
  Portfolios in Fund     and Length of     Principal Occupation(s)  Other Directorships
 Complex Overseen by       Time Served       During Past 5 Years    of Public Companies
       Director
------------------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
<S>                    <C>                    <C>                                  <C>
 William T. Reynolds   S                      Director and                         None
 5/26/48               ince later of          Vice President
 37 portfolios         1989                   ,
                                              T. Rowe Price and T. Rowe Price
                       or                     Group, Inc.
                       year of                ; Director, T. Rowe
                       incorporation          Price Global Asset Management
                       (
                       b                      Limited
                       )                      Chairman of the Board, California
                                              Tax-Free, State Tax-Free, Tax-
                                              Exempt Money, Tax-Free High
                                              Yield, Tax-Free Income, and Tax-
                                              Free Short-Intermediate Funds;
                                              Director, Tax-Free Intermediate
                                              Bond Fund; Vice President, Tax-
                                              Efficient Funds
---------------------------------------------------------------------------------------------------
</TABLE>





<TABLE>
<CAPTION>
<S>                    <C>                      <C>                                     <C>
 James S. Riepe        Tax-Efficient Funds,     Director and                            None
 6/25/43               1997; all other          Vice President
 98 portfolios         corporations, s          ,
                       ince                     T. Rowe Price;
                       later of                 Vice Chairman of
                       1983                     the Board, Director and
                                                Vice
                       or                       President
                       year                     ,
                       of incorporation
                       (                        T
                       b                        . Rowe Price Group,
                       )                        Inc.; Chairman of the Board and
                                                Director, T. Rowe Price Investment
                                                Services, Inc., T. Rowe Price
                                                Retirement Plan Services, Inc.,
                                                T. Rowe Price Services, Inc.
                                                ,
                                                 and

                                                T. Rowe Price Global Asset
                                                Management Limited
                                                ; Chairman of
                                                the Board, Director, President, and
                                                Trust Officer, T. Rowe Price Trust
                                                Company; Director, T. Rowe Price
                                                International, Inc.,
                                                and T. Rowe
                                                Price Global Investment Services

                                                Limited
                                                Director, California Tax-Free, State
                                                Tax-Free, Tax-Exempt Money, Tax-
                                                Free High Yield, Tax-Free Income,
                                                Tax-Free Intermediate Bond, and
                                                Tax-Free Short-Intermediate
                                                Funds; Director and Vice
                                                President, Tax-Efficient Funds
--------------------------------------------------------------------------------------------------------
</TABLE>





                                       47

<PAGE>

<TABLE>
<CAPTION>
<S>                     <C>                <C>                      <C>
 Name, Date of Birth,      Term of Of
    and Number of            fice(a)
  Portfolios in Fund     and Length of     Principal Occupation(s)  Other Directorships
 Complex Overseen by       Time Served       During Past 5 Years    of Public Companies
       Director
------------------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
<S>                    <C>           <C>                                  <C>
 M. David Testa        S             Vice Chairman of the Board, Chief    None
 4/22/44               ince          Investment Officer, Director, and
 98 portfolios         1997          Vice President
                                     , T. Rowe Price
                                     Group, Inc.; Chief Investment
                                     Officer, Director, and
                                     Vice
                                     President
                                     , T. Rowe Price
                                     ; Vice
                                     President and Director, T. Rowe
                                     Price Trust Company; Director,
                                     T. Rowe Price Global Investment
                                     Services Limited
                                     ,
                                      T. Rowe Price
                                     International, Inc.
                                     , and T. Rowe
                                     Price Global Asset Management

                                     Limited
                                     Director, all funds
------------------------------------------------------------------------------------------
</TABLE>



 (a) Each director serves until election of a successor.

 (b) See years of incorporation in the table above.


                                  Officers/(a)/

<TABLE>
<CAPTION>
<S>                                       <C>
Name, Date of Birth, Address, and         Position(s) Held With
Principal Occupations                     Fund
------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
<S>                                <C>
R. Lee Arnold, Jr., 9/7/70         Vice President, Tax-Free High Yield Fund
Assistant Vice President, T. Rowe
Price; Chartered Financial
Analyst; Certified Public
Accountant
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                           <C>
Jeremy N. Baker, 2/27/68                        Vice President, California
Assistant Vice President, T.  Rowe Price;       Tax-Free, State Tax-
Chartered Financial Analyst                     Free, and Tax-Free Income Funds
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                        <C>
Linda A. Brisson, 7/8/59                     Vice President, California
Vice President, T. Rowe Price and T. Rowe    Tax-Free and State Tax-
Price Group, Inc.                            Free Funds
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                         <C>
Steven G. Brooks, 8/5/54    Vice President, California Tax-Free, State Tax-
Vice President, T. Rowe     Free, and Tax-Exempt Money Funds
Price and T. Rowe Price
Group, Inc.; Chartered
Financial Analyst
-------------------------------------------------------------------------------
</TABLE>





                                       48

<PAGE>

<TABLE>
<CAPTION>
<S>                                       <C>
Name, Date of Birth, Address, and         Position(s) Held With
Principal Occupations                     Fund
------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
<S>                                                  <C>
Joseph A. Carrier, 12/30/60                            Treasurer, all funds
Vice President, T. Rowe Price, T. Rowe Price Group,
Inc., and T. Rowe Price Investment Services, Inc.
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                     <C>
Jonathan M. Chirunga, 2/2/66              Vice President, State Tax-Free Funds
Assistant Vice President, T. Rowe
Price
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                <C>
Maria H. Condez, 4/3/62              Assistant Vice President, California
Employee, T. Rowe Price              Tax-Free,
                                     State Tax-Free, and Tax-Exempt Money Funds
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                         <C>
G. Richard Dent, 11/14/60                     Vice President, California
Vice President, T. Rowe Price and T. Rowe     Tax-Free, State Tax-
Price Group, Inc.                             Free, Tax-Exempt Money, Tax-Free
                                              High Yield,
                                              and Tax-Free Income Funds
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                     <C>
Jill L. Hauser, 6/23/58                 Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price and T.
Rowe Price Group, Inc.
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                         <C>
Charles B. Hill, 9/22/61    President, Tax-Free Intermediate Bond Fund;
Vice President, T. Rowe     Executive Vice President, Tax-Free Short-
Price and T. Rowe Price     Intermediate Fund; Vice President, State Tax-
Group, Inc.                 Free, Tax-Free High Yield, and Tax-Free Income
                            Funds
-------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
<S>                                        <C>
Henry H. Hopkins, 12/23/42                 Vice President
Director and Vice President, T. Rowe       , all funds
Price Group, Inc.; Vice President, T.
Rowe Price Associates, T. Rowe Price
International, Inc., and T. Rowe Price
Retirement Plan Services, Inc.; Vice
President and Director, T. Rowe Price
Investment Services, Inc., T. Rowe Price
Services, Inc., and T. Rowe Price Trust
Company
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                     <C>
Thomas J. Huber, 9/23/66                Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price and T.
Rowe Price Group, Inc.; Chartered
Financial Analyst
-------------------------------------------------------------------------------
</TABLE>





                                       49

<PAGE>

<TABLE>
<CAPTION>
<S>                                       <C>
Name, Date of Birth, Address, and         Position(s) Held With
Principal Occupations                     Fund
------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
<S>                                <C>
T. Dylan Jones, 2/7/71               Assistant Vice President, California
Employee, T. Rowe Price              Tax-Free,
                                     State Tax-Free, and Tax-Exempt Money Funds
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                             <C>
J. Jeffrey Lang, 1/10/62                          Vice President, Tax-Efficient
Vice President, T. Rowe Price and T. Rowe         Funds
Price Trust Company
-------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
<S>                           <C>
Marcy M. Lash, 1/30/63        Vice President, State Tax-Free, Tax-Exempt
Vice President, T. Rowe       Money, Tax-Free High Yield, Tax-Free Income,
Price; (1998) formerly        and Tax-Free Short-Intermediate Funds
Assistant Vice President,
underwriting, at Connie Lee
Insurance Company
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                         <C>
Alan D. Levenson, 7/17/58   Vice President, California Tax-Free, State Tax-
Vice President, T. Rowe     Free, and Tax-Exempt Money Funds
Price and T. Rowe Price
Group, Inc.; (1998)
formerly Senior Vice
President and Director of
Research at Aubrey G.
Lanston & Co., Inc.
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                                <C>
Patricia B. Lippert, 1/12/53                         Secretary, all funds
Assistant Vice President, T. Rowe Price and T.
Rowe Price Investment Services, Inc.
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                      <C>
Joseph K. Lynagh,        President, Tax-Exempt Money Fund; Executive
6/9/58                   Vice President, California Tax-Free and State Tax-
Vice President, T. Rowe  Free Funds
Price and T. Rowe Price
Group, Inc.; Chartered
Financial Analyst
-------------------------------------------------------------------------------
</TABLE>





<TABLE>
<CAPTION>
<S>                                         <C>
Konstantine B. Mallas, 5/26/63                Vice President, California
Vice President, T. Rowe Price and T. Rowe     Tax-Free, State Tax-
Price Group, Inc.                             Free, Tax-Free High Yield,
                                              Tax-Free Income, Tax-
                                              Free Intermediate Bond, Tax-Free
                                              Short-
                                              Intermediate Funds
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                        <C>
James M. McDonald,         Vice President, California Tax-Free, State Tax-
9/29/49                    Free, and Tax-Exempt Money Funds
Vice President, T. Rowe
Price, T. Rowe Price
Group, Inc., and T. Rowe
Price Trust Company
-------------------------------------------------------------------------------
</TABLE>





                                       50

<PAGE>

<TABLE>
<CAPTION>
<S>                                       <C>
Name, Date of Birth, Address, and         Position(s) Held With
Principal Occupations                     Fund
------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
<S>                         <C>
Hugh D. McGuirk, 7/6/60     Executive Vice President, Tax-Efficient Funds;
Vice President, T. Rowe     Vice President, State Tax-Free, Tax-Free High
Price and T. Rowe Price     Yield, Tax-Free Income, Tax-Free Intermediate
Group, Inc.                 Bond, and Tax-Free Short-Intermediate Funds
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                                  <C>
David S. Middleton, 1/18/56                            Controller, all funds
Vice President, T. Rowe Price, T. Rowe Price Group,
Inc., and T. Rowe Price Trust Company
-------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
<S>                                         <C>
Mary J. Miller, 7/19/55                       President, California Tax-Free,
Vice President, T. Rowe Price and T. Rowe     State Tax-Free,
Price Group, Inc.                             Tax-Free High Yield, Tax-Free
                                              Income, Tax-Free
                                              Short-Intermediate Funds;
                                              Executive Vice
                                              President, Tax-Free Intermediate
                                              Bond Fund;
                                              Vice President, Tax-Efficient and
                                              Tax-Exempt
                                              Money Funds
-------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
<S>                                <C>
James M. Murphy, 4/23/67           Vice President, Tax-Free High Yield Fund
Vice President, T. Rowe Price and
T. Rowe Price Group, Inc.; (2000)
formerly Portfolio Manager at
Prudential Investments; Chartered
Financial Analyst
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                                 <C>
Donald J. Peters, 7/3/59                              President, Tax-Efficient
Vice President, T. Rowe Price and T. Rowe Price       Funds
Group, Inc.
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                       <C>
Stephen P. Richter,       Vice President, Tax-Free High Yield and Tax-Free
10/18/69                  Income Funds
Vice President, T. Rowe
Price; (2000) formerly
Vice President at Euler
ACI; Chartered Financial
Analyst
-------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
<S>                                     <C>
William J. Stromberg, 3/10/60           Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price and T.
Rowe Price Group, Inc.; Chartered
Financial Analyst
-------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
<S>                              <C>
Timothy G. Taylor, 9/15/75         Assistant Vice President, State Tax-Free,
Employee, T. Rowe Price            Tax-Free
                                   Intermediate Bond, and Tax-Free Short-
                                   Intermediate Funds
-------------------------------------------------------------------------------
</TABLE>





                                       51

<PAGE>

<TABLE>
<CAPTION>
<S>                                       <C>
Name, Date of Birth, Address, and         Position(s) Held With
Principal Occupations                     Fund
------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
<S>                                     <C>
Mark R. Weigman, 7/30/62                Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price, T. Rowe
Price Group, Inc., and T. Rowe Price
Trust Company; Chartered Financial
Analyst
-------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
<S>                                           <C>
Edward A. Wiese, 4/12/59                        Vice President, California
Vice President, T. Rowe Price, T. Rowe Price    Tax-Free, State Tax-
Group, Inc., and T. Rowe Price Trust            Free, Tax-Exempt Money,
Company; Director, Chief Investment Officer,    Tax-Free Intermediate
and Vice President, T. Rowe Price Savings       Bond, and Tax-Free
Bank; Chartered Financial Analyst               Short-Intermediate Funds
-------------------------------------------------------------------------------
</TABLE>



(a)
  Unless otherwise indicated, the officers have been employees of T. Rowe Price
  or T. Rowe Price International for at least five years.


                           Director Compensation Table

   The fund does not pay pension or retirement benefits to its officers or
   directors. Also, any director of the fund who is an officer or employee of T.
   Rowe Price or T. Rowe Price International does not receive any remuneration
   from the fund.

<TABLE>
<CAPTION>
Name of Person                     Aggregate Compensation From               Total Compensation From Fund and
---------------------------------  Fund(a)                                   Fund Complex Paid to Directors(b)
---------------------------------------------------------------------------  ---------------------------------
                                   -----------------------------------------------------------------------------
<S>                                <S>                                       <C>
California Tax-Free Bond Fund
Calvin W. Burnett, Ph.D.                                             $1,470                           $110,000
Anthony W. Deering                                                    1,111                            110,000
Donald W. Dick, Jr.(c)                                                  233                            110,000
David K. Fagin(c)                                                       238                            112,000
F. Pierce Linaweaver                                                  1,657                            113,000
Hanne M. Merriman(c)                                                    233                            110,000
John G. Schreiber                                                     1,657                            113,000
Hubert D. Vos(c)                                                        235                            111,000
Paul M. Wythes(c)                                                       240                            113,000
----------------------------------------------------------------------------------------------------------------
California Tax-Free Money Fund
Calvin W. Burnett, Ph.D.                                             $1,274                           $110,000
Anthony W. Deering                                                      982                            110,000
Donald W. Dick, Jr.(c)                                                  204                            110,000
David K. Fagin(c)                                                       206                            112,000
F. Pierce Linaweaver                                                  1,277                            113,000
Hanne M. Merriman(c)                                                    204                            110,000
John G. Schreiber                                                     1,277                            113,000
Hubert D. Vos(c)                                                        205                            111,000
Paul M. Wythes(c)                                                       207                            113,000
----------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Free Fund
Calvin W. Burnett, Ph.D.                                             $1,261                           $110,000
Anthony W. Deering                                                    1,113                            110,000
Donald W. Dick, Jr.(c)                                                  204                            110,000
David K. Fagin(c)                                                       206                            112,000
F. Pierce Linaweaver                                                  1,263                            113,000
Hanne M. Merriman(c)                                                    204                            110,000
John G. Schreiber                                                     1,263                            113,000
Hubert D. Vos(c)                                                        205                            111,000
Paul M. Wythes(c)                                                       207                            113,000
----------------------------------------------------------------------------------------------------------------
Georgia Tax-Free Bond Fund
Calvin W. Burnett, Ph.D.                                             $1,210                           $110,000
Anthony W. Deering                                                      960                            110,000
Donald W. Dick, Jr.(c)                                                  200                            110,000
David K. Fagin(c)                                                       201                            112,000
F. Pierce Linaweaver                                                  1,212                            113,000
Hanne M. Merriman(c)                                                    200                            110,000
John G. Schreiber                                                     1,212                            113,000
Hubert D. Vos(c)                                                        201                            111,000
Paul M. Wythes(c)                                                       202                            113,000
----------------------------------------------------------------------------------------------------------------
Maryland Short-Term Tax-Free Bond Fund
Calvin W. Burnett, Ph.D.                                             $1,348                           $110,000
Anthony W. Deering                                                    1,009                            110,000
Donald W. Dick, Jr.(c)                                                  213                            110,000
David K. Fagin(c)                                                       215                            112,000
F. Pierce Linaweaver                                                  1,352                            113,000
Hanne M. Merriman(c)                                                    213                            110,000
John G. Schreiber                                                     1,352                            113,000
Hubert D. Vos(c)                                                        214                            111,000
Paul M. Wythes(c)                                                       217                            113,000
----------------------------------------------------------------------------------------------------------------
Maryland Tax-Free Bond Fund
Calvin W. Burnett, Ph.D.                                             $4,027                           $110,000
Anthony W. Deering                                                    1,929                            110,000
Donald W. Dick, Jr.(c)                                                  411                            110,000
David K. Fagin(c)                                                       435                            112,000
F. Pierce Linaweaver                                                  4,063                            113,000
Hanne M. Merriman(c)                                                    411                            110,000
John G. Schreiber                                                     4,063                            113,000
Hubert D. Vos(c)                                                        423                            111,000
Paul M. Wythes(c)                                                       446                            113,000
----------------------------------------------------------------------------------------------------------------
Maryland Tax-Free Money Fund(d)
Calvin W. Burnett, Ph.D.                                               $968                           $110,000
Anthony W. Deering                                                      824                            110,000
Donald W. Dick, Jr.(c)                                                  193                            110,000
David K. Fagin(c)                                                       194                            112,000
F. Pierce Linaweaver                                                    969                            113,000
Hanne M. Merriman(c)                                                    193                            110,000
John G. Schreiber                                                       969                            113,000
Hubert D. Vos(c)                                                        193                            111,000
Paul M. Wythes(c)                                                       194                            113,000
----------------------------------------------------------------------------------------------------------------
New Jersey Tax-Free Bond Fund
Calvin W. Burnett, Ph.D.                                             $1,345                           $110,000
Anthony W. Deering                                                    1,006                            110,000
Donald W. Dick, Jr.(c)                                                  210                            110,000
David K. Fagin(c)                                                       212                            112,000
F. Pierce Linaweaver                                                  1,349                            113,000
Hanne M. Merriman(c)                                                    210                            110,000
John G. Schreiber                                                     1,349                            113,000
Hubert D. Vos(c)                                                        211                            111,000
Paul M. Wythes(c)                                                       213                            113,000
----------------------------------------------------------------------------------------------------------------
New York Tax-Free Bond Fund
Calvin W. Burnett, Ph.D.                                             $1,567                           $110,000
Anthony W. Deering                                                    1,082                            110,000
Donald W. Dick, Jr.(c)                                                  225                            110,000
David K. Fagin(c)                                                       229                            112,000
F. Pierce Linaweaver                                                  1,574                            113,000
Hanne M. Merriman(c)                                                    225                            110,000
John G. Schreiber                                                     1,574                            113,000
Hubert D. Vos(c)                                                        227                            111,000
Paul M. Wythes(c)                                                       231                            113,000
----------------------------------------------------------------------------------------------------------------
New York Tax-Free Money Fund
Calvin W. Burnett, Ph.D.                                             $1,324                           $110,000
Anthony W. Deering                                                      998                            110,000
Donald W. Dick, Jr.(c)                                                  207                            110,000
David K. Fagin(c)                                                       209                            112,000
F. Pierce Linaweaver                                                  1,327                            113,000
Hanne M. Merriman(c)                                                    207                            110,000
John G. Schreiber                                                     1,327                            113,000
Hubert D. Vos(c)                                                        208                            111,000
Paul M. Wythes(c)                                                       210                            113,000
----------------------------------------------------------------------------------------------------------------
Virginia Tax-Free Bond Fund
Calvin W. Burnett, Ph.D.                                             $1,898                           $110,000
Anthony W. Deering                                                    1,197                            110,000
Donald W. Dick, Jr.(c)                                                  252                            110,000
David K. Fagin(c)                                                       259                            112,000
F. Pierce Linaweaver                                                  1,909                            113,000
Hanne M. Merriman(c)                                                    252                            110,000
John G. Schreiber                                                     1,909                            113,000
Hubert D. Vos(c)                                                        256                            111,000
Paul M. Wythes(c)                                                       263                            113,000
----------------------------------------------------------------------------------------------------------------
Tax-Efficient Balanced Fund
Calvin W. Burnett, Ph.D.(c)                                            $195                           $110,000
Anthony W. Deering(c)                                                   195                            110,000
Donald W. Dick, Jr.                                                     875                            110,000
David K. Fagin                                                          892                            112,000
F. Pierce Linaweaver(c)                                                 196                            113,000
Hanne M. Merriman                                                       891                            110,000
John G. Schreiber(c)                                                    196                            113,000
Hubert D. Vos                                                           891                            111,000
Paul M. Wythes                                                          876                            113,000
----------------------------------------------------------------------------------------------------------------
Tax-Efficient Growth Fund
Calvin W. Burnett, Ph.D.(c)                                            $200                           $110,000
Anthony W. Deering(c)                                                   200                            110,000
Donald W. Dick, Jr.                                                     889                            110,000
David K. Fagin                                                          916                            112,000
F. Pierce Linaweaver(c)                                                 202                            113,000
Hanne M. Merriman                                                       915                            110,000
John G. Schreiber(c)                                                    202                            113,000
Hubert D. Vos                                                           916                            111,000
Paul M. Wythes                                                          892                            113,000
----------------------------------------------------------------------------------------------------------------
Tax-Efficient Multi-Cap Growth Fund
Calvin W. Burnett, Ph.D.(c)                                            $189                           $110,000
Anthony W. Deering(c)                                                   189                            110,000
Donald W. Dick, Jr.                                                     858                            110,000
David K. Fagin                                                          863                            112,000
F. Pierce Linaweaver(c)                                                 189                            113,000
Hanne M. Merriman                                                       863                            110,000
John G. Schreiber(c)                                                    189                            113,000
Hubert D. Vos                                                           863                            111,000
Paul M. Wythes                                                          858                            113,000
----------------------------------------------------------------------------------------------------------------
Tax-Exempt Money Fund
Calvin W. Burnett, Ph.D.                                             $3,018                           $110,000
Anthony W. Deering                                                    1,796                            110,000
Donald W. Dick, Jr.(c)                                                  330                            110,000
David K. Fagin(c)                                                       345                            112,000
F. Pierce Linaweaver                                                  3,041                            113,000
Hanne M. Merriman(c)                                                    330                            110,000
John G. Schreiber                                                     3,041                            113,000
Hubert D. Vos(c)                                                        338                            111,000
Paul M. Wythes(c)                                                       353                            113,000
----------------------------------------------------------------------------------------------------------------
Tax-Free High Yield Fund
Calvin W. Burnett, Ph.D.                                             $3,394                           $110,000
Anthony W. Deering                                                    2,151                            110,000
Donald W. Dick, Jr.(c)                                                  395                            110,000
David K. Fagin(c)                                                       416                            112,000
F. Pierce Linaweaver                                                  3,967                            113,000
Hanne M. Merriman(c)                                                    395                            110,000
John G. Schreiber                                                     3,967                            113,000
Hubert D. Vos(c)                                                        405                            111,000
Paul M. Wythes(c)                                                       427                            113,000
----------------------------------------------------------------------------------------------------------------
Tax-Free Income Fund
Calvin W. Burnett, Ph.D.                                             $4,744                           $110,000
Anthony W. Deering                                                    2,469                            110,000
Donald W. Dick, Jr.(c)                                                  457                            110,000
David K. Fagin(c)                                                       485                            112,000
F. Pierce Linaweaver                                                  4,786                            113,000
Hanne M. Merriman(c)                                                    457                            110,000
John G. Schreiber                                                     4,786                            113,000
Hubert D. Vos(c)                                                        471                            111,000
Paul M. Wythes(c)                                                       499                            113,000
----------------------------------------------------------------------------------------------------------------
Tax-Free Intermediate Bond Fund
Calvin W. Burnett, Ph.D.                                             $1,204                           $110,000
Anthony W. Deering                                                    1,146                            110,000
Donald W. Dick, Jr.(c)                                                  210                            110,000
David K. Fagin(c)                                                       213                            112,000
F. Pierce Linaweaver                                                  1,208                            113,000
Hanne M. Merriman(c)                                                    210                            110,000
John G. Schreiber                                                     1,208                            113,000
Hubert D. Vos(c)                                                        211                            111,000
Paul M. Wythes(c)                                                       214                            113,000
----------------------------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate Fund
Calvin W. Burnett, Ph.D.                                             $2,133                           $110,000
Anthony W. Deering                                                    1,307                            110,000
Donald W. Dick, Jr.(c)                                                  270                            110,000
David K. Fagin(c)                                                       278                            112,000
F. Pierce Linaweaver                                                  2,146                            113,000
Hanne M. Merriman(c)                                                    270                            110,000
John G. Schreiber                                                     2,146                            113,000
Hubert D. Vos(c)                                                        274                            111,000
Paul M. Wythes(c)                                                       283                            113,000
----------------------------------------------------------------------------------------------------------------
</TABLE>





                                       52

<PAGE>



                                       53

<PAGE>



                                       54

<PAGE>



                                       55

<PAGE>



                                       56

<PAGE>

 (a) Amounts in this column are based on accrued compensation for fiscal year
   2002.

 (b) Amounts in this column are based on compensation received for fiscal
   year 2002. The T. Rowe Price complex included 97 funds as of December 31,
   2001.

 (c) Newly elected to fund Board as of October 24, 2001.

 (d) Expenses are based on accrued compensation for the period March 31,
   2001, to February 28, 2002.


                 Directors' Holdings in the T. Rowe Price Funds

   The following table sets forth the T. Rowe Price fund holdings of the
   independent and inside directors, as of December 31, 2001.

<TABLE>
<CAPTION>
                              Burnett  Deering     Dick     Fagin    Linaweaver  Merriman  Schreiber    Vos       Wythes
-----------------------------------------------------------                                                     ----------
<S>                           <C>      <C>       <C>       <C>       <C>         <C>       <C>        <C>       <C>
    Aggregate Holdings,
    -------------------         $1-     over      over      over       over       over       over      over      over
         All Funds            $10,000  $100,000  $100,000  $100,000   $100,000   $100,000  $100,000   $100,000  $100,000
         ---------
--------------------------------------------------------------------------------------------------------------------------
 Balanced Fund                 None      None      None      None $50,001-$100,000 None      None       None       None

--------------------------------------------------------------------------------------------------------------------------
 Blue Chip Growth Fund         None      None   $1-$10,0$10,001-$50,000   None         over      None       None       None
                                                                                     $100,000
------------------------------------------------------------------------------------------------------------------------------
 Blue Chip Growth              None      None      None        None            None         None      None       None       None
 Fund-Advisor Class
-----------------------------------------------------------------------------------------------------------------------------------
 Blue Chip Growth Portfolio    None      None      None        None            None         None      None       None       None
-----------------------------------------------------------------------------------------------------------------------------------
 California Tax-Free Bond      None      None      None        None            None         None      None       None       None
 Fund
-----------------------------------------------------------------------------------------------------------------------------------
 California Tax-Free Money     None      None      None        None            None         None      None       None       None
 Fund
-----------------------------------------------------------------------------------------------------------------------------------
 Capital Appreciation Fund     None      None      over        None            None      $10,001-$50,000   None       None     None
                                                 $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Capital Opportunity Fund      None      None      None        None            None           None         None       None     None
------------------------------------------------------------------------------------------------------------------------------------
 Corporate Income Fund         None      None      None        None            None           None         None       None     None
------------------------------------------------------------------------------------------------------------------------------------
 Developing Technologies       None      None      None        None            None           None         None       None     None
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 Diversified Small-Cap         None      None      None        None            None           None         None       None     None
 Growth Fund
------------------------------------------------------------------------------------------------------------------------------------
 Dividend Growth Fund          None      None      None   $10,001-$50,000      None      $10,001-$50,000   None       None     None

------------------------------------------------------------------------------------------------------------------------------------
 Emerging Europe &             None      None      None        None            None           None         None       None     None
 Mediterranean Fund
------------------------------------------------------------------------------------------------------------------------------------
 Emerging Markets Bond Fund    None      None      None        None            None           None         None       None     None
------------------------------------------------------------------------------------------------------------------------------------
 Emerging Markets Stock Fund   None      None      None        None            None           None         None       None     None
------------------------------------------------------------------------------------------------------------------------------------
 Equity Income Fund            None      None$50,001-$100,$50,001-$100,000     None      $50,001-$100,000  None  $10,001-$50,00None

------------------------------------------------------------------------------------------------------------------------------------
 Equity Income Fund-Advisor    None      None         None            None            None            None         None       None
 Class
------------------------------------------------------------------------------------------------------------------------------------
 Equity Income Portfolio       None      None         None            None            None            None         None       None
------------------------------------------------------------------------------------------------------------------------------------
 Equity Index 500 Fund         None      None         None            None            None       over $100,000     None       None

------------------------------------------------------------------------------------------------------------------------------------
 Equity Index 500 Portfolio    None      None         None            None            None            None         None       None
------------------------------------------------------------------------------------------------------------------------------------
 European Stock Fund           None      over    $10,001-$50,000 $10,001-$50,000      None            None         None       None
                                       $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Extended Equity Market        None      None         None            None            None            None         None       None
 Index Fund
------------------------------------------------------------------------------------------------------------------------------------
 Financial Services Fund       None      None    $10,001-$50,000      None            None            None         None       None

------------------------------------------------------------------------------------------------------------------------------------
 Florida Intermediate          None      None         None            None            None            None         None       None
 Tax-Free Fund
------------------------------------------------------------------------------------------------------------------------------------
 Georgia Tax-Free Bond Fund    None      None         None            None            None            None         None       None
------------------------------------------------------------------------------------------------------------------------------------
 Global Stock Fund             None      None         None            None            None            None         None       None
------------------------------------------------------------------------------------------------------------------------------------
 Global Technology Fund        None      None         None            None            None            None         None       None
------------------------------------------------------------------------------------------------------------------------------------
 GNMA Fund                     None      None         None            None            None            None         over       None
                                                                                                                 $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Government Reserve            None      None         None            None            None            None         None       None
 Investment Fund
------------------------------------------------------------------------------------------------------------------------------------
 Growth & Income Fund          None      None      $1-$10,000         None            None            None         over       No$10,
                                                                                                                 $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Growth Stock Fund             None      None    $10,001-$50,000      None       $10,001-$50,000      None         None       None

------------------------------------------------------------------------------------------------------------------------------------
 Growth Stock Fund-Advisor     None      None         None            None            None            None         None       None
 Class
------------------------------------------------------------------------------------------------------------------------------------
 Health Sciences Fund          None      None    $10,001-$50,000      None            None            None         None $50,001-$100

------------------------------------------------------------------------------------------------------------------------------------
 Health Sciences Portfolio     None      None         None            None            None            None         None       None
------------------------------------------------------------------------------------------------------------------------------------
 High Yield Fund             $1-$10,000  None    $10,001-$50,000      None            None            None         over       None
                                                                                                                 $100,000
------------------------------------------------------------------------------------------------------------------------------------
 High Yield Fund-Advisor        None      None         None            None            None            None         None      None
 Class
------------------------------------------------------------------------------------------------------------------------------------
 Institutional Foreign          None      None         None            None            None            None         None      None
 Equity Fund
------------------------------------------------------------------------------------------------------------------------------------
 Institutional Large-Cap        None      None         None            None            None            None         None      None
 Growth Fund
------------------------------------------------------------------------------------------------------------------------------------
 Institutional Large-Cap        None      None         None            None            None            None         None      None
 Value Fund
------------------------------------------------------------------------------------------------------------------------------------
 Institutional Mid-Cap          None      None         None            None            None            None         None      None
 Equity Growth Fund
------------------------------------------------------------------------------------------------------------------------------------
 Institutional Small-Cap        None      None         None            None            None            None         None      None
 Stock Fund
------------------------------------------------------------------------------------------------------------------------------------
 International Bond Fund        None      None   $50,001-$100,000      None            None            None         None      None

------------------------------------------------------------------------------------------------------------------------------------
 International Bond             None      None         None            None            None            None         None      None
 Fund-Advisor Class
------------------------------------------------------------------------------------------------------------------------------------
 International Discovery        None$50,001-$100,0$10,001-$50,000      None       over $100,000        None         None      None
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 International Equity Index     None         None            None            None            None            None         None    No
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 International Growth &         None         None            None            None            None            None         None    No
 Income Fund
------------------------------------------------------------------------------------------------------------------------------------
 International Stock Fund    $1-$10,000 over $100,000        None       over $100,000        None            None         None    No

------------------------------------------------------------------------------------------------------------------------------------
 International Stock            None         None            None            None            None            None         None    No
 Fund-Advisor Class
------------------------------------------------------------------------------------------------------------------------------------
 International Stock            None         None            None            None            None            None         None    No
 Portfolio
------------------------------------------------------------------------------------------------------------------------------------
 Japan Fund                     None         None            None            None            None            None         None    No
------------------------------------------------------------------------------------------------------------------------------------
 Latin America Fund             None         None            None            None            None            None         None    No
------------------------------------------------------------------------------------------------------------------------------------
 Limited-Term Bond Portfolio    None         None            None            None            None            None         None    No
------------------------------------------------------------------------------------------------------------------------------------
 Maryland Short-Term            None         None            None            None            None            None         None    No
 Tax-Free Bond Fund
------------------------------------------------------------------------------------------------------------------------------------
 Maryland Tax-Free Bond Fund    None         None            None            None            None            None         None    No
------------------------------------------------------------------------------------------------------------------------------------
 Maryland Tax-Free Money        None         None            None            None            None            None         None    No
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 Media & Telecommunications     None    $10,001-$50,000      None            None            None            None         None    No
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 Mid-Cap Growth Fund            None         None         $1-$10,000    $10,001-$50,000      None            None         No$10,001-

------------------------------------------------------------------------------------------------------------------------------------
 Mid-Cap Growth Fund-Advisor    None         None            None            None            None            None         None    No
 Class
------------------------------------------------------------------------------------------------------------------------------------
 Mid-Cap Growth Portfolio       None         None            None            None            None            None         None    No
------------------------------------------------------------------------------------------------------------------------------------
 Mid-Cap Value Fund             None         None            None            None            None            None         None    No
------------------------------------------------------------------------------------------------------------------------------------
 New America Growth Fund        None         None            None            None       over $100,000   $10,001-$50,000   None    No
------------------------------------------------------------------------------------------------------------------------------------
 New America Growth             None         None            None            None            None            None         None    No
 Portfolio
------------------------------------------------------------------------------------------------------------------------------------
 New Asia Fund                  None         None            None       $10,001-$50,000      None            None         None    No

------------------------------------------------------------------------------------------------------------------------------------
 New Era Fund                   None         None            None            None            None            None         No$10,001-

------------------------------------------------------------------------------------------------------------------------------------
 New Horizons Fund           $1-$10,000      None       $10,001-$50,000   $1-$10,000    over $100,000   $10,001-$50,000   No$10,001-

------------------------------------------------------------------------------------------------------------------------------------
 New Income Fund                None         None      $50,001-$100,000      None            None            None         over    No
                                                                                                                        $100,000
------------------------------------------------------------------------------------------------------------------------------------
 New Jersey Tax-Free Bond       None         None            None            None            None            None         None    No
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 New York Tax-Free Bond Fund    None         None            None            None            None            None         None    No
------------------------------------------------------------------------------------------------------------------------------------
 New York Tax-Free Money        None         None            None            None            None            None         None    No
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 Personal Strategy Balanced     None         None            None            None            None            None         None    No
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 Personal Strategy Balanced     None         None            None            None            None            None         None    No
 Portfolio
------------------------------------------------------------------------------------------------------------------------------------
 Personal Strategy Growth       None         None            None            None            None            None         None    No
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 Personal Strategy Income       None         None            None            None            None            None         None    No
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 Prime Reserve Fund          $1-$10,000      None       over $100,000        None         $1-$10,000   $50,001-$100,0$10,001-$50,0No

------------------------------------------------------------------------------------------------------------------------------------
 Prime Reserve Fund-PLUS        None         None            None            None            None            None           None
 Class
------------------------------------------------------------------------------------------------------------------------------------
 Prime Reserve Portfolio        None         None            None            None            None            None           None
------------------------------------------------------------------------------------------------------------------------------------
 Real Estate Fund               None         None            None            None            None            None           None
------------------------------------------------------------------------------------------------------------------------------------
 Reserve Investment Fund        None         None            None            None            None            None           None
------------------------------------------------------------------------------------------------------------------------------------
 Science & Technology Fund      None    over $100,000        None            None            None       $10,001-$50,000     No$10,00
------------------------------------------------------------------------------------------------------------------------------------
 Science & Technology           None         None            None            None            None            None           None
 Fund-Advisor Class
------------------------------------------------------------------------------------------------------------------------------------
 Short-Term Bond Fund           None         None            None      $50,001-$100,000      None            None           over
                                                                                                                          $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Small-Cap Stock Fund           None         None         $1-$10,000    $10,001-$50,000      None            None           No$10,00

------------------------------------------------------------------------------------------------------------------------------------
 Small-Cap Stock                None         None            None            None            None            None           None
 Fund-Advisor Class
------------------------------------------------------------------------------------------------------------------------------------
 Small-Cap Value Fund           None         None            None            None            None            None           No$10,00

------------------------------------------------------------------------------------------------------------------------------------
 Small-Cap Value                None         None            None            None            None            None           None
 Fund-Advisor Class
------------------------------------------------------------------------------------------------------------------------------------
 Spectrum Growth Fund           None         None            None            None            None       over $100,000       None

------------------------------------------------------------------------------------------------------------------------------------
 Spectrum Income Fund           None         None            None            None            None            None           None
------------------------------------------------------------------------------------------------------------------------------------
 Spectrum International Fund    None         None            None            None            None       $10,001-$50,000     None
------------------------------------------------------------------------------------------------------------------------------------
 Summit Cash Reserves Fund      None         None            None       over $100,000        None            None           over
                                                                                                                          $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Summit GNMA Fund               None         None            None            None            None            None           None
------------------------------------------------------------------------------------------------------------------------------------
 Summit Municipal Income        None         None            None            None            None            None           over
 Fund                                                                                                                     $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Summit Municipal               None         None            None            None            None            None           over
 Intermediate Fund                                                                                                        $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Summit Municipal Money         None         None            None            None            None      $50,001-$100,000     None
 Market Fund
------------------------------------------------------------------------------------------------------------------------------------
 Tax-Efficient Balanced Fund    None         None            None      $50,001-$100,000      None            None           None
------------------------------------------------------------------------------------------------------------------------------------
 Tax-Efficient Growth Fund      None         None            None       $10,001-$50,000      None            None           None
------------------------------------------------------------------------------------------------------------------------------------
 Tax-Efficient Multi-Cap        None         None            None            None            None            None           None
 Growth Fund
------------------------------------------------------------------------------------------------------------------------------------
 Tax-Exempt Money Fund          None         None            None            None            None            None           over
                                                                                                                          $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Tax-Exempt Money Fund-PLUS     None         None            None            None            None            None           None
 Class
------------------------------------------------------------------------------------------------------------------------------------
 Tax-Free High Yield Fund       None         None            None            None            None            None           over
                                                                                                                          $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Tax-Free Income Fund           None         None            None            None            None            None           over
                                                                                                                          $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Tax-Free Intermediate Bond     None         None            None            None            None            None           None
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 Tax-Free Short-Intermediate    None         None            None            None            None            None           None
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 Total Equity Market Index      None         None            None            None            None            None           None
 Fund
------------------------------------------------------------------------------------------------------------------------------------
 U.S. Bond Index Fund           None         None            None            None            None            None           None
------------------------------------------------------------------------------------------------------------------------------------
 U.S. Treasury Intermediate     None         None       over $100,000        None            None            None           over
 Fund                                                                                                                     $100,000
------------------------------------------------------------------------------------------------------------------------------------
 U.S. Treasury Long-Term        None         None            None            None            None            None           over
 Fund                                                                                                                     $100,000
------------------------------------------------------------------------------------------------------------------------------------
 U.S. Treasury Money Fund       None         None            None            None            None            None           over
                                                                                                                          $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Value Fund                     None         None       $10,001-$50,000      None            None      $50,001-$100,000     over
                                                                                                                          $100,000
------------------------------------------------------------------------------------------------------------------------------------
 Value Fund-Advisor Class       None         None            None            None            None            None           None
------------------------------------------------------------------------------------------------------------------------------------
 Virginia Tax-Free Bond Fund    None         None            None            None            None            None           None
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>





                                       57

<PAGE>



                                       58

<PAGE>



                                       59

<PAGE>



                                       60

<PAGE>



                                       61

<PAGE>

<TABLE>
<CAPTION>
                            Kennedy           Reynolds          Riepe            Testa
--------------------------------------------------------------------------------------------
<S>                     <C>               <C>               <C>            <C>
 Aggregate Holdings,
 -------------------
      All Funds          over $100,000     over $100,000    over $100,000   over $100,000
      ---------
--------------------------------------------------------------------------------------------
 Balanced Fund                None              None        over $100,000        None
--------------------------------------------------------------------------------------------
 Blue Chip Growth Fund        None              None            None             None
--------------------------------------------------------------------------------------------
 Blue Chip Growth             None              None            None             None
 Fund-Advisor Class
--------------------------------------------------------------------------------------------
 Blue Chip Growth             None              None            None             None
 Portfolio
--------------------------------------------------------------------------------------------
 California Tax-Free          None              None            None             None
 Bond Fund
--------------------------------------------------------------------------------------------
 California Tax-Free          None              None            None             None
 Money Fund
--------------------------------------------------------------------------------------------
 Capital Appreciation    over $100,000          None        over $100,000        None
 Fund
--------------------------------------------------------------------------------------------
 Capital Opportunity    $10,001-$50,000         None            None             None
 Fund
--------------------------------------------------------------------------------------------
 Corporate Income Fund        None              None            None             None
--------------------------------------------------------------------------------------------
 Developing                   None              None            None             None
 Technologies Fund
--------------------------------------------------------------------------------------------
 Diversified Small-Cap        None              None            None             None
 Growth Fund
--------------------------------------------------------------------------------------------
 Dividend Growth Fund    over $100,000          None            None             None
--------------------------------------------------------------------------------------------
 Emerging Europe &            None              None            None             None
 Mediterranean Fund
--------------------------------------------------------------------------------------------
 Emerging Markets Bond        None              None            None             None
 Fund
--------------------------------------------------------------------------------------------
 Emerging Markets             None              None            None         over $100,000
 Stock Fund
--------------------------------------------------------------------------------------------
 Equity Income Fund     $10,001-$50,000   $50,001-$100,000  over $100,000        None
--------------------------------------------------------------------------------------------
 Equity Income                None              None            None             None
 Fund-Advisor Class
--------------------------------------------------------------------------------------------
 Equity Income                None              None            None             None
 Portfolio
--------------------------------------------------------------------------------------------
 Equity Index 500 Fund        None              None            None             None
--------------------------------------------------------------------------------------------
 Equity Index 500             None              None            None             None
 Portfolio
--------------------------------------------------------------------------------------------
 European Stock Fund          None              None            None             None
--------------------------------------------------------------------------------------------
 Extended Equity              None              None            None             None
 Market Index Fund
--------------------------------------------------------------------------------------------
 Financial Services      over $100,000          None            None             None
 Fund
--------------------------------------------------------------------------------------------
 Florida Intermediate         None              None            None             None
 Tax-Free Fund
--------------------------------------------------------------------------------------------
 Georgia Tax-Free Bond        None              None            None             None
 Fund
--------------------------------------------------------------------------------------------
 Global Stock Fund            None              None            None             None
--------------------------------------------------------------------------------------------
 Global Technology            None              None            None             None
 Fund
--------------------------------------------------------------------------------------------
 GNMA Fund                    None         over $100,000        None             None
--------------------------------------------------------------------------------------------
 Government Reserve           None              None            None             None
 Investment Fund
--------------------------------------------------------------------------------------------
 Growth & Income Fund         None              None        over $100,000        None
--------------------------------------------------------------------------------------------
 Growth Stock Fund            None              None            None             None
--------------------------------------------------------------------------------------------
 Growth Stock                 None              None            None             None
 Fund-Advisor Class
--------------------------------------------------------------------------------------------
 Health Sciences Fund    over $100,000     over $100,000        None         over $100,000
--------------------------------------------------------------------------------------------
 Health Sciences              None              None            None             None
 Portfolio
--------------------------------------------------------------------------------------------
 High Yield Fund              None              None        over $100,000        None
--------------------------------------------------------------------------------------------
 High Yield                   None              None            None             None
 Fund-Advisor Class
--------------------------------------------------------------------------------------------
 Institutional Foreign        None              None            None             None
 Equity Fund
--------------------------------------------------------------------------------------------
 Institutional                None              None            None             None
 Large-Cap Growth Fund
--------------------------------------------------------------------------------------------
 Institutional                None              None            None             None
 Large-Cap Value Fund
--------------------------------------------------------------------------------------------
 Institutional Mid-Cap        None              None            None             None
 Equity Growth Fund
--------------------------------------------------------------------------------------------
 Institutional                None              None            None             None
 Small-Cap Stock Fund
--------------------------------------------------------------------------------------------
 International Bond           None           $1-$10,000         None             None
 Fund
--------------------------------------------------------------------------------------------
 International Bond           None              None            None             None
 Fund-Advisor Class
--------------------------------------------------------------------------------------------
 International          $50,001-$100,000        None         $1-$10,000      over $100,000
 Discovery Fund
--------------------------------------------------------------------------------------------
 International Equity         None              None            None             None
 Index Fund
--------------------------------------------------------------------------------------------
 International Growth         None              None            None             None
 & Income Fund
--------------------------------------------------------------------------------------------
 International Stock     over $100,000          None        over $100,000    over $100,000
 Fund
--------------------------------------------------------------------------------------------
 International Stock          None              None            None             None
 Fund-Advisor Class
--------------------------------------------------------------------------------------------
 International Stock          None              None            None             None
 Portfolio
--------------------------------------------------------------------------------------------
 Japan Fund                   None              None        over $100,000        None
--------------------------------------------------------------------------------------------
 Latin America Fund      over $100,000          None            None             None
--------------------------------------------------------------------------------------------
 Limited-Term Bond            None              None            None             None
 Portfolio
--------------------------------------------------------------------------------------------
 Maryland Short-Term          None        $50,001-$100,000      None             None
 Tax-Free Bond Fund
--------------------------------------------------------------------------------------------
 Maryland Tax-Free            None        $10,001-$50,000       None             None
 Bond Fund
--------------------------------------------------------------------------------------------
 Maryland Tax-Free            None              None            None             None
 Money Fund
--------------------------------------------------------------------------------------------
 Media &
 Telecommunications      over $100,000          None            None             None
 Fund
--------------------------------------------------------------------------------------------
 Mid-Cap Growth Fund     over $100,000          None            None         over $100,000
--------------------------------------------------------------------------------------------
 Mid-Cap Growth               None              None            None             None
 Fund-Advisor Class
--------------------------------------------------------------------------------------------
 Mid-Cap Growth               None              None            None             None
 Portfolio
--------------------------------------------------------------------------------------------
 Mid-Cap Value Fund      over $100,000          None            None             None
--------------------------------------------------------------------------------------------
 New America Growth           None              None            None             None
 Fund
--------------------------------------------------------------------------------------------
 New America Growth           None              None            None             None
 Portfolio
--------------------------------------------------------------------------------------------
 New Asia Fund           over $100,000          None         $1-$10,000          None
--------------------------------------------------------------------------------------------
 New Era Fund            over $100,000          None            None             None
--------------------------------------------------------------------------------------------
 New Horizons Fund            None        $50,001-$100,000      None         over $100,000
--------------------------------------------------------------------------------------------
 New Income Fund              None              None            None             None
--------------------------------------------------------------------------------------------
 New Jersey Tax-Free          None              None            None             None
 Bond Fund
--------------------------------------------------------------------------------------------
 New York Tax-Free            None              None            None             None
 Bond Fund
--------------------------------------------------------------------------------------------
 New York Tax-Free            None              None            None             None
 Money Fund
--------------------------------------------------------------------------------------------
 Personal Strategy            None              None            None             None
 Balanced Fund
--------------------------------------------------------------------------------------------
 Personal Strategy            None              None            None             None
 Balanced Portfolio
--------------------------------------------------------------------------------------------
 Personal Strategy            None              None            None             None
 Growth Fund
--------------------------------------------------------------------------------------------
 Personal Strategy            None              None            None             None
 Income Fund
--------------------------------------------------------------------------------------------
 Prime Reserve Fund      over $100,000       $1-$10,000     over $100,000   $10,001-$50,000
--------------------------------------------------------------------------------------------
 Prime Reserve                None              None            None             None
 Fund-PLUS Class
--------------------------------------------------------------------------------------------
 Prime Reserve                None              None            None             None
 Portfolio
--------------------------------------------------------------------------------------------
 Real Estate Fund             None              None            None             None
--------------------------------------------------------------------------------------------
 Reserve Investment           None              None            None             None
 Fund
--------------------------------------------------------------------------------------------
 Science & Technology         None         over $100,000    over $100,000        None
 Fund
--------------------------------------------------------------------------------------------
 Science & Technology         None              None            None             None
 Fund-Advisor Class
--------------------------------------------------------------------------------------------
 Short-Term Bond Fund         None        $50,001-$100,000  over $100,000        None
--------------------------------------------------------------------------------------------
 Small-Cap Stock Fund    over $100,000          None            None             None
--------------------------------------------------------------------------------------------
 Small-Cap Stock              None              None            None             None
 Fund-Advisor Class
--------------------------------------------------------------------------------------------
 Small-Cap Value Fund         None        $10,001-$50,000   over $100,000    over $100,000
--------------------------------------------------------------------------------------------
 Small-Cap Value              None              None            None             None
 Fund-Advisor Class
--------------------------------------------------------------------------------------------
 Spectrum Growth Fund         None              None            None             None
--------------------------------------------------------------------------------------------
 Spectrum Income Fund         None              None            None             None
--------------------------------------------------------------------------------------------
 Spectrum                     None              None            None             None
 International Fund
--------------------------------------------------------------------------------------------
 Summit Cash Reserves    over $100,000          None        over $100,000    over $100,000
 Fund
--------------------------------------------------------------------------------------------
 Summit GNMA Fund             None              None            None             None
--------------------------------------------------------------------------------------------
 Summit Municipal             None              None            None             None
 Income Fund
--------------------------------------------------------------------------------------------
 Summit Municipal             None              None            None         over $100,000
 Intermediate Fund
--------------------------------------------------------------------------------------------
 Summit Municipal        over $100,000     over $100,000    over $100,000        None
 Money Market Fund
--------------------------------------------------------------------------------------------
 Tax-Efficient                None              None            None             None
 Balanced Fund
--------------------------------------------------------------------------------------------
 Tax-Efficient Growth         None              None            None             None
 Fund
--------------------------------------------------------------------------------------------
 Tax-Efficient                None              None            None             None
 Multi-Cap Growth Fund
--------------------------------------------------------------------------------------------
 Tax-Exempt Money Fund   over $100,000     over $100,000        None             None
--------------------------------------------------------------------------------------------
 Tax-Exempt Money             None              None            None             None
 Fund-PLUS Class
--------------------------------------------------------------------------------------------
 Tax-Free High Yield          None              None            None             None
 Fund
--------------------------------------------------------------------------------------------
 Tax-Free Income Fund         None              None            None        $10,001-$50,000
--------------------------------------------------------------------------------------------
 Tax-Free Intermediate        None              None            None             None
 Bond Fund
--------------------------------------------------------------------------------------------
 Tax-Free
 Short-Intermediate           None           $1-$10,000     over $100,000        None
 Fund
--------------------------------------------------------------------------------------------
 Total Equity Market          None              None        over $100,000        None
 Index Fund
--------------------------------------------------------------------------------------------
 U.S. Bond Index Fund         None              None            None             None
--------------------------------------------------------------------------------------------
 U.S. Treasury                None         over $100,000        None             None
 Intermediate Fund
--------------------------------------------------------------------------------------------
 U.S. Treasury                None              None            None             None
 Long-Term Fund
--------------------------------------------------------------------------------------------
 U.S. Treasury Money          None              None            None             None
 Fund
--------------------------------------------------------------------------------------------
 Value Fund              over $100,000    $10,001-$50,000   over $100,000    over $100,000
--------------------------------------------------------------------------------------------
 Value Fund-Advisor           None              None            None             None
 Class
--------------------------------------------------------------------------------------------
 Virginia Tax-Free            None              None            None             None
 Bond Fund
--------------------------------------------------------------------------------------------
</TABLE>





                                       62

<PAGE>



                                       63

<PAGE>

 PRINCIPAL HOLDERS OF SECURITIES
 -------------------------------------------------------------------------------

   As of July 31, 2002, the officers and directors of the fund, as a group,
   owned less than 1% of the outstanding shares of the fund.

   As of July 31, 2002, the following shareholders of record owned more than 5%
   of the outstanding shares of the fund:

   New York Tax-Free Money Fund (8.96%): 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 (12.05%): TRP Finance, Inc., 802 West Street,
   Suite 301, Wilmington, Delaware 19801-1526.

   Tax-Exempt Money Fund-PLUS Class (100.0%): Pershing Division of DLJ
   Securities Corporation for exclusive benefit of TRP Money Fund Customer
   Accounts, 1 Pershing Plaza, Jersey City, New Jersey 07399-0002.

   Tax-Free Short-Intermediate Fund (5.09%): Charles Schwab & Co., Inc.,
   Reinvest Account, Attn.: Mutual Fund Department, 101 Montgomery Street, San
   Francisco, California 94104-4122.



                                       64

<PAGE>

 INVESTMENT MANAGEMENT SERVICES
 -------------------------------------------------------------------------------
   Services
   Under the Management Agreement, T. Rowe Price provides the fund with
   discretionary investment services. Specifically, T. Rowe Price is responsible
   for supervising and directing the investments of the fund in accordance with
   the fund's investment objectives, program, and restrictions as provided in
   its prospectus and this Statement of Additional Information. T. Rowe Price is
   also responsible for effecting all security transactions on behalf of the
   fund, including the negotiation of commissions and the allocation of

   principal business and portfolio brokerage. . In addition to these services,
   T. Rowe Price provides the fund with certain corporate administrative
   services, including: 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 agent's activities; and permitting T. Rowe Price's employees to serve
   as officers, directors, and committee members of the fund without cost to the
   fund.

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

   Approval of Management Agreements
   The Management Agreements of the funds are reviewed each year by the funds'
   Boards of Directors to determine whether the agreements should be renewed for
   a one-year period or not. Renewal of the agreements requires the majority
   vote of the Board of Directors, including a majority of the independent
   directors. Each fund Board consists of a majority of independent directors.

   In approving the continuation of the investment management agreements for
   each fund for the current year, the Board reviewed reports prepared by T.
   Rowe Price, materials provided by fund counsel and counsel to the independent
   directors, as well as other information. The Board considered the nature and
   quality of the investment management services provided to the fund by T. Rowe
   Price under the investment management agreements and the personnel who
   provide these services, including the historical performance of the fund
   compared to its benchmark index and its peer group of similar investment
   companies. In addition, the Board considered other services provided to the
   fund by T. Rowe Price and its affiliates, such as administrative services,
   shareholder services, fund accounting, assistance in meeting legal and
   regulatory requirements, and other services necessary for the fund's
   operation.

   The Board considered the fees paid to T. Rowe Price for investment management
   services, as well as compensation paid to T. Rowe Price or its affiliates for
   other non-advisory services provided to the fund. In connection with its
   review of the fees paid to T. Rowe Price and its affiliates, the Board
   reviewed information provided by Lipper Inc. comparing the fund's advisory
   fee rate and overall expense ratio with those of comparable funds. Where
   applicable, the Board considered that the fund's advisory fee structure
   reflects breakpoints, which permit fee reductions resulting from economies of
   scale. Additionally and where applicable, the Board considered the
   contractual fee waivers and expense reimbursements agreed to by T. Rowe
   Price.

   The Board also considered the costs incurred and the benefits received by T.
   Rowe Price and its affiliates, including the profitability of T. Rowe Price
   from providing advisory services to the fund. In reviewing data concerning
   the profitability of T. Rowe Price, the Board examined, among other
   components, the cost allocation methodology utilized in the presentation. In
   addition, the Board considered other potential benefits to T. Rowe Price,
   such as the research services T. Rowe Price receives from brokers in return
   for allocating fund brokerage in a "soft dollar" arrangement.

   Based on the information reviewed and the discussions, the Board concluded
   that it was satisfied with the nature and quality of the services provided by
   T. Rowe Price to the fund and that the management fee rate was


                                       65

<PAGE>

   reasonable in relation to such services. The independent directors of the
   fund were assisted by independent legal counsel in their deliberations.

   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 Funds' 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 fund's prospectus as of the close of business on the
   previous business day on which the fund was open for business.

   The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund Fee
   accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
   Accrual for any particular day is computed by multiplying the fraction of one
   (1) over the number of calendar days in the year by the individual Fund Fee
   Rate and multiplying this product by the net assets of the fund for that day,
   as determined in accordance with the fund's prospectus as of the close of
   business on the previous business day on which the fund was open for

   business. The individual fund fees  are listed in the following table:

<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 Short-Term Tax-Free Bond Fund        0.10
Maryland Tax-Free Bond Fund                   0.10
Maryland Tax-Free Money 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
Tax-Efficient Balanced Fund                   0.20
Tax-Efficient Growth Fund                     0.30
Tax-Efficient Multi-Cap Growth Fund           0.35
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>





                                       66

<PAGE>

   The following table sets forth the total management fees, if any, paid to T.
   Rowe Price by each fund, during the last three fiscal years:
<TABLE>
<CAPTION>
                           Fund                                2002         2001            2000
                           ----                                ----         ----            ----
<S>                                                         <C>          <C>            <C>
California Tax-Free Bond                                    $1,026,000   $  933,000      $  932,000
California Tax-Free Money                                      330,000      351,000         344,000
Florida Intermediate Tax-Free                                  351,000      313,000         352,000
Georgia Tax-Free Bond                                          305,000      215,000         191,000
Maryland Short-Term Tax-Free Bond                              561,000      485,000         532,000
Maryland Tax-Free Bond                                       4,898,000    4,289,000       4,357,000
Maryland Tax-Free Money                                         29,000            0(a)            0(a)
New Jersey Tax-Free Bond                                       532,000      464,000         506,000
New York Tax-Free Bond                                         884,000      795,000         863,000
New York Tax-Free Money                                        423,000      418,000         384,000
Virginia Tax-Free Bond                                       1,442,000    1,179,000       1,171,000
Tax-Efficient Balanced                                         267,000      252,000         200,000
Tax-Efficient Growth                                           489,000      556,000         192,000
Tax-Efficient Multi-Cap Growth                                  17,000            0               0
Tax-Exempt Money*                                            3,197,000    2,937,000       2,774,000
Tax-Free High Yield                                          6,882,000    6,644,000       7,823,000
Tax-Free Income                                              6,701,000    6,275,000       6,600,000
Tax-Free Intermediate Bond                                     473,000      417,000         455,000
Tax-Free Short-Intermediate                                  1,821,000    1,645,000       1,811,000
-------------------------------------------------------------------------------------------------------
</TABLE>


  (a) Prior to commencement of operations.

  *  The fund has two classes of shares. The management fee is allocated to
     each class based on relative net assets.


                           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.

   Expense Limitations and Reimbursements
   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 (other than interest, taxes, brokerage, and other expenditures that
   are capitalized in accordance with generally accepted accounting principles
   and extraordinary expenses) which would cause the fund's ratio of expenses to
   average net assets to exceed the indicated percentage limitation. (The
   expense limitation for the Advisor Class relates to operating expenses other
   than management fees and certain other portfolio level expenses such as fees
   for custody, outside directors, and auditors.) 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.


                                       67

<PAGE>


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


<TABLE>
<CAPTION>
                                                      Expense       Reimbursement
           Fund                Limitation Period       Ratio            Date
           ----                -----------------     Limitation         ----
---------------------------------------------------------------
                                                     -------------------------------
<S>                          <S>                     <C>         <S>
California Tax-Free Money    March 1, 2001 -
(a)                          February 28, 2003         0.55%     February 28, 2005
                             March 1, 2001 -
Georgia Tax-Free Bond (b)    February 28, 2003         0.65%     February 28, 2005
Maryland Short-Term          March 1, 2001 -
Tax-Free Bond                February 28, 2003         0.60%     February 28, 2005
                             March 30, 2001 -
Maryland Tax-Free Money      February 28, 2003         0.55%     February 28, 2005
                             March 1, 2001 -
New York Tax-Free Money (c)  February 28, 2003         0.55%     February 28, 2005
Tax-Efficient Multi-Cap      March 1, 2002 -
Growth (d)                   February 28, 2004         1.25%     February 28, 2006
Tax-Free Income              September 30, 2002 -      0.90%     June 30, 2006
Fund-Advisor Class           June 30, 2004
------------------------------------------------------------------------------------
</TABLE>



 (a) The California Tax-Free Money Fund previously operated under a 0.55%
   limitation that expired February 28, 2001. The reimbursement period for
   this limitation extends through February 28, 2003.

 (b) The Georgia Tax-Free Bond Fund previously operated under a 0.65%
   limitation that expired February 28, 2001. The reimbursement period for
   this limitation extends through February 28, 2003.

 (c) The New York Tax-Free Money Fund previously operated under a 0.55%
   limitation that expired February 28, 2001. The reimbursement period for
   this limitation extends through February 28, 2003.

 (d) The Tax-Efficient Multi-Cap Growth Fund previously operated under a
   1.25% limitation that expired February 28, 2002. The reimbursement
   period for this limitation extends through February 28, 2004.

   California Tax-Free Money Fund

   Pursuant to the present expense limitation, $81,000 of management fees were
   not accrued by the fund for the year ended February 28, 2002. Additionally,
   $158,000 of unaccrued management fees remain subject to reimbursement through
   February 28, 2003, and $81,000 through February 28, 2005.

   Georgia Tax-Free Bond Fund

   Pursuant to the present expense limitation, $10,000 of management fees were
   not accrued by the fund for the year ended February 28, 2002. Additionally,
   unaccrued fees in the amount of $115,000 remain subject to reimbursement by
   the fund through February 28, 2005.

   Maryland Short-Term Tax-Free Bond Fund

   Pursuant to the present and previous expense limitation, $3,000 of previously
   unaccrued management fees were accrued as expenses by the fund during the
   year ended February 28, 2002.

   Maryland Tax-Free Money Fund

   Pursuant to the present expense limitation, $93,000 of management fees were
   not accrued by the fund for the period ended February 28, 2002.

   New York Tax-Free Money Fund

   Pursuant to the present expense limitation, $63,000 of management fees were
   not accrued for the year ended February 28, 2002. Additionally, $130,000 of
   unaccrued management fees remain subject to reimbursement through February
   28, 2003, and $63,000 through February 28, 2005.

   Tax-Efficient Multi-Cap Growth Fund

   Pursuant to the present expense limitation, $97,000 of management fees were
   not accrued by the fund for the period ended February 28, 2002. Additionally,
   $137,000 of unaccrued fees and other expenses remain subject to reimbursement
   through February 29, 2004.


                                       68

<PAGE>

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

   The funds paid the expenses shown in the following table for the fiscal year
   ended February 28, 2002, to T. Rowe Price and its affiliates.


<TABLE>
<CAPTION>
               Fund                  Transfer Agent and       Accounting
               ----                 Shareholder Services       Services
                                    --------------------       --------
<S>                                 <C>                    <C>
California Tax-Free Bond                  $111,000             $ 64,000
California Tax-Free Money                   61,000               64,000
Florida Intermediate Tax-Free               43,000               64,000
Georgia Tax-Free Bond                       41,000               64,000
Maryland Short-Term Tax-Free Bond           66,000               64,000
Maryland Tax-Free Bond                     487,000               84,000
Maryland Tax-Free Money                     17,000               59,000
New Jersey Tax-Free Bond                    72,000               64,000
New York Tax-Free Bond                     114,000               64,000
New York Tax-Free Money                     57,000               64,000
Virginia Tax-Free Bond                     163,000               64,000
Tax-Efficient Balanced                      43,000               84,000
Tax-Efficient Growth                       135,000               64,000
Tax-Efficient Multi-Cap Growth              36,000               64,000
Tax-Exempt Money                           370,000               95,000
Tax-Exempt Money Fund-PLUS Class            20,000                4,000
Tax-Free High Yield                        543,000              104,000
Tax-Free Income                            584,000              104,000
Tax-Free Income Fund-Advisor Class              --                   --
Tax-Free Intermediate Bond                  94,000               64,000
Tax-Free Short-Intermediate                208,000               64,000
---------------------------------------------------------------------------
</TABLE>






 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 Maryland Tax-Free Bond Fund paid $3,467 to various
   third parties in calendar year 2001.


                                       69

<PAGE>


   The Advisor Class has adopted an Advisor Class administrative fee payment
   program ("Advisor Class AFP") under which various intermediaries, including
   intermediaries receiving 12b-1 payments, may receive payments from the
   Advisor Class in addition to 12b-1 fees for providing various recordkeeping
   and transfer agent type services to the Advisor Classes and/or shareholders
   thereof. These services include, but are not limited to: transmission of net
   purchase and redemption orders; maintenance of separate records for
   shareholders reflecting purchases, redemptions, and share balances; mailing
   of shareholder confirmations and periodic statements; and telephone services
   in connection with the above.

   Control of Investment Advisor
   T. Rowe Price Group, Inc., ("Group") owns 100% of the stock of T. Rowe Price
   Associates, Inc. Group was formed in 2000 as a holding company for the T.
   Rowe Price affiliated companies.




 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 for all T. Rowe
   Price mutual funds on a continuous basis. 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.

   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 Price funds, 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 of prospectuses
   and reports to shareholders; and issuing shares, including expenses of
   confirming purchase orders.

   The Underwriting Agreement also 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 for each fund, except for
   those fees and expenses specifically assumed by the fund. Investment
   Services' expenses are paid by T. Rowe Price.

   Investment Services acts as the agent of the fund, in connection with the
   sale of fund 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. No compensation is paid to Investment
   Services.


   Tax-Free Income Fund-Advisor Class


                   Distribution and Shareholder Services Plan

   The fund Directors have adopted a Plan under Rule 12b-1 with respect to each
   Advisor Class ("Class"). Each Plan provides that the Class may compensate
   Investment Services, or such other persons as the fund or Investment Services
   designates, to finance any or all of the distribution, shareholder servicing,
   maintenance of shareholder accounts, and/or other administrative services
   with respect to Class shares. It is expected that most, if not all, payments
   under the Plan will be made (either directly, or indirectly through
   Investment Services) to brokers, dealers, banks, insurance companies, and
   intermediaries other than Investment Services. Under the Plan, each Advisor
   Class pays a fee at the annual rate of up to 0.25% of that class's average
   daily net assets. Normally, the full amount of the fee is paid to the
   intermediary on shares sold through that intermediary. However, a lesser
   amount may be paid based on the level of services provided. Intermediaries
   may use the payments for, among other purposes, compensating employees
   engaged in sales and/or shareholder servicing of the Class, as well as for a
   wide variety of other purposes associated with supporting, distributing, and
   servicing Class shares. The amount of fees paid by a Class during any year
   may be more or less than the cost of distribution and other services provided
   to the Class and its investors. NASD rules limit



                                       70

<PAGE>


   the amount of annual distribution and service fees that may be paid by a
   mutual fund and impose a ceiling on the cumulative distribution fees paid.
   The Plan complies with these rules.

   The Plan requires that Investment Services provide, or cause to be provided,
   a quarterly written report identifying the amounts expended by each Class and
   the purposes for which such expenditures were made, to the fund Directors for
   their review.

   Prior to approving the Plan, the fund considered various factors relating to
   the implementation of the Plan and determined that there is a reasonable
   likelihood that the Plan will benefit each fund, its Class, and the Class's
   shareholders. The fund Directors noted that, to the extent the Plan allows a
   fund to sell Class shares in markets to which it would not otherwise have
   access, the Plan may result in additional sales of fund shares. This may
   enable a fund to achieve economies of scale that could reduce expenses. In
   addition, certain ongoing shareholder services may be provided more
   effectively by intermediaries with which shareholders have an existing
   relationship.

   The Plan is renewable from year to year with respect to each fund, so long as
   its continuance is approved at least annually (1) by the vote of a majority
   of the fund Directors and (2) by a vote of the majority of the fund's
   independent directors ("Rule 12b-1 Directors"), cast in person at a meeting
   called for the purpose of voting on such approval. The Plan may not be
   amended to increase materially the amount of fees paid by any Class
   thereunder unless such amendment is approved by a majority vote of the
   outstanding shares of such Class and by the fund Directors in the manner
   prescribed by Rule 12b-1 under the 1940 Act. The Plan is terminable with
   respect to a Class at any time by a vote of a majority of the Rule 12b-1
   Directors or by a majority vote of the outstanding shares in the Class.



 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 Funds

   The fund has entered into a Custodian Agreement with JPMorgan Chase Bank,
   London, pursuant to which portfolio securities which are purchased outside
   the United States are maintained in the custody of various foreign branches
   of JPMorgan Chase 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 JPMorgan Chase Bank, London
   is Woolgate House, Coleman Street, London, EC2P 2HD, England.



 CODE OF ETHICS
 -------------------------------------------------------------------------------
   The fund, its investment adviser (T. Rowe Price), and its principal
   underwriter (T. Rowe Price Investment Services), have a written Code of
   Ethics which requires persons with access to investment information ("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


                                       71

<PAGE>

   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.



 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
   and the use of affiliates to assist in routing orders for execution.

   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 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 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 favorable security prices through responsible
   brokers and dealers, and in the case of agency transactions, at competitive
   commission rates. However, under certain conditions, higher brokerage
   commissions may be paid in return for brokerage and research services. As a
   general practice, over-the-counter orders are executed with market-makers or
   on an agency basis through an electronic communications network. 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 brokers and 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 ask
   prices. Securities may also be purchased from underwriters at prices which
   include underwriting fees.

   Equity and Fixed-Income Securities
   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 clients. In evaluating the reasonableness of commission rates,
   T. Rowe Price considers: (a) historical commission rates; (b) rates which
   other institutional investors are


                                       72

<PAGE>

   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 and dollar amount; (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.


       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. 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. In addition, such services may include computers and related
   hardware.

   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 is relieved of expenses which it might
   otherwise bear.

   Subject to its policy on directed brokerage (see below), 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. Therefore, research may not necessarily
   benefit all accounts paying commissions to such brokers. Accordingly, while
   T. Rowe Price cannot readily determine the extent to which commission rates
   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 fund participates. Such research is used to benefit the accounts
   that purchase in the offering.


                                       73

<PAGE>

                         Internal Allocation Procedures

   T. Rowe Price has a policy of not precommitting a specific amount of business
   to any broker or dealer over any specific time period. Historically, the
   majority of brokerage placement has been determined by the needs of a
   specific transaction such as market-making, availability of a buyer or seller
   of a particular security, or specialized execution skills. However, T. Rowe
   Price does have an internal brokerage allocation procedure for that portion
   of its discretionary client brokerage business where special needs do not
   exist, or where the business may be allocated among several brokers or
   dealers, which are able to meet the needs of the transaction.

   Each year, T. Rowe Price assesses the contribution of the brokerage and
   research services provided by brokers or dealers and attempts to allocate a
   portion of its brokerage business in response to these assessments. Research
   analysts, counselors, various investment committees, and the Trading
   Department each seek to evaluate the brokerage and research services they
   receive from brokers or dealers and make judgments as to the level of
   business which would recognize such services. In addition, brokers or dealers
   sometimes suggest a level of business they would like to receive in return
   for the various brokerage and research services they provide. Actual business
   received by any firm may be less than the suggested allocations but can, and
   often does, exceed the suggestions because the total business is allocated on
   the basis of all the considerations described above. In no case is a broker
   or dealer excluded from receiving business from T. Rowe Price because it has
   not been identified as providing research services.


                                  Miscellaneous

   T. Rowe Price's brokerage allocation policy is generally 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 make recommendations which
   result in clients 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 may include the T. Rowe Price
   Associates Foundation, Inc., a not for profit entity, in aggregated orders
   from time to time.

   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.


                                       74

<PAGE>

                            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 relative sizes of the participating client portfolios or the
   relative sizes of the participating client orders depending upon the market
   involved. 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 recognize the efforts of a
   portfolio manager in negotiating a transaction or a private placement; (ii)
   reallocations to eliminate de minimis positions; (iii) priority for accounts
   with specialized investment policies and objectives; and (iv) reallocations
   in light of a participating portfolio's characteristics (e.g., available
   cash, industry or issuer concentration, duration, and credit exposure). Also
   with respect to private placement transactions, conditions imposed by the
   issuer may limit availability of allocations to client accounts.

   Price Associates may give advice and take action for clients, including
   investment companies, which differs from advice given or the timing or nature
   of action taken for other clients. Price Associates is not obligated to
   initiate transactions for clients in any security which its principals,
   affiliates, or employees may purchase or sell for their own accounts or for
   other clients.


                                      Other

   The funds engaged in portfolio transactions involving broker-dealers in the
   following amounts for the last three fiscal years:
<TABLE>
<CAPTION>
                      Fund                             2002             2001                2000
                      ----                             ----             ----                ----
<S>                                               <C>             <C>                <C>
California Tax-Free Bond                          $  494,734,000  $  459,046,000      $  399,657,000
California Tax-Free Money                            516,698,000     677,594,000         529,005,000
Florida Intermediate Tax-Free                        103,015,000      98,485,000         164,457,000
Georgia Tax-Free Bond                                113,941,000     103,982,000         128,761,000
Maryland Short-Term Tax-Free Bond                    168,989,000     150,645,000         208,764,000
Maryland Tax-Free Bond                               921,460,000     779,048,000       1,074,813,000
Maryland Tax-Free Money                              116,628,000               0(a)                0(a)
New Jersey Tax-Free Bond                             103,834,000     159,392,000         246,768,000
New York Tax-Free Bond                               383,560,000     308,411,000         557,693,000
New York Tax-Free Money                              665,636,000     904,946,000         445,916,000
Virginia Tax-Free Bond                               647,309,000     489,320,000         501,953,000
Tax-Efficient Balanced                                42,225,000      61,193,000          35,978,000
Tax-Efficient Growth                                  13,767,000      40,132,000         190,748,000
Tax-Efficient Multi-Cap Growth                        11,063,000      35,230,000                   0(a)
Tax-Exempt Money                                   4,807,614,000   4,839,094,000       3,074,940,000
Tax-Free High Yield                                1,736,425,000   1,058,439,000       2,863,124,000
Tax-Free Income                                    2,241,571,000   1,825,401,000       2,483,560,000
Tax-Free Intermediate Bond                           194,273,000     127,542,000         233,442,000
Tax-Free Short-Intermediate                          698,303,000     698,823,000         940,315,000
--------------------------------------------------------------------------------------------------------
</TABLE>


  (a) Prior to commencement of operations.


                                       75

<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 last three fiscal years:
<TABLE>
<CAPTION>
                    Fund                            2002             2001                2000
                    ----                            ----             ----                ----
<S>                                            <C>             <C>                <C>
California Tax-Free Bond                       $  430,967,000  $  417,308,000      $  363,741,000
California Tax-Free Money                         511,698,000     677,594,000         529,005,000
Florida Intermediate Tax-Free                      98,056,000      92,630,000         157,690,000
Georgia Tax-Free Bond                             101,256,000      87,139,000         111,145,000
Maryland Short-Term Tax-Free Bond                 159,538,000     149,661,000         202,708,000
Maryland Tax-Free Bond                            764,835,000     696,091,000         936,693,000
Maryland Tax-Free Money                           117,628,000               0(a)                0(a)
New Jersey Tax-Free Bond                           80,220,000     141,212,000         210,964,000
New York Tax-Free Bond                            332,920,000     271,121,000         509,250,000
New York Tax-Free Money                           664,625,000     904,946,000         445,916,000
Virginia Tax-Free Bond                            556,184,000     461,343,000         453,295,000
Tax-Efficient Balanced                             28,379,000      58,469,000          27,426,000
Tax-Efficient Growth                                        0          86,000         108,589,000
Tax-Efficient Multi-Cap Growth                         20,000      19,456,000                   0(a)
Tax-Exempt Money                                4,798,542,000   4,839,094,000       3,074,134,000
Tax-Free High Yield                             1,483,958,000     980,494,000       2,557,197,000
Tax-Free Income                                 2,001,031,000   1,363,127,000       2,190,578,000
Tax-Free Intermediate Bond                        176,754,000     124,042,000         221,818,000
Tax-Free Short-Intermediate                       655,605,000     641,617,000         917,005,000
-----------------------------------------------------------------------------------------------------
</TABLE>


  (a) Prior to commencement of operations.

   The following amounts involved trades with brokers acting as agents or
   underwriters for the last three fiscal years:
<TABLE>
<CAPTION>
                   Fund                          2002           2001              2000
                   ----                          ----           ----              ----
<S>                                          <C>           <C>              <C>
California Tax-Free Bond                     $ 63,767,000  $ 41,738,000      $ 35,916,000
California Tax-Free Money                       5,000,000             0                 0
Florida Intermediate Tax-Free                   4,959,000     5,855,000         6,767,000
Georgia Tax-Free Bond                          12,685,000    16,843,000        17,616,000
Maryland Short-Term Tax-Free Bond               9,451,000       984,000         6,056,000
Maryland Tax-Free Bond                        156,625,000    82,957,000       138,120,000
Maryland Tax-Free Money                         1,000,000             0(a)              0(a)
New Jersey Tax-Free Bond                       23,614,000    18,180,000        35,804,000
New York Tax-Free Bond                         50,640,000    37,290,000        48,443,000
New York Tax-Free Money                         1,011,000             0                 0
Virginia Tax-Free Bond                         91,125,000    27,976,000        48,658,000
Tax-Efficient Balanced                         13,846,000     2,723,000         8,552,000
Tax-Efficient Growth                           13,767,000    40,046,000        82,159,000
Tax-Efficient Multi-Cap Growth                 11,043,000    15,774,000                 0(a)
Tax-Exempt Money                                9,072,000             0           806,000
Tax-Free High Yield                           252,467,000    77,945,000       305,927,000
Tax-Free Income                               240,540,000   462,274,000       292,982,000
Tax-Free Intermediate Bond                     17,519,000     3,499,000        11,624,000
Tax-Free Short-Intermediate                    42,698,000    57,206,000        23,310,000
---------------------------------------------------------------------------------------------
</TABLE>




                                       76

<PAGE>

  (a) Prior to commencement of operations.

   The following chart shows the total commissions, including discounts received
   in connection with underwritings received by brokers acting as agents or
   underwriters, in connection with portfolio transactions for the last three
   fiscal years:
<TABLE>
<CAPTION>
              Fund                    2002        2001            2000
              ----                    ----        ----            ----
<S>                                <C>          <C>          <C>
California Tax-Free Bond           $  297,000   $194,000      $  228,000
California Tax-Free Money              19,000          0               0
Florida Intermediate Tax-Free          20,000     30,000          40,000
Georgia Tax-Free Bond                  61,000     64,000          80,000
Maryland Short-Term Tax-Free Bond      27,000      6,000          45,000
Maryland Tax-Free Bond                484,000    333,000         660,000
Maryland Tax-Free Money                 1,000          0(a)            0(a)
New Jersey Tax-Free Bond               96,000     91,000         151,000
New York Tax-Free Bond                255,000    206,000         280,000
New York Tax-Free Money                 1,000          0               0
Virginia Tax-Free Bond                361,000    129,000         238,000
Tax-Efficient Balanced                 19,000     21,000          50,000
Tax-Efficient Growth                   11,000     22,000          41,000
Tax-Efficient Multi-Cap Growth         11,000     12,000               0(a)
Tax-Exempt Money                        4,000          0           8,000
Tax-Free High Yield                 1,586,000    658,000       2,301,000
Tax-Free Income                     1,103,000    922,000       1,409,000
Tax-Free Intermediate Bond             68,000     19,000          46,000
Tax-Free Short-Intermediate           141,000    217,000         110,000
----------------------------------------------------------------------------
</TABLE>


  (a) Prior to commencement of operations.

   The percentage of total portfolio transactions, placed with firms which
   provided research, statistical, or other services to T. Rowe Price in
   connection with the management of the funds, or in some cases, to the funds
   for the last three fiscal years are shown below:
<TABLE>
<CAPTION>
                     Fund                          2002         2001          2000
                     ----                          ----         ----          ----
<S>                                             <C>          <C>          <C>
California Tax-Free Bond                              0%        0%            0%
California Tax-Free Money                             0         0             0
Florida Intermediate Tax-Free                         0         0             0
Georgia Tax-Free Bond                                 0         0             0
Maryland Short-Term Tax-Free Bond                     0         0             0
Maryland Tax-Free Bond                                0         0             0
Maryland Tax-Free Money                               0         0(a)          0(a)
New Jersey Tax-Free Bond                              0         0             0
New York Tax-Free Bond                                0         0             0
New York Tax-Free Money                               0         0             0
Virginia Tax-Free Bond                                0         0             0
Tax-Efficient Balanced                                0         0             0
Tax-Efficient Growth                                  0         0             0
Tax-Efficient Multi-Cap Growth                     0.39         0             0(a)
Tax-Exempt Money                                      0         0             0
Tax-Free High Yield                                   0         0             0
Tax-Free Income                                       0         0             0
Tax-Free Intermediate Bond                            0         0             0
Tax-Free Short-Intermediate                           0         0             0
---------------------------------------------------------------------------------------
</TABLE>




                                       77

<PAGE>

  (a) Prior to commencement of operations.

   The portfolio turnover rate for each fund for the last three fiscal years
   are:
<TABLE>
<CAPTION>
                                 Fund                                       2002        2001          2000
                                 ----                                       ----        ----          ----
<S>                                                                      <C>         <C>          <C>
California Tax-Free Bond                                                   39.0%       37.7%         40.8%
California Tax-Free Money                                                N/A         N/A          N/A
Florida Intermediate Tax-Free                                              15.3        19.5          30.9
Georgia Tax-Free Bond                                                      32.1        33.9          48.5
Maryland Short-Term Tax-Free Bond                                          23.8        29.2          41.4
Maryland Tax-Free Bond                                                     18.5        19.3          29.2
Maryland Tax-Free Money                                                  N/A         N/A          N/A
New Jersey Tax-Free Bond                                                   17.0        24.6          50.2
New York Tax-Free Bond                                                     33.5        36.1          77.5
New York Tax-Free Money                                                  N/A         N/A          N/A
Virginia Tax-Free Bond                                                     47.1        38.1          48.1
Tax-Efficient Balanced                                                     24.3        19.1          40.0
Tax-Efficient Growth                                                        8.5        12.0          23.4(b)
Tax-Efficient Multi-Cap Growth                                             15.4        10.4(b)          0(a)
Tax-Exempt Money                                                         N/A         N/A          N/A
Tax-Free High Yield                                                        32.7        15.1          57.4
Tax-Free Income                                                            28.2        28.6          44.3
Tax-Free Intermediate Bond                                                 19.7        17.3          47.6
Tax-Free Short-Intermediate                                                30.0        40.7(c)       49.7
---------------------------------------------------------------------------------------------------------------
</TABLE>


    (a) Prior to commencement of operations.

    (b) Annualized.

    (c) Excludes the effect of the acquisition of the Virginia Short-Term
       Bond Fund assets.



 PRICING OF SECURITIES
 -------------------------------------------------------------------------------

   All funds (other than the Money Funds)

   Debt securities are generally traded in the over-the-counter market.
   Securities are valued at prices 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.



                                       78

<PAGE>


   Tax-Efficient Funds

   Equity securities listed or regularly traded on a securities exchange or in
   the over-the-counter market are valued at the last quoted sale price, or
   official closing price for certain markets, 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 are valued at the
   mean of the latest bid and ask prices for domestic securities and the last
   quoted sale price for international securities. Other equity securities are
   valued at a price within the limits of the latest bid and ask prices deemed
   by the Board of Directors, 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[, including options on futures
   contracts,] are valued at the mean of the closing bid and ask prices.
   Financial futures contracts are valued at closing settlement prices.

   Money Funds

   Securities are valued at amortized cost. Assets and liabilities for which
   such valuation procedures 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.

   All Funds

   Assets and liabilities for which the above valuation procedures are
   inappropriate or are deemed not to reflect fair value are stated at fair
   value as determined in good faith by or under the supervision of the officers
   of the fund, as authorized by the Board of Directors.


       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 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 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 determines present minimal credit risks and
       which are eligible securities as defined by Rule 2a-7; and

   (d) The Board of Directors must determine that (i) it is in the best interest
       of the fund and its shareholders to maintain a stable 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
       believes that it fairly reflects the market-based net asset value per
       share.

   Although the fund believes that it will be able to maintain its net asset
   value at $1.00 per share under most conditions, there can be no absolute
   assurance that it will be able to do so on a continuous basis. If the fund's
   net asset value per share declined, or was expected to decline, below $1.00
   (rounded to the nearest one cent), the Board of Directors of the fund might
   temporarily reduce or suspend dividend payments in an effort to maintain the
   net asset value at $1.00 per share. As a result of such reduction or
   suspension of dividends, an investor would receive less income during a given
   period than if such a reduction or suspension had not taken place. Such
   action could result in an investor receiving no dividend for the period
   during which he holds his


                                       79

<PAGE>

   shares and in his receiving, upon redemption, a price per share lower than
   that which he paid. On the other hand, if the fund's net asset value per
   share were to increase, or were anticipated to increase, above $1.00 (rounded
   to the nearest one cent), the Board of Directors of the fund might supplement
   dividends in an effort to maintain the net asset value at $1.00 per share.



 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.



 DIVIDENDS AND DISTRIBUTIONS
 -------------------------------------------------------------------------------
   Unless you elect otherwise, the fund's annual capital gain distribution and,
   for the Tax-Efficient Funds, the annual dividend, if any, will be reinvested
   on the reinvestment date using the NAV per share of that date. The
   reinvestment date normally precedes the payment date by one day although the
   exact timing is subject to change.



 TAX STATUS
 -------------------------------------------------------------------------------
   The fund intends to qualify as a "regulated investment company" under
   Subchapter M of the 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 income , 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 either dividend or capital gain distributions. 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.


                                       80

<PAGE>

   If, in any taxable year, the fund should not qualify as a regulated
   investment company under the Code: (1) the fund would be taxed at normal
   corporate rates on the entire amount of its taxable income, if any, without a
   deduction for dividends or other distributions to shareholders; and (2) the
   fund's distributions, to the extent made out of the fund's current or
   accumulated earnings and profits, would be taxable to shareholders as
   ordinary dividends (regardless of whether they would otherwise have been

   considered capital gain dividends),  and the fund may qualify for the 70%
   deduction for dividends received by corporations.

   All funds (other than Tax-Efficient 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 that 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.

   Tax-Efficient Growth and Tax-Efficient Multi-Cap Growth Funds

   A portion of the dividends paid by the funds may be eligible for the

   dividend-received deduction applicable to corporate shareholders. . Long-term
   capital gain distributions paid from the 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 nonexempt 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.


                        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 engaged in a
   business in the U.S. and the gains are connected with that business, or the


                                       81

<PAGE>

   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, for U.S. tax purposes.
   Such foreign investment funds or trusts have been the only or primary way to
   invest in certain countries. In addition to bearing their proportionate share
   of the fund's expenses (management fees and operating expenses), shareholders
   will also indirectly bear similar expenses of such foreign investment funds
   or 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.


                        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 28, 2002, were:
<TABLE>
<CAPTION>
              Fund                 Current Yield       Compound Yield
              ----                 -------------       --------------
<S>                               <C>               <C>
California Tax-Free Money              0.80%               0.81%
Maryland Tax-Free Money                1.13                1.13
New York Tax-Free Money                0.95                0.95
Tax-Exempt Money                       1.05                1.06
Tax-Exempt Money Fund-PLUS Class       0.95                0.96
</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


                                       82

<PAGE>

   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.

   The yield of each fund calculated under the above-described method for the
   month ended February 28, 2002, was:
<TABLE>
<CAPTION>
<S>                                     <C>
California Tax-Free Bond Fund                  3.90%
Florida Intermediate Tax-Free Fund             3.02
Georgia Tax-Free Bond Fund                     3.79
Maryland Short-Term Tax-Free Bond Fund         1.61
Maryland Tax-Free Bond Fund                    4.08
New Jersey Tax-Free Bond Fund                  4.02
New York Tax-Free Bond Fund                    3.98
Virginia Tax-Free Bond Fund                    4.02
Tax-Free High Yield Fund                       5.10
Tax-Free Income Fund                           4.08
Tax-Free Intermediate Bond Fund                3.00
Tax-Free Short-Intermediate Fund               2.37
</TABLE>



   The tax-equivalent yields (assuming a federal tax bracket of 30.0%) for each
   fund for the same period were as follows:
<TABLE>
<CAPTION>
<S>                                        <C>
California Tax-Free Bond Fund(a)                  6.14%
Florida Intermediate Tax-Free Fund(b)             4.41
Georgia Tax-Free Bond Fund(c)                     5.76
Maryland Short-Term Tax-Free Bond Fund(d)         2.50
Maryland Tax-Free Bond Fund(d)                    6.33
New Jersey Tax-Free Bond Fund(e)                  6.14
New York Tax-Free Bond Fund(f)                    6.35
Virginia Tax-Free Bond Fund(g)                    6.09
Tax-Free High Yield Fund                          7.29
Tax-Free Income Fund                              5.83
Tax-Free Intermediate Bond Fund                   4.29
Tax-Free Short-Intermediate Fund                  3.39
---------------------------------------------------------------
</TABLE>


         (a) Assumes a state tax bracket of 9.3%.

         (b) Assumes an intangibles tax rate of 0.10%.

         (c) Assumes a state tax bracket of 6.0%.

         (d) Assumes a state tax bracket of 4.75% and a local tax bracket
            of 3.15%.

         (e) Assumes a state tax bracket of 6.37%.

         (f) Assumes a state tax bracket of 6.85% and a local tax bracket
            of 3.648%.

         (g) Assumes a state tax bracket of 5.75%.


                                       83

<PAGE>

   The tax-equivalent yields (assuming a federal tax bracket of 27.0%) for each
   fund for the same period were as follows:
<TABLE>
<CAPTION>
<S>                                        <C>
California Tax-Free Bond Fund(a)                  5.89%
Florida Intermediate Tax-Free Fund(b)             4.24
Georgia Tax-Free Bond Fund(c)                     5.52
Maryland Short-Term Tax-Free Bond Fund(d)         2.40
Maryland Tax-Free Bond Fund(d)                    6.07
New Jersey Tax-Free Bond Fund(e)                  5.83
New York Tax-Free Bond Fund(f)                    6.09
Virginia Tax-Free Bond Fund(g)                    5.84
Tax-Free High Yield Fund                          6.99
Tax-Free Income Fund                              5.59
Tax-Free Intermediate Bond Fund                   4.11
Tax-Free Short-Intermediate Fund                  3.25
---------------------------------------------------------------
</TABLE>


         (a) Assumes a state tax bracket of 9.3%.

         (b) Assumes an intangibles tax rate of 0.10%.

         (c) Assumes a state tax bracket of 6.0%.

         (d) Assumes a state tax bracket of 4.75% and a local tax bracket
            of 3.15%.

         (e) Assumes a state tax bracket of 5.525%.

         (f) Assumes a state tax bracket of 6.85% and a local tax bracket
            of 3.648%.

         (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 period of
   time will vary from the average.


                                       84

<PAGE>


<TABLE>
<CAPTION>
                  Cumulative Performance Percentage Change
                            Periods ended 2/28/02
            Fund               1 Yr.    5 Yrs.  10 Yrs.    Since     Inception
            ----               -----    ------  -------  Inception     Date
                                                         ---------     ----
<S>                           <C>       <C>     <C>      <C>        <S>
California Tax-Free Bond       5.96%    34.06%  91.29%   164.12%     09/15/86
California Tax-Free Money      1.79     13.73   29.16     63.56      09/15/86
Florida Intermediate
Tax-Free                       5.92     29.10        --   61.37      03/31/93
Georgia Tax-Free Bond          6.29     33.39        --   70.65      03/31/93
Maryland Short-Term Tax-Free
Bond                           5.32     24.04        --   47.29      01/29/93
Maryland Tax-Free Bond         6.56     33.00   87.96    152.37      03/31/87
Maryland Tax-Free Money             --      --       --          *   03/30/01
New Jersey Tax-Free Bond       6.46     32.44   88.94    105.09      04/30/91
New York Tax-Free Bond         6.27     33.53   92.06    176.12      08/28/86
New York Tax-Free Money        2.02     14.99   30.38     64.16      08/28/86
Virginia Tax-Free Bond         6.40     33.75   90.84    106.34      04/30/91
Tax-Efficient Balanced        -0.94         --       --   45.17      06/30/97
Tax-Efficient Growth          -8.84(a)      --       --   -7.20(a)   07/30/99
Tax-Efficient Multi-Cap
Growth                        -7.03(a)      --       --  -14.00(a)   12/29/00
Tax-Exempt Money               2.12     15.85   32.33    134.54      04/08/81
Tax-Exempt Money Fund-PLUS
Class                          1.99         --       --    9.24      11/01/98
Tax-Free High Yield            5.28     26.04   83.68    274.66      03/01/85
Tax-Free Income                5.99     32.92   89.78    447.79      10/26/76
Tax-Free Income Fund-Advisor
Class                               --      --       --         --   09/30/02
Tax-Free Intermediate Bond     6.30     30.54        --   72.36      11/30/92
Tax-Free Short-Intermediate    5.92     27.13   61.81    171.80      12/23/83
-------------------------------------------------------------------------------
</TABLE>




  (a) Not adjusted for redemption fees.

  *No figure is provided because the fund's performance is for a period of
     less than one year.


                                       85

<PAGE>


<TABLE>
<CAPTION>
                   Average Annual Compound Rates of Return
                            Periods ended 2/28/02
            Fund               1 Yr.    5 Yrs.  10 Yrs.    Since     Inception
            ----               -----    ------  -------  Inception     Date
                                                         ---------     ----
<S>                           <C>       <C>     <C>      <C>        <S>
California Tax-Free Bond       5.96%    6.04%    6.70%     6.49%     09/15/86
California Tax-Free Money      1.79     2.61     2.59      3.24      09/15/86
Florida Intermediate
Tax-Free                       5.92     5.24         --    5.51      03/31/93
Georgia Tax-Free Bond          6.29     5.93         --    6.18      03/31/93
Maryland Short-Term Tax-Free
Bond                           5.32     4.40         --    4.36      01/29/93
Maryland Tax-Free Bond         6.56     5.87     6.51      6.40      03/31/87
Maryland Tax-Free Money             --      --       --          *   03/30/01
New Jersey Tax-Free Bond       6.46     5.78     6.57      6.86      04/30/91
New York Tax-Free Bond         6.27     5.95     6.74      6.77      08/28/86
New York Tax-Free Money        2.02     2.83     2.69      3.25      08/28/86
Virginia Tax-Free Bond         6.40     5.99     6.68      6.91      04/30/91
Tax-Efficient Balanced        -0.94         --       --    8.32      06/30/97
Tax-Efficient Growth          -8.84(a)      --       --   -2.85(a)   07/30/99
Tax-Efficient Multi-Cap
Growth                        -7.03(a)      --       --  -12.13(a)   12/29/00
Tax-Exempt Money               2.12     2.99     2.84      4.16      04/08/81
Tax-Exempt Money Fund-PLUS
Class                          1.99         --       --    2.69      11/01/98
Tax-Free High Yield            5.28     4.74     6.27      8.08      03/01/85
Tax-Free Income                5.99     5.86     6.62      6.94      10/26/76
Tax-Free Income Fund-Advisor
Class                               --      --       --         --   09/30/02
Tax-Free Intermediate Bond     6.30     5.47         --    6.06      11/30/92
Tax-Free Short-Intermediate    5.92     4.92     4.93      5.65      12/23/83
-------------------------------------------------------------------------------
</TABLE>




  (a) Not adjusted for redemption fees.

  *No figure is provided because the fund's performance is for a period of
     less than one year.


                         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 those in which the fund
   invests; (2) the consumer price index (or any other measure for inflation),
   or 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-advantaged product, may be illustrated by graphs, charts, etc.; (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; (6) the fund may disclose the performance of other funds
   or accounts managed by T. Rowe Price in a manner similar to the fund; and (7)
   the blended total returns or performance rankings of the funds may be
   disclosed.


                                       86

<PAGE>

                               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 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 T. Rowe Price funds, including the Advisor Class, are considered to be
   "no-load" funds. They impose no front-end or back-end sales loads. However,
   the Advisor Class does charge 12b-1 fees. Under applicable National
   Association of Securities Dealers Regulation, Inc. ("NASDR") regulations,
   mutual funds that have no front-end or deferred sales charges and whose total
   asset-based charges for sales-related expenses and/or service fees (as
   defined by NASDR) do not exceed 0.25% of average net assets per year may be
   referred to as no-load funds.



                               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 and in cash 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.



 CAPITAL STOCK
 -------------------------------------------------------------------------------
   Tax-Efficient, 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
   three series, Tax-Efficient Balanced Fund, Tax-Efficient Growth Fund, and
   Tax-Efficient Multi-Cap 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 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,


                                       87

<PAGE>

   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 may increase or decrease the
   aggregate number of shares of stock or the number of shares of stock of any
   class or series that the fund has authorized to issue without shareholder
   approval.


   Except to the extent that the fund's Board of Directors might provide 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 Directors have provided, that as to any matter with respect to which a
   separate vote of any class is required by the 1940 Act, such requirement as
   to a separate vote by that class shall apply in lieu of any voting
   requirements established by the Maryland General Corporation Law. Otherwise,
   holders of each class of capital stock are not entitled to vote as a class on
   any matter. Accordingly, the preferences, rights, and other characteristics
   attaching to any class of shares might be altered or eliminated, or the class
   might be combined with another class or classes, by action approved by the
   vote of the holders of a majority of all the shares of all classes entitled
   to be voted on the proposal, without any additional right to vote as a class
   by the holders of the capital stock or of another affected class or classes.


   Shareholders are entitled to one vote for each full share held (and
   fractional votes for fractional shares held) and will vote in the election of
   or removal of directors (to the extent hereinafter provided) and on other
   matters submitted to the vote of shareholders. There will normally be no
   meetings of shareholders for the purpose of electing directors unless and
   until such time as less than a majority of the directors holding office have
   been elected by shareholders, at which time the directors then in office will
   call a shareholders' meeting for the election of directors. Except as set
   forth above, the directors shall continue to hold office and may appoint
   successor directors. Voting rights are not cumulative, so that the holders of
   more than 50% of the shares voting in the election of directors can, if they
   choose to do so, elect all the directors of the fund, in which event the
   holders of the remaining shares will be unable to elect any person as a
   director. As set forth in the By-Laws of the Corporation, a special meeting
   of shareholders of the Corporation shall be called by the Secretary of the
   Corporation on the written request of shareholders entitled to cast at least
   10% of all the votes of the Corporation entitled to be cast at such meeting.
   Shareholders requesting such a meeting must pay to the Corporation the
   reasonably estimated costs of preparing and mailing the notice of the
   meeting. The Corporation, however, will otherwise assist the shareholders
   seeking to hold the special meeting in communicating to the other
   shareholders of the Corporation to the extent required by Section 16(c) of
   the 1940 Act.



 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. 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; Maryland Tax-Free Money
   Fund; New Jersey Tax-Free Bond Fund; New York Tax-Free Bond Fund; New York
   Tax-Free Money 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
   open-end investment companies, commonly known as "mutual funds."


                                       88

<PAGE>

   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 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 as to avoid, as far as possible, ultimate liability of the
   shareholders for liabilities of such fund.



 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
 -------------------------------------------------------------------------------
   Shearman & Sterling, whose address is 599 Lexington Avenue, New York, New
   York 10022, is legal counsel to the fund.


                                       89

<PAGE>

 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 listed below for the period ended
   February 28, 2002, and the report of independent accountants are included in
   each fund's Annual Report for the period ended February 28, 2002. 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 period ended February 28, 2002, are
   incorporated into this Statement of Additional Information by reference
   (references are to page numbers in the reports):

<TABLE>
<CAPTION>
                          ANNUAL REPORT REFERENCES:
                                   CALIFORNIA TAX-  CALIFORNIA TAX-  GEORGIA
                                   FREE MONEY       FREE BOND        TAX-FREE
                                   ----------       ---------        BOND
                                                                     ----
<S>                                <C>              <C>              <C>
Financial Highlights, February
28, 2002                                 11               12            8
Statement of Net Assets, February
28, 2002                                13-16            17-24         9-13
Statement of Operations, year
ended
February 28, 2002                        25               25            14
Statement of Changes in Net
Assets, years ended
February 28, 2002, and February
28, 2001                                 26               26            15
Notes to Financial Statements,
February 28, 2002                       27-31            27-31        16-19
Report of Independent Accountants        32               32            20
</TABLE>



<TABLE>
<CAPTION>
                                      NEW JERSEY  FLORIDA       NEW YORK TAX-
                                      TAX-FREE    INTERMEDIATE  FREE MONEY
                                      BOND        TAX-FREE      ----------
                                      ----        --------
<S>                                   <C>         <C>           <C>
Financial Highlights, February 28,
2002                                      8            8             10
Statement of Net Assets, February
28, 2002                                 9-14         9-12          12-16
Statement of Operations, year ended
February 28, 2002                         15           13            24
Statement of Changes in Net Assets,
years ended
February 28, 2002, and February 28,
2001                                      16           14            25
Notes to Financial Statements,
February 28, 2002                       17-20        15-18          26-30
Report of Independent Accountants         21           19            31
</TABLE>



<TABLE>
<CAPTION>
                                                NEW YORK       VIRGINIA
                                                TAX-FREE BOND  TAX-FREE BOND
                                                -------------  -------------
<S>                                             <C>            <C>
Financial Highlights, February 28, 2002              11              8
Statement of Net Assets, February 28, 2002          17-23           9-16
Statement of Operations, year ended
February 28, 2002                                    24              17
Statement of Changes in Net Assets, years
ended
February 28, 2002, and February 28, 2001             25              18
Notes to Financial Statements, February 28,
2002                                                26-30          19-22
Report of Independent Accountants                    31              23
</TABLE>





                                       90

<PAGE>

<TABLE>
<CAPTION>
                                    MARYLAND       MARYLAND       TAX-EXEMPT
                                    SHORT-TERM     TAX-FREE BOND  MONEY FUND-
                                    TAX-FREE BOND  -------------  PLUS CLASS
                                    -------------                 ----------
<S>                                 <C>            <C>            <C>
Financial Highlights, February 28,
2002                                     13             14             3
Statement of Net Assets, February
28, 2002                                20-25          26-38         4-17
Statement of Operations, year
ended
February 28, 2002                        39             39            18
Statement of Changes in Net
Assets, years ended
February 28, 2002, and February
28, 2001                                 40             40            19
Notes to Financial Statements,
February 28, 2002                       41-45          41-45         20-22
Report of Independent Accountants        46             46            23
</TABLE>



<TABLE>
<CAPTION>
                                          TAX-EXEMPT  TAX-FREE HIGH  TAX-FREE
                                          MONEY       YIELD          INCOME
                                          -----       -----          ------
<S>                                       <C>         <C>            <C>
Financial Highlights, February 28, 2002       2             2           2
Statement of Net Assets, February 28,
2002                                         4-17         3-25         3-22
Statement of Operations, year ended
February 28, 2002                             18           26           23
Statement of Changes in Net Assets,
years ended
February 28, 2002, and February 28, 2001      19           27           24
Notes to Financial Statements, February
28, 2002                                    20-22         28-31       25-28
Report of Independent Accountants             23           32           29
</TABLE>



<TABLE>
<CAPTION>
                                 TAX-FREE      TAX-EFFICIENT  TAX-FREE SHORT-
                                 INTERMEDIATE  BALANCED       INTERMEDIATE
                                 BOND          --------       ------------
                                 ----
<S>                              <C>           <C>            <C>
Financial Highlights, February
28, 2002                              2              2               2
Statement of Net Assets,
February 28, 2002                    3-11          3-13            3-14
Statement of Operations, year
ended
February 28, 2002                     12            14              15
Statement of Changes in Net
Assets, years ended
February 28, 2002, and February
28, 2001                              13            15              16
Notes to Financial Statements,
February 28, 2002                   14-17          16-19           17-20
Report of Independent
Accountants                           18            20              21
</TABLE>



<TABLE>
<CAPTION>
                                                  TAX-EFFICIENT
                                                  GROWTH
                                                  ------
<S>                                               <C>
Financial Highlights, February 28, 2002                 2
Statement of Net Assets, February 28, 2002             3-8
Statement of Operations, year ended
February 28, 2002                                       9
Statement of Changes in Net Assets, years ended
February 28, 2002, and February 28, 2001               10
Notes to Financial Statements, February 28, 2002      11-14
Report of Independent Accountants                      15
</TABLE>





                                       91

<PAGE>

<TABLE>
<CAPTION>
                                                        TAX-EFFICIENT
                                                        MULTI-CAP GROWTH
                                                        ----------------
<S>                                                     <C>
Financial Highlights, February 28, 2002                        2
Portfolio of Investments, February 28, 2002                   3-12
Statement of Assets and Liabilities, February 28, 2002         13
Statement of Operations, year ended February 28, 2002          14
Statement of Changes in Net Assets, years ended
February 28, 2002, and February 28, 2001                       15
Notes to Financial Statements, February 28, 2002             16-19
Report of Independent Accountants                              20
</TABLE>



<TABLE>
<CAPTION>
                                                               MARYLAND
                                                               TAX-FREE MONEY
                                                               --------------
<S>                                                            <C>
Financial Highlights, February 28, 2002                              12
Statement of Net Assets, February 28, 2002                         15-19
Statement of Operations, period from March 30, 2001,
(commencement of operations), to February 28, 2002                   39
Statement of Changes in Net Assets, period from March 30,
2001, (commencement of operations), to February 28, 2002             40
Notes to Financial Statements, February 28, 2002                   41-45
Report of Independent Accountants                                    46
</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 known as high-grade
   bonds.

   A-Bonds rated A possess many favorable investment attributes and are to be
   considered as upper medium-grade obligations.

   Baa-Bonds rated Baa are considered as medium-grade obligations, i.e., they
   are neither highly protected nor poorly secured. Interest payments and
   principal security appear adequate for the present, but certain protective
   elements may be 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
   characterizes 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.


                                       92

<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 repayment of
   principal or payment of interest.

   Ca-Bonds rated Ca represent obligations which are speculative in a high
   degree. Such issues are often in default or have other marked shortcomings.

   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 the 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-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 in accordance with the


                                       93

<PAGE>

   terms of the obligation for bond issues 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 (+)
   designation. A-2 satisfactory capacity to pay principal and interest. A-3
   adequate capacity for timely payment, but are more 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.


                                       94


<PAGE>

                                     PART C
                               OTHER INFORMATION

ITEM 23. EXHIBITS


(a)(1)   Articles of Incorporation of Registrant, dated September 24, 1976
         (electronically filed with Amendment No. 20 dated April 22, 1994)


(a)(2)   Articles of Amendment, dated November 4, 1976 (electronically filed
         with Amendment No. 20 dated April 22, 1994)

(a)(3)   Article of Amendment dated May 1, 1981 (electronically filed with
         Amendment No. 20 dated April 22, 1994)

(a)(4)   Articles of Amendment dated July 1, 1983 (electronically filed with
         Amendment No. 20 dated April 22, 1994)


(a)(5)   Form of Articles Supplementary, dated _____________, 2002


(b)      By-Laws of Registrant, as amended May 1, 1981, January 21, 1982,
         October 27, 1982, January 1, 1983, February 23, 1983, January 21, 1988,
         April 20, 1990, July 1, 1991, July 20, 1993, and July 21, 1999
         (electronically filed with Amendment No. 25 dated June 27, 2000)

(c)      Specimen Stock Certificate (filed with Amendment No. 2)

(d)      Investment Management Agreement between Registrant and T. Rowe Price
         Associates, Inc. (electronically filed with Amendment No. 20 dated
         April 22, 1994)


(e)      Underwriting Agreement between Registrant and T. Rowe Price Investment
         Services, Inc., dated July 24, 2002



(f)      Inapplicable


(g)      Custody Agreements


(g)(1)   Custodian Agreement between T. Rowe Price Funds and State Street Bank
         and Trust Company, dated January 28, 1998, as amended November 4, 1998,
         April 21, 1999, February 9, 2000, April 19, 2000, July 18, 2000,
         October 25, 2000, February 7, 2001, June 7, 2001, July 24, 2001, April
         24, 2002, and July 24, 2002


(g)(2)   Subcustodian Agreements between T. Rowe Price Tax-Free Funds and Irving
         Trust Company and Morgan Guaranty Trust Company (filed with Amendment
         No. 8)
<PAGE>


(g)(3)   Subcustodian Agreement between Irving Trust Company and State Street
         Bank and Trust Company (filed with Amendment No. 12)

(h)      Other Agreements


(h)(1)   Transfer Agency and Service Agreement between T. Rowe Price Services,
         Inc. and T. Rowe Price Funds, dated January 1, 2002, as amended April
         24, 2002 and July 24, 2002



(h)(2)   Agreement between T. Rowe Price Associates, Inc. and T. Rowe Price
         Funds for Fund Accounting Services, dated January 1, 2002, as amended
         April 24, 2002 and July 24, 2002



(i)      Legal Opinion


(j)      Other Opinions

(j)(1)   Consent of Independent Accountants


(j)(2)   Power of Attorney


(k)      Inapplicable

(l)      Inapplicable


(m)(1)   Rule 12b-1 Plan for the T. Rowe Price Tax-Free Income Fund-Advisor
         Class dated July 24, 2002

(m)(2)   Form of Selling Agreement to be used by T. Rowe Price Investment
         Services, Inc.

(n)      Rule 18f-3 Plan for the T. Rowe Price Tax-Free Income Fund-Advisor
         Class dated July 24, 2002


(p)      Code of Ethics, dated April 1, 2002

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

         None

ITEM 25. INDEMNIFICATION


         The Registrant maintains comprehensive Errors and Omissions and
Officers and Directors insurance policies written by ICI Mutual. These policies
provide coverage for T. Rowe Price Associates, Inc. ("Manager"), and its
subsidiaries and affiliates

<PAGE>


as listed in Item 26 of this Registration Statement (with the exception of the
T. Rowe Price Associates Foundation, Inc.), and all other investment companies
in the T. Rowe Price family of mutual funds. In addition to the corporate
insureds, the policies also cover the officers, directors, and employees of the
Manager, its subsidiaries, and affiliates. The premium is allocated among the
named corporate insureds in accordance with the provisions of Rule 17d-1(d)(7)
under the Investment Company Act of 1940.


GENERAL. The Charter of the Corporation provides that to the fullest extent
permitted by Maryland or federal law, no director or officer of the Corporation
shall be personally liable to the Corporation or the holders of Shares for money
damages and each director and officer shall be indemnified by the Corporation;
PROVIDED, HOWEVER, that nothing therein shall be deemed to protect any director
or officer of the Corporation against any liability to the Corporation of the
holders of Shares to which such director or officer would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.

         Article X, Section 10.01 of the Registrant's By-Laws provides as
follows:

         Section 10.01.
INDEMNIFICATION AND PAYMENT OF EXPENSES IN ADVANCE: The Corporation shall
--------------- --- ------- -- -------- -- -------
indemnify any individual ("Indemnitee") who is a present or former director,
officer, employee, or agent of the Corporation, or who is or has been serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, who,
by reason of his position was, is, or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative (hereinafter collectively referred to
as a "Proceeding") against any judgments, penalties, fines, settlements, and
reasonable expenses (including attorneys' fees) incurred by such Indemnitee in
connection with any Proceeding, to the fullest extent that such indemnification
may be lawful under Maryland law. The Corporation shall pay any reasonable
expenses so incurred by such Indemnitee in defending a Proceeding in advance of
the final disposition thereof to the fullest extent that such advance payment
may be lawful under Maryland law. Subject to any applicable limitations and
requirements set forth in the Corporation's Articles of Incorporation and in
these By-Laws, any payment of indemnification or advance of expenses shall be
made in accordance with the procedures set forth in Maryland law.

         Notwithstanding the foregoing, nothing herein shall protect or purport
to protect any Indemnitee against any liability to which he would otherwise be
subject by reason of willful
<PAGE>

misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office ("Disabling Conduct").

         Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:

         (a)
there is a final decision on the merits by a court or other body before whom the
Proceeding was brought that the Indemnitee was not liable by reason of Disabling
Conduct; or

         (b)
in the absence of such a decision, there is a reasonable determination, based
upon a review of the facts, that the Indemnitee was not liable by reason of
Disabling Conduct, which determination shall be made by:

             (i)
the vote of a majority of a quorum of directors who are neither "interested
persons" of the Corporation as defined in Section 2(a)(19) of the Investment
Company Act, nor parties to the Proceeding; or

             (ii)    an independent legal counsel in a written opinion.

         Anything in this Article X to the contrary notwithstanding, any advance
of expenses by the Corporation to any Indemnitee shall be made only upon the
undertaking by such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is met:

         (a)  the Indemnitee provides a security for his undertaking; or

         (b)
the Corporation shall be insured against losses arising by reason of any lawful
advances; or

         (c)
there is a determination, based on a review of readily available facts, that
there is reason to believe that the Indemnitee will ultimately be found entitled
to indemnification, which determination shall be made by:

             (i)
a majority of a quorum of directors who are neither "interested persons" of the
Corporation as defined in Section 2(a)(19) of the Investment Company Act, nor
parties to the Proceeding; or

             (ii)    an independent legal counsel in a written opinion.

<PAGE>

         SECTION 10.02. INSURANCE OF OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS.
To the fullest extent permitted by applicable Maryland law and by Section 17(h)
of the Investment Company Act of 1940, as from time to time amended, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the Corporation, or who is or
was serving at the request of the Corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or other
enterprise, against any liability asserted against him and incurred by him in or
arising out of his position, whether or not the Corporation would have the power
to indemnify him against such liability.

         Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER

         T. Rowe Price Group, Inc., ("GROUP") owns 100% of the stock of T. Rowe
Price Associates, Inc. Group was formed in 2000 as a holding company for the T.
Rowe Price affiliated companies.

         T. Rowe Price Associates, Inc. ("PRICE ASSOCIATES"), a Maryland
corporation, serves as investment adviser to individual and institutional
investors, including investment companies. Price Associates is registered as an
investment adviser under the Investment Advisers Act of 1940.

         T. Rowe Price Savings Bank ("SAVINGS BANK"), a wholly owned subsidiary
of T. Rowe Price Associates, Inc., commenced operations in 2000. The Savings
Bank is a federally chartered savings bank, and provides federally insured bank
products to a national customer base.

<PAGE>

         T. Rowe Price International, Inc. (formerly Rowe Price-Fleming
International, Inc.), a Maryland corporation, is a wholly owned subsidiary of T.
Rowe Price Finance, Inc. T. Rowe Price International, Inc. ("T. ROWE PRICE
INTERNATIONAL") was incorporated in Maryland in 2000 and provides investment
counsel service with respect to foreign securities for institutional investors
in the United States and elsewhere. In addition to managing private counsel
client accounts, T. Rowe Price International also sponsors and serves as adviser
and subadviser to U.S. and foreign registered investment companies which invest
in foreign securities, and provides investment advice to the T. Rowe Price Trust
Company, trustee of the International Common Trust Fund.

         T. Rowe Price Global Investment Services Limited ("GLOBAL INVESTMENT
SERVICES") is an English Corporation, organized in 2000, and a wholly owned
subsidiary of T. Rowe Price Group, Inc. Global Investment Services is also
regulated by the English Financial Services Authority and provides investment
management, sales, and client servicing to non-U.S. institutional and retail
investors.

         T. Rowe Price Global Asset Management Limited ("GLOBAL ASSET
MANAGEMENT"), an English corporation, is an SEC registered investment adviser
under the Investment Advisers Act of 1940. Global Asset Management provides
investment management services to Japanese investment trusts and other accounts
for institutional investors in Japan pursuant to one or more delegation
agreements entered into between Daiwa SB Investments, Ltd. and Global Asset
Management or other advisory agreements. Global Asset Management is a
wholly-owned subsidiary of T. Rowe Price Group, Inc.

         T. Rowe Price Investment Services, Inc. ("INVESTMENT SERVICES"), a
wholly owned subsidiary of T. Rowe Price Associates, Inc., was incorporated in
Maryland in 1980 for the specific purpose of acting as principal underwriter and
distributor for the registered investment companies which T. Rowe Price
Associates, Inc. sponsors and serves as investment adviser (the "PRICE FUNDS").
Investment Services also serves as distributor for any proprietary variable
annuity products. Investment Services is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. In 1984, Investment Services expanded its activities to
include a brokerage service.

         TRP Distribution, Inc., a wholly owned subsidiary of Investment
Services, was incorporated in Maryland in 1991. It was organized for, and
engages in, the sale of certain investment related products prepared by
Investment Services and T. Rowe Price Retirement Plan Services.

<PAGE>

         T. Rowe Price Associates Foundation, Inc. (the "FOUNDATION"), was
incorporated in 1981 (and is not a subsidiary of T. Rowe Price Associates,
Inc.). The Foundation's overall objective is to improve the quality of life in
the community at large by making charitable contributions to nonprofit
organizations benefiting education, arts and culture, civic and community, and
human services interests. In addition to grant making, the Foundation also has a
very generous matching gift program whereby contributions its employees make to
qualifying organizations of their choice are matched according to established
guidelines.

         T. Rowe Price Services, Inc. ("PRICE SERVICES"), a wholly owned
subsidiary of T. Rowe Price Associates, Inc., was incorporated in Maryland in
1982 and is registered as a transfer agent under the Securities Exchange Act of
1934. Price Services provides transfer agent, dividend disbursing, and certain
other services, including shareholder services, to the Price Funds.

         T. Rowe Price Retirement Plan Services, Inc. ("RPS"), a wholly owned
subsidiary of T. Rowe Price Associates, Inc., was incorporated in Maryland in
1991 and is registered as a transfer agent under the Securities Exchange Act of
1934. RPS provides administrative, recordkeeping, and subaccounting services to
administrators of employee benefit plans.

         T. Rowe Price Trust Company ("TRUST COMPANY"), a wholly owned
subsidiary of T. Rowe Price Associates, Inc., is a Maryland-chartered
limited-service trust company, organized in 1983 for the purpose of providing
fiduciary services. The Trust Company serves as trustee and/or custodian of
certain qualified and non-qualified employee benefit plans, individual
retirement accounts, and common trust funds.

         T. Rowe Price Investment Technologies, Inc. was incorporated in
Maryland in 1996. A wholly owned subsidiary of T. Rowe Price Associates, Inc.,
it owns the technology rights, hardware, and software of T. Rowe Price
Associates, Inc. and affiliated companies and provides technology services to
them.

         TRPH Corporation, a wholly owned subsidiary of T. Rowe Price
Associates, Inc., was organized in 1997 to acquire an interest in a UK-based
corporate finance advisory firm.

         T. Rowe Price Threshold Fund Associates, Inc., a wholly owned
subsidiary of T. Rowe Price Associates, Inc., was incorporated in Maryland in
1994 and serves as the general partner of T. Rowe Price Threshold Fund III,
L.P., a Delaware limited partnership.

<PAGE>

         T. Rowe Price Threshold Fund III, L.P., a Delaware limited partnership,
was organized in 1994 by T. Rowe Price Associates, Inc. and invests in private
financings of small companies with high growth potential; Threshold Fund
Associates, Inc. is the General Partner of the partnership.

         T. Rowe Price Stable Asset Management, Inc. ("STABLE ASSET
MANAGEMENT"), was incorporated in Maryland in 1988 as a wholly owned subsidiary
of T. Rowe Price Associates, Inc. Stable Asset Management is registered as an
investment adviser under the Investment Advisers Act of 1940, and specializes in
the management of investment portfolios which seek stable investment returns
through the use of guaranteed investment contracts, bank investment contracts,
structured investment contracts issued by insurance companies and banks, as well
as fixed income securities.

         T. Rowe Price Recovery Fund Associates, Inc., a Maryland corporation,
is a wholly owned subsidiary of T. Rowe Price Associates, Inc. organized in 1988
for the purpose of serving as General Partner of T. Rowe Price Recovery Fund,
L.P., a Delaware limited partnership which invests in financially distressed
companies.

         T. Rowe Price Recovery Fund II Associates, L.L.C., is a Maryland
limited liability company (with T. Rowe Price Associates, Inc. and T. Rowe Price
Trust Company as its members) organized in 1996 to serve as General Partner of
T. Rowe Price Recovery Fund II, L.P., a Delaware limited partnership which also
invests in financially distressed companies.

         T. Rowe Price (Canada), Inc. ("TRP CANADA") is a Maryland corporation
organized in 1988 as a wholly owned subsidiary of T. Rowe Price Associates, Inc.
This entity is registered as an investment adviser under the Investment Advisers
Act of 1940 as well as with the Ontario Securities Commission to provide
advisory services to individual and institutional clients residing in Canada.

         T. Rowe Price Insurance Agency, Inc., is a wholly owned subsidiary of
T. Rowe Price Group, Inc., organized in Maryland in 1994 and licensed to do
business in several states to act primarily as a distributor of proprietary
variable annuity products.

         Since 1983, T. Rowe Price Associates, Inc. has organized several
distinct Maryland limited partnerships, which are informally called the Pratt
Street Ventures partnerships, for the purpose of acquiring interests in
growth-oriented businesses.

         TRP Suburban, Inc., is a Maryland corporation organized in 1990 as a
wholly owned subsidiary of T. Rowe Price Associates, Inc. It entered into
agreements with McDonogh School and CMANE--
<PAGE>

McDonogh-Rowe Limited Partnership to construct an office building in Owings
Mills, Maryland, which currently houses T. Rowe Price Associates' transfer
agent, plan administrative services, retirement plan services, and operations
support functions.

         TRP Suburban Second, Inc., a wholly owned Maryland subsidiary of T.
Rowe Price Associates, Inc., was incorporated in 1995 to primarily engage in the
development and ownership of real property located in Owings Mills, Maryland.

         TRP Suburban Third, Inc., a wholly owned Maryland subsidiary of T. Rowe
Price Associates, Inc., was incorporated in 1999 to primarily engage in the
development and ownership of real property located in Colorado Springs,
Colorado.

         TRP Finance, Inc., a wholly owned subsidiary of T. Rowe Price
Associates, Inc., is a Delaware corporation organized in 1990 to manage certain
passive corporate investments and other intangible assets.

         T. Rowe Price Strategic Partners Fund II, L.P. is a Delaware limited
partnership organized in 1992, for the purpose of investing in small public and
private companies seeking capital for expansion or undergoing a restructuring of
ownership. The general partner of T. Rowe Price Strategic Partners Fund II, L.P.
is T. Rowe Price Strategic Partners II, L.P., a Delaware limited partnership
whose general partner is T. Rowe Price Strategic Partners Associates, Inc.

         T. Rowe Price Advisory Services, Inc., ("ADVISORY SERVICES"), a wholly
owned subsidiary of T. Rowe Price Group, Inc. was incorporated in Maryland in
2000 Advisory Services is registered as an investment adviser under the
Investment Advisers Act of 1940, and provides investment advisory services to
individuals, including shareholders of the Price Funds.


         Listed below are the directors and executive officers of T. Rowe Price
Group, Inc. who have other substantial businesses, professions, vocations, or
employment aside from their association with T. Rowe Price Associates, Inc.:


<PAGE>

                     DIRECTORS OF T. ROWE PRICE GROUP, INC.

D. WILLIAM J. GARRETT, Director of T. Rowe Price Group, Inc. Mr. Garrett was the
Group Chief Executive of Robert Fleming Holdings Limited from 1997 until 2000
when the company was acquired by the Chase Manhattan Corporation. He also served
as a director of Rowe Price-Fleming International, Inc. (now T. Rowe Price
International) from 1981 until 2000. Mr. Garrett's address is 13 Stanley
Crescent, London W11 2NA, England.

JAMES H. GILLIAM, JR., Director of T. Rowe Price Group, Inc. Mr. Gilliam is an
attorney, private investor and consultant; counsel to Knickerbocker LLC, a
private investment company; and director or trustee at several institutions. Mr.
Gilliam's address is: Brandywine Plaza, 105 Foulk Road, Suite 101, Wilmington,
Delaware 19803.

DONALD B. HEBB, JR., Director of T. Rowe Price Group, Inc. Mr. Hebb is the
managing general partner of ABS Capital Partners. Mr. Hebb's address is One
South Street, 25th Floor, Baltimore, Maryland 21202.

RICHARD L. MENSCHEL, Director of T. Rowe Price Group, Inc. Mr. Menschel is a
limited partner of The Goldman Sachs Group, L.P., an investment banking firm.
Mr. Menschel's address is: 85 Broad Street, 2nd Floor, New York, New York 10004.

ANNE MARIE WHITTEMORE, Director of T. Rowe Price Group, Inc. Mrs. Whittemore is
a partner of the law firm of McGuire, Woods, Battle & Boothe L.L.P. and a
Director of Owens & Minor, Inc.; Fort James Corporation; and Albemarle
Corporation. Mrs. Whittemore's address is: One James Center, Richmond, Virginia
23219.

All of the following directors of T. Rowe Price Group, Inc. are employees of T.
Rowe Price Associates, Inc.


EDWARD C. BERNARD, Director and Vice President of T. Rowe Price Group, Inc., and
T. Rowe Price Associates, Inc.; Director and President of T. Rowe Price
Insurance Agency, Inc., T. Rowe Price Investment Services, Inc., and T. Rowe
Price Advisory Services, Inc.; Director of T. Rowe Price Services, Inc.; Vice
President of TRP Distribution, Inc.; Chairman of the Board and Director of T.
Rowe Price Savings Bank.



HENRY H. HOPKINS, Director and Vice President of T. Rowe Price Group, Inc.;
Director of T. Rowe Price Insurance Agency, Inc.; Director and Vice President of
T. Rowe Price (Canada), Inc., T. Rowe Price Investment Services, Inc., T. Rowe
Price Recovery Fund Associates, Inc., T. Rowe Price Services, Inc., T. Rowe
Price Threshold Fund Associates, Inc., T. Rowe Price Trust Company, TRP
Distribution, Inc., and TRPH Corporation; Vice President of

<PAGE>


T. Rowe Price Associates, Inc., T. Rowe Price International, T. Rowe Price
Retirement Plan Services, Inc., T. Rowe Price Stable Asset Management, Inc., and
T. Rowe Price Strategic Partners Associates, Inc.; Vice President of T. Rowe
Price Recovery Fund II Associates, L.L.C.



JAMES A.C. KENNEDY, Director and Vice President of T. Rowe Price Group, Inc. and
T. Rowe Price Associates, Inc.; President and Director of T. Rowe Price
Strategic Partners Associates, Inc.; Director and Vice President of T. Rowe
Price Threshold Fund Associates, Inc.



JOHN H. LAPORTE, JR., Director and Vice President of T. Rowe Price Group, Inc.;
Vice President of T. Rowe Price Associates, Inc.



WILLIAM T. REYNOLDS, Director and Vice President of T. Rowe Price Group, Inc.
and T. Rowe Price Associates, Inc.; Chairman of the Board and Director of T.
Rowe Price Stable Asset Management, Inc.; Director of TRP Finance, Inc.and T.
Rowe Price Global Asset Management Limited; Director and President of T. Rowe
Price Recovery Fund Associates, Inc.; President of T. Rowe Price Recovery Fund
II Associates, L.L.C.



JAMES S. RIEPE, Vice-Chairman of the Board, Director, and Vice President of T.
Rowe Price Group, Inc.; Director and Vice President of T. Rowe Price Associates,
Inc. and T. Rowe Price Stable Asset Management, Inc.; Chairman of the Board,
Director, President, and Trust Officer of T. Rowe Price Trust Company; Chairman
of the Board and Director of T. Rowe Price (Canada), Inc., T. Rowe Price Global
Asset Management Limited, T. Rowe Price Investment Services, Inc., T. Rowe Price
Investment Technologies, Inc., T. Rowe Price Retirement Plan Services, Inc., and
T. Rowe Price Services, Inc.; Director of T. Rowe Price International, Inc., T.
Rowe Price Global Investment Services Limited, T. Rowe Price Insurance Agency,
Inc., TRPH Corporation, and T. Rowe Price Advisory Services, Inc.; and Director
and President of TRP Distribution, Inc., TRP Suburban, Inc., TRP Suburban
Second, Inc., and TRP Suburban Third, Inc.



GEORGE A. ROCHE, Chairman of the Board, Director, and President of T. Rowe Price
Group, Inc.; Director and President of T. Rowe Price Associates, Inc.; Chairman
of the Board and Director of TRP Finance, Inc.; Director of T. Rowe Price
International, Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe
Price Strategic Partners, Inc.; Director and Vice President of T. Rowe Price
Threshold Fund Associates, Inc., TRP Suburban, Inc., TRP Suburban Second, Inc.,
and TRP Suburban Third, Inc.



BRIAN C. ROGERS, Director and Vice President of T. Rowe Price Group, Inc.; Vice
President of T. Rowe Price Associates, Inc.; Vice President of T. Rowe Price
Trust Company.

<PAGE>



M. DAVID TESTA, Vice Chairman of the Board, Chief Investment Officer, Director,
and Vice President of T. Rowe Price Group, Inc.; Chief Investment Officer,
Director, and Vice President of T. Rowe Price Associates, Inc.; Director, T.
Rowe Price International, Inc., T. Rowe Price Global Investment Services
Limited, TRPH Corporation, and T. Rowe Price Global Asset Management Limited;
Director and President of T. Rowe Price (Canada), Inc.; Director and Vice
President of T. Rowe Price Trust Company.



MARTIN G. WADE, Director and Vice President of T. Rowe Price Group, Inc.; Vice
President of T. Rowe Price Associates, Inc.; Chairman of the Board and Director
of T. Rowe Price International, Inc. and T. Rowe Price Global Investment
Services Limited; Director, T. Rowe Price Global Asset Management Limited.


                         ADDITIONAL EXECUTIVE OFFICERS


CRISTINA WASIAK, Chief Financial Officer and Vice President of T. Rowe Price
Group, Inc. and T. Rowe Price Associates, Inc.; Director, TRP Finance, Inc.



         Certain directors and officers of T. Rowe Price Group, Inc., and T.
Rowe Price Associates, Inc. are also officers and/or directors of one or more of
the Price Funds and/or one or more of the affiliated entities listed herein.


         See also "Management of the Funds," in Registrant's Statement of
Additional Information.

ITEM 27. PRINCIPAL UNDERWRITERS

(a)      The principal underwriter for the Registrant is Investment Services.
         Investment Services acts as the principal underwriter for the T. Rowe
         Price family of mutual funds, including the following investment
         companies: T. Rowe Price Growth Stock Fund, Inc., T. Rowe Price New
         Horizons Fund, Inc., T. Rowe Price New Era Fund, Inc., T. Rowe Price
         New Income Fund, Inc., T. Rowe Price Prime Reserve Fund, Inc., T. Rowe
         Price Tax-Free Income Fund, Inc., T. Rowe Price Tax-Exempt Money Fund,
         Inc., T. Rowe Price International Funds, Inc., T. Rowe Price Growth &
         Income Fund, Inc., T. Rowe Price Tax-Free Short-Intermediate Fund,
         Inc., T. Rowe Price Short-Term Bond Fund, Inc., T. Rowe Price High
         Yield Fund, Inc., T. Rowe Price Tax-Free High Yield Fund, Inc., T. Rowe
         Price New America Growth Fund, T. Rowe Price Equity Income Fund, T.
         Rowe Price GNMA Fund, T. Rowe Price Capital Appreciation Fund, T. Rowe
         Price California Tax-Free Income Trust, T. Rowe Price State Tax-Free
<PAGE>

         Income Trust, T. Rowe Price Science & Technology Fund, Inc., T. Rowe
         Price Small-Cap Value Fund, Inc., T. Rowe Price Institutional
         International Funds, Inc., T. Rowe Price U.S. Treasury Funds, Inc., T.
         Rowe Price Index Trust, Inc., T. Rowe Price Spectrum Fund, Inc., T.
         Rowe Price Balanced Fund, Inc., T. Rowe Price Mid-Cap Growth Fund,
         Inc., T. Rowe Price Small-Cap Stock Fund, Inc., T. Rowe Price Tax-Free
         Intermediate Bond Fund, Inc., T. Rowe Price Dividend Growth Fund, Inc.,
         T. Rowe Price Blue Chip Growth Fund, Inc., T. Rowe Price Summit Funds,
         Inc., T. Rowe Price Summit Municipal Funds, Inc., T. Rowe Price Equity
         Series, Inc., T. Rowe Price International Series, Inc., T. Rowe Price
         Fixed Income Series, Inc., T. Rowe Price Personal Strategy Funds, Inc.,
         T. Rowe Price Value Fund, Inc., T. Rowe Price Capital Opportunity Fund,
         Inc., T. Rowe Price Corporate Income Fund, Inc., T. Rowe Price Health
         Sciences Fund, Inc., T. Rowe Price Mid-Cap Value Fund, Inc., T. Rowe
         Price Institutional Equity Funds, Inc., T. Rowe Price Financial
         Services Fund, Inc., T. Rowe Price Diversified Small-Cap Growth Fund,
         Inc., T. Rowe Price Tax-Efficient Funds, Inc., T. Rowe Price Reserve
         Investment Funds, Inc., T. Rowe Price Media & Telecommunications Fund,
         Inc., T. Rowe Price Real Estate Fund, Inc., T. Rowe Price Developing
         Technologies Fund, Inc., and T. Rowe Price Global Technology Fund,
         Inc., T. Rowe Price U.S. Bond Index Fund, Inc., T. Rowe Price
         International Index Fund, Inc., and T. Rowe Price Institutional Income
         Funds, Inc.


         Investment Services is a wholly owned subsidiary of T. Rowe Price
         Associates, Inc., is registered as a broker-dealer under the Securities
         Exchange Act of 1934 and is a member of the National Association of
         Securities Dealers, Inc. Investment Services has been formed for the
         limited purpose of distributing the shares of the Price Funds and will
         not engage in the general securities business. Investment Services will
         not receive any commissions or other compensation for acting as
         principal underwriter.


(b)      The address of each of the directors and officers of Investment
         Services listed below is 100 East Pratt Street, Baltimore, Maryland
         21202.

<TABLE>
<CAPTION>
NAME                                                               POSITIONS AND                   POSITIONS AND
                                                                   OFFICES WITH                    OFFICES WITH
                                                                   UNDERWRITER                     REGISTRANT
<S>                                                                <C>                             <C>
James S. Riepe                                                     Chairman of the Board           Director
                                                                   and Director
Edward C. Bernard                                                  President and Director          None
Henry H. Hopkins                                                   Vice President and Director     Vice President
Wayne D. O'Melia                                                   Vice President and Director     None
Charles E. Vieth                                                   Vice President and Director     None
Patricia M. Archer                                                 Vice President                  None
Steven J. Banks                                                    Vice President                  None
John T. Bielski                                                    Vice President                  None
John H. Boyd                                                       Vice President                  None
Darrell N. Braman                                                  Vice President                  None
Ronae M. Brock                                                     Vice President                  None
Edwin J. Brooks III                                                Vice President                  None
Meredith C. Callanan                                               Vice President                  None
John H. Cammack                                                    Vice President                  None
Ann R. Campbell                                                    Vice President                  None
Christine M. Carolan                                               Vice President                  None
Joseph A. Carrier                                                  Vice President                  None
Laura H. Chasney                                                   Vice President                  None
Renee M. Christoff                                                 Vice President                  None
Jerome A. Clark                                                    Vice President                  None
Joseph A. Crumbling                                                Vice President                  None
Christine S. Fahlund                                               Vice President                  None
Laurie L. Fierro                                                   Vice President                  None
Forrest R. Foss                                                    Vice President                  None
Thomas A. Gannon                                                   Vice President                  None
John R. Gilner                                                     Vice President                  None
John Halaby                                                        Vice President                  None
Douglas E. Harrison                                                Vice President                  None
David J. Healy                                                     Vice President                  None
Joanne M. Healy                                                    Vice President                  None
Joseph P. Healy                                                    Vice President                  None
Walter J. Helmlinger                                               Vice President                  None
Salvador G. LaBella                                                Vice President                  None
Steven A. Larson                                                   Vice President                  None
Cynthia W. LaRue                                                   Vice President                  None
Gayle A. Lomax                                                     Vice President                  None
Gayatri Malik                                                      Vice President                  None
Sarah McCafferty                                                   Vice President                  None
Donald W. McCall                                                   Vice President                  None
Mark J. Mitchell                                                   Vice President                  None
Nancy M. Morris                                                    Vice President                  None
George A. Murnaghan                                                Vice President                  None
Steven E. Norwitz                                                  Vice President                  None
Edmund M. Notzon III                                               Vice President                  None
Barbara A. O'Connor                                                Vice President                  None
David Oestreicher                                                  Vice President                  None
Regina M. Pizzonia                                                 Vice President                  None
Kathleen G. Polk                                                   Vice President                  None
Pamela D. Preston                                                  Vice President                  None
Kylelane Purcell                                                   Vice President                  None
Suzanne J. Ricklin                                                 Vice President                  None
George D. Riedel                                                   Vice President                  None
John R. Rockwell                                                   Vice President                  None
Christopher J. Rohan                                               Vice President                  None
Kenneth J. Rutherford                                              Vice President                  None
Alexander Savich                                                   Vice President                  None
Kristin E. Seeberger                                               Vice President                  None
John W. Seufert                                                    Vice President                  None
Donna B. Singer                                                    Vice President                  None
Carole H. Smith                                                    Vice President                  None
Scott Such                                                         Vice President                  None
Jerome Tuccille                                                    Vice President                  None
Walter Wdowiak                                                     Vice President                  None
Barbara A. O'Connor                                                Treasurer                       None
Barbara A. Van Horn                                                Secretary                       None
Kimberly B. Andersen                                               Assistant Vice President        None
Shane Baldino                                                      Assistant Vice President        None
Richard J. Barna                                                   Assistant Vice President        None
Catherine L. Berkenkemper                                          Assistant Vice President        None
Elizabeth A. Cairns                                                Assistant Vice President        None
Patricia Cannon                                                    Assistant Vice President        None
Jodi Ann Casson                                                    Assistant Vice President        None
Linsley G. Craig                                                   Assistant Vice President        None
Jon Derek Dry                                                      Assistant Vice President        None
Dominick J. Dunnigan                                               Assistant Vice President        None
Cheryl L. Emory                                                    Assistant Vice President        None
Bruce S. Fulton                                                    Assistant Vice President        None
John A. Galateria                                                  Assistant Vice President        None
Karen Glooch                                                       Assistant Vice President        None
Jason L. Gounaris                                                  Assistant Vice President        None
David A.J. Groves                                                  Assistant Vice President        None
Kristen L. Heerema                                                 Assistant Vice President        None
David A. Hueser                                                    Assistant Vice President        None
Shawn M. Isaacson                                                  Assistant Vice President        None
Suzanne M. Knoll                                                   Assistant Vice President        None
Patricia B. Lippert                                                Assistant Vice President        Secretary
Lois Lynch                                                         Assistant Vice President        None
Karen M. Magness                                                   Assistant Vice President        None
Amy L. Marker                                                      Assistant Vice President        None
C. Lillian Matthews                                                Assistant Vice President        None
Janice D. McCrory                                                  Assistant Vice President        None
John T. McGuigan                                                   Assistant Vice President        None
Daniel M. Middelton                                                Assistant Vice President        None
Laurie K. Mitchell                                                 Assistant Vice President        None
Clark P. Neel                                                      Assistant Vice President        None
Danielle Nicholson Smith                                           Assistant Vice President        None
JeanneMarie B. Patella                                             Assistant Vice President        None
Jean E. Ramos-Izquierdo                                            Assistant Vice President        None
Seamus A. Ray                                                      Assistant Vice President        None
Shawn D. Reagan                                                    Assistant Vice President        None
Jennifer L. Richardson                                             Assistant Vice President        None
Kristin M. Rodriguez                                               Assistant Vice President        None
Ramon D. Rodriguez                                                 Assistant Vice President        None
Deborah Seidel                                                     Assistant Vice President        None
Kevin C. Shea                                                      Assistant Vice President        None
Thomas L. Siedell                                                  Assistant Vice President        None
John A. Stranovsky                                                 Assistant Vice President        None
Nancy R. Tabor                                                     Assistant Vice President        None
Robyn S. Thompson                                                  Assistant Vice President        None
Judith B. Ward                                                     Assistant Vice President        None
William R. Weker, Jr.                                              Assistant Vice President        None
Natalie F. Widdowson                                               Assistant Vice President        None
Mary G. Williams                                                   Assistant Vice President        None
Linda C. Wright                                                    Assistant Vice President        None
Timothy R. Yee                                                     Assistant Vice President        None
</TABLE>

<PAGE>

<PAGE>

<PAGE>


(c)      Not applicable. Investment Services will not receive any compensation
         with respect to its activities as underwriter for the Price Funds.


ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

         All accounts, books, and other documents required to be maintained by
the Registrant under Section 31(a) of the Investment Company Act of 1940 and the
rules thereunder will be maintained by the Registrant at its offices at 100 East
Pratt Street, Baltimore, Maryland 21202. Transfer, dividend disbursing, and
shareholder service activities are performed by T. Rowe Price Services, Inc., at
4515 Painters Mill Road, Owings Mills, Maryland 21117. Custodian activities for
the Registrant are performed at State Street Bank and Trust Company's Service
Center (State Street South), 1776 Heritage Drive, Quincy, Massachusetts 02171.

ITEM 29. MANAGEMENT SERVICES

         Registrant is not a party to any management-related service contract,
other than as set forth in the Prospectus or Statement of Additional
Information.

ITEM 30. UNDERTAKINGS

(a)      Not applicable
<PAGE>

         Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the City of Baltimore, State of Maryland, this
September 4, 2002.


         T. ROWE PRICE TAX-FREE INCOME FUND, INC.


         /s/William T. Reynolds
By:      William T. Reynolds
         Chairman of the Board

         Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:

Signature                Title                 Date
---------                -----                 ----

/s/William T. Reynolds   Chairman of the Board  September 4, 2002
William T. Reynolds      (Chief Executive Officer)

/s/Joseph A. Carrier     Treasurer (Chief       September 4, 2002
Joseph A. Carrier        Financial Officer)

*                        Director               September 4, 2002
Calvin W. Burnett

*                        Director               September 4, 2002
Anthony W. Deering

*                        Director               September 4, 2002
Donald W. Dick, Jr.

*                        Director               September 4, 2002
David K. Fagin

*                        Director               September 4, 2002
F. Pierce Linaweaver

*                        Director               September 4, 2002
Hanne M. Merriman

/s/James S. Riepe        Director               September 4, 2002
James S. Riepe

*                        Director               September 4, 2002
John G. Schreiber
<PAGE>


/s/M. David Testa        Director               September 4, 2002
M. David Testa

*                        Director               September 4, 2002
Hubert D. Vos

*                        Director               September 4, 2002
Paul M. Wythes

*/s/Henry H. Hopkins     Vice President and     September 4, 2002
Henry H. Hopkins         Attorney-In-Fact