Annual Report
Short-Term
Bond Fund
May 31, 1998
T. Rowe Price
Report Highlights
Short-Term Bond Fund
o A good economy and flat to declining inflation continued
to benefit the bond market.
o The Short-Term Bond Fund's 3.33% six-month gain notably
surpassed its Lipper peer group and contributed to
superior performance for the one-year period as well.
o The fund added value by moderately extending duration and
maintaining a healthy stake in corporate bonds,
especially BBB rated bonds.
o We took advantage of changing relative values by altering
the portfolio's sector exposure.
o As long as the comfortable balance between economic
growth and low inflation continues, the Federal Reserve
is unlikely to change monetary policy.
Fellow Shareholders
The U.S. bond market enjoyed another period of steady economic
growth, low inflation, and flat to declining interest rates
during the six months ended May 31, 1998. Corporate bonds, in
particular high-yield issues, regained market leadership,
while mortgage-backed bonds were sluggish. In this
environment, the Short-Term Bond Fund posted solid returns
that outpaced its peer group average.
Market Environment
After pushing short-term interest rates down early in the
year, investors in the U.S. bond market largely took a
wait-and-see attitude over the past six months, given the
uncertainty caused by an Asian currency crisis and very strong
economic growth. Fortunately, a feared surge in inflation
never materialized. The annualized consumer price index (CPI)
remained below 2%, and the producer price index (PPI) showed
prices flat to declining.
The Federal Reserve, seeing no inflation but remaining anxious
about growth, has kept the federal funds target rate at its
current level for more than a year. In the absence of Fed
action, shorter-term interest rates drifted toward the target
rate and then fluctuated within a relatively narrow range.
Five-year Treasury rates, for example, swung back and forth in
a 25-basis-point band in the last six months (one hundred
basis points equal one percent).
The fallout from the Asian currency crisis was surprisingly
beneficial. As many economists predicted, weak currency caused
many Asian nations to boost exports, and the resulting influx
of inexpensive goods was among the reasons domestic inflation
remained tame during the period.
Corporate bonds outperformed lower-yielding Treasuries, with
high-yield bonds performing best in response to the strong
economy. Investors shied away from mortgage-backed bonds, as a
year of declining interest rates sparked a flurry of mortgage
prepayments.
Interest Rate Levels
5-Year Treasury Note2-Year Treasury NoteFed Funds Target Rate
5/31/97 6.6 6.29 5.5
6.31 6.01 5.5
6 5.81 5.5
8/31 6.22 5.98 5.5
5.94 5.76 5.5
5.78 5.66 5.5
11/30 5.82 5.73 5.5
5.71 5.66 5.5
5.48 5.4 5.5
2/28 5.6 5.54 5.5
5.62 5.57 5.5
5.72 5.66 5.5
5/31/98 5.57 5.56 5.5
Performance and Strategy Review
Performance Comparison
Periods Ended 5/31/98 6 Months 12 Months
_____________________________________________________________
Short-Term Bond Fund 3.33% 6.87%
Lipper Short Investment-
Grade Debt Funds Average 2.96 6.53
Your fund finished the six-month period with a 3.33% total return, well
ahead of the 2.96% gain for the Lipper Short Investment-Grade Debt Funds
Average. That showing also helped the fund exceed its benchmark over the
past 12 months with a 6.87% return. We added value by maintaining a
slightly longer duration than the peer group and by overweighting
corporate debt securities, particularly lower-quality, BBB rated issues
with improving credit trends. Dividends were relatively stable.
In the past six months, the fund took a somewhat more aggressive interest
rate posture within its prescribed limitations. Currently, it carries a
2.7-year weighted average maturity and a 2.2-year weighted average
effective duration, somewhat longer (more interest rate sensitive) than
six months ago. The persistently favorable interest rate environment, as
well as low (and falling) domestic inflation, made this shift possible. As
short-term rates slipped, the positioning provided the fund with
attractive price gains.
Quality Diversification pie
AAA 44%
AA 11%
A 26%
BBB 17%
BB and Below 2%
The fund's success, however, owed more to its relatively high weighting in
corporate bonds. More than half of fund assets were in corporate bonds at
the end of the period, with 17% in issues rated BBB and an additional 2%
in split-rated bonds, reflected as a BB position in the accompanying
table, which are rated investment grade by some agencies but not others.
These holdings not only offered a comparatively high income but also
responded well to sustained economic growth and a broad trend toward
improving credit quality. Nonetheless, the fund finished the period with
an average credit quality of AA, the same as six months ago.
The fund's sector positioning shifted as we rotated into better valued
sectors when some of our best opportunities became fully valued. Utilities
continued to be the largest corporate sector weighting, but we reduced
banking and media and communications holdings after they performed
strongly. On the other hand, we added significantly to industrials, where
prices became more compelling after the sector lagged the market. We also
picked up many attractively priced consumer products issues in response to
the growing strength in consumer sentiment and demand. Some consumer
issues continued to lag through the end of the period, though fortunately
not enough to offset the portfolio's stronger performers or to drag down
overall returns.
Additionally, we trimmed the fund's mortgage overweighting to a more
neutral exposure relative to its peer group after falling interest rates
early in the period caused mortgage prepayment risk to rise. The freed-up
assets were redeployed to high-quality asset-backed and government agency
securities.
Outlook
The course of the domestic bond market will depend largely on how long the
U.S. economy and inflation maintain their surprising balancing act. While
adding uncertainty to 1998's second-half growth outlook, the continuing
Asian crisis may help keep inflation in a range that encourages Fed
inaction.
As long as the Fed holds the line on interest rates and the economy and
corporate profits remain favorable, we are likely to pursue a strategy
that incorporates longer bonds and lower-quality corporate holdings.
Should the environment change, we would probably increase holdings in
asset-backed, federal agency, and mortgage-backed holdings.
Respectfully submitted,
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
June 22, 1998
T. Rowe Price Short-Term Bond Fund
Portfolio Highlights
Key statistics
11/30/97 5/31/98
_____________________________________________________________________
Price Per Share $ 4.67 $ 4.69
Dividends Per Share
For 6 months 0.14 0.13
For 12 months 0.27 0.27
Dividend Yield *
For 6 months 5.99% 5.79%
For 12 months 6.08 5.97
Weighted Average Maturity (years) 2.3 2.7
Weighted Average Effective
Duration (years) 1.9 2.2
Weighted Average Quality ** AA AA
* Dividends earned and reinvested for the periods indicated are
annualized and divided by the average daily net asset values per share
for the same period.
** Based on T. Rowe Price research.
Sector Diversification
Percent of Percent of
Net Assets Net Assets
11/30/97 5/31/98
________________________________________________________________
Corporate Bonds and Notes 50% 51%
Utilities 10 10
Industrial 4 8
Consumer Products 2 7
Finance and Credit 5 6
Banking 10 6
All Other 19 14
Asset-Backed Securities 4 8
Mortgage-Backed Securities 30 23
U.S. Government Obligations 11 11
U.S. Treasuries 4 3
Government Agency Obligations 7 8
Money Market Funds* 5 7
Other Assets Less Liabilities - -
__________________________________________________________________
Total 100% 100%
* See note at end of financial statements.
T. Rowe Price Short-Term Bond Fund
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the
fund over the past 10 fiscal year periods or since inception (for funds
lacking 10-year records). The result is compared with a broad-based
average or index. The index return does not reflect expenses, which have
been deducted from the fund's return.
Short-Term Bond Fund
Lehman 1-3 Year
Government/Corporate Short-Term
Bond Index Bond Fund
5/88 $ 10,000 $ 10,000
5/89 10,802 10,708
5/90 11,807 11,551
5/91 13,109 12,666
5/92 14,383 13,841
5/93 15,382 14,866
5/94 15,705 15,067
5/95 16,877 15,581
5/96 17,780 16,295
5/97 18,964 17,318
5/98 20,292 18,508
Average Annual Compound Total Return
This table shows how the fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a
constant rate.
Periods Ended
5/31/98 1 Year 3 Years 5 Years 10 Years
________________________________________________________________
Short-Term
Bond Fund 6.87% 5.91% 4.48% 6.35%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
Financial Highlights
For a share outstanding throughout each period
Year 3 Months+ Year
Ended Ended Ended
5/31/985/31/975/31/965/31/95 5/31/94 2/28/94
NET ASSET VALUE
Beginning of
period $4.65 $4.64 $4.72 $4.85 $ 5.00 $5.09
Investment
activities
Net investment
income 0.27 0.27 0.29 0.29 0.07 0.31
Net realized and
unrealized gain
(loss) 0.04 0.01 (0.08) (0.13) (0.15) (0.09)
Total from
investment
activities 0.31 0.28 0.21 0.16 (0.08) 0.22
Distributions
Net investment
income (0.27) (0.26) (0.28) (0.29) (0.07) (0.28)
Tax return of
capital - (0.01) (0.01) - - (0.03)
Total
distributions (0.27) (0.27) (0.29) (0.29) (0.07) (0.31)
NET ASSET VALUE
End of period $4.69 $4.65 $4.64 $4.72 $ 4.85 $5.00
_________________________________________________
Ratios/Supplemental Data
Total return* 6.87% 6.28% 4.58% 3.41% (1.65)% 4.36%
Ratio of expenses to
average net assets 0.72% 0.74% 0.72% 0.79% 0.79%! 0.74%
Ratio of net investment
income to average
net assets 5.82% 5.91% 6.15% 6.09% 5.56%! 6.00%
Portfolio turnover
rate 73.0% 103.9% 118.7% 136.9% 222.8%! 90.8%
Net assets, end
of period
(in thousands)$331,955$373,284$429,498$493,726$601,924$668,066
* Total return reflects the rate that an investor would have earned on
an investment in the fund during each
period, assuming reinvestment of all distributions.
! Annualized.
+ The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
May 31, 1998
Statement of Net Assets
Par/Shares Value
In thousands
CORPORATE BONDS AND NOTES 50.5%
Banking 5.7%
Banco Generale, (144a), 7.70%, 8/1/02 $ 4,450 $ 4,342
MBNA, Sub. Notes, 7.25%, 9/15/02 2,650 2,731
Mercantile Bankshares, Sr. Notes,
(144a), 6.13%, 7/15/98! 3,500 3,499
Mercantile Safe Deposit & Trust,
6.53%, 7/3/00 4,200 4,242
Morgan Guaranty Trust, Sub. Notes,
7.375%, 2/1/02 4,000 4,175
18,989
Consumer Products 6.5%
Beckman Instruments, Sr. Notes, (144a),
7.10%, 3/4/03 1,625 1,631
Grand Metropolitan Investment, Gtd.
Notes, 6.50%, 9/15/99 4,450 4,476
Nabisco, 6.00%, 2/15/11 3,500 3,474
Pepsico, MTN, 5.75%, 1/2/03 3,700 3,669
Philip Morris, 7.25%, 9/15/01 4,300 4,423
Sony, 6.125%, 3/4/03 4,025 4,025
21,698
Energy & Petroleum 5.4%
MCN Financing, (144a), 6.305%, 6/1/98 4,275 4,282
PDV America
Sr. Notes
7.25%, 8/1/98 2,700 2,706
7.875%, 8/1/03 4,800 4,997
Williams Cos, 6.125%, 2/15/02 2,500 2,487
YPF Sociedad Anonima, 7.25%, 3/15/03 3,300 3,260
17,732
Finance and Credit 6.4%
Amvescap, Sr. Notes, (144a), 6.375%,
5/15/03 4,250 4,257
Ciesco, MTN, (144a), 7.38%, 4/19/00! 3,750 3,811
General Electric Capital, MTN, 6.15%,
11/5/01 4,150 4,183
Heller Financial, 7.875%, 11/1/99 3,780 3,865
International Lease Finance, MTN,
6.69%, 4/3/00 5,000 5,065
21,181
Industrials 8.4%
Allied-Signal, 5.75%, 3/15/01 3,350 3,330
General Motors Acceptance Corporation, MTN
6.625%, 4/24/00 4,400 4,451
Ingersoll Rand
6.34%, 12/3/01 1,000 1,005
Ingersoll Rand
Sr. Notes, 6.255%, 2/15/01 $ 2,700 $ 2,710
Lockheed, 6.75%, 3/15/03 4,300 4,396
Praxair, 6.15%, 4/15/03 3,350 3,341
USA Waste Services, Sr. Notes,
6.50%, 12/15/02 4,300 4,311
Waste Management, 6.625%, 7/15/02 3,350 3,367
Westinghouse Credit, MTN, 9.04%, 6/1/98 1,000 1,000
27,911
Insurance 0.7%
Chubb, Deb., 8.75%, 11/15/99 2,225 2,274
2,274
Investment Dealers 2.1%
Lehman Brothers, Sr. Sub. Notes,
7.25%, 4/15/03 3,600 3,732
Salomon Smith Barney Holdings, 7.30%,
5/15/02 3,250 3,376
7,108
Media and Communications 2.6%
NWCG Holdings, Sr. Disc. Notes,
Zero Coupon, 6/15/99 4,550 4,273
Time Warner, (144a), 6.10%, 12/30/01 4,200 4,172
8,445
Transportation 2.7%
Chilbar Shipping, 6.98%, 7/15/01 1,753 1,795
Delta Air Lines, ETC, 9.60%,
5/26 - 6/1/00 2,960 3,151
ERAC USA Finance, (144a), 6.375%,
5/15/03 4,000 3,995
8,941
Utilities 10.0%
CE Electric UK Funding, Sr. Notes,
(144a), 6.853%, 12/30/04 4,000 4,102
Midamerican Energy, Sr. Notes, 6.50%,
12/15/01 4,450 4,502
Niagara Mohawk Power, 7.375%, 8/1/03 2,000 2,079
Orange and Rockland Utilities, Deb.,
6.14%, 3/1/00 4,500 4,505
Pacific Gas and Electric, 1st Mtg.
Bonds, 8.75%, 1/1/01 4,500 4,784
Progress Capital Holdings, MTN, (144a),
6.88%, 8/1/01 4,400 4,491
Public Service Electric & Gas, Mtg.
Bonds, 8.875%, 6/1/03 4,350 4,846
Texas NM Power, 1st Mtg. Notes,
9.25%, 9/15/00 1,750 1,848
United Illuminating, 6.25%, 12/15/02 2,150 2,128
33,285
Total Corporate Bonds and Notes (Cost
$166,895) 167,564
ASSET-BACKED SECURITIES 7.5%
Auto-Backed 0.9%
Banc One Auto Grantor Trust, 6.27%,
11/20/03
$ 2,876 $ 2,891
USAA Auto Loan Grantor Trust, 5.00%,
11/15/99 77 76
2,967
Credit Card-Backed 2.5%
Fingerhut Master Trust, 6.07%, 2/15/05 3,300 3,320
MBNA Master Credit Card Trust, VR,
5.837%, 3/15/01 5,000 5,005
8,325
Home Equity Loans-Backed 1.0%
IMC Home Equity Loan Trust, 6.36%, 6/1/28 3,300 3,299
3,299
Receivables-Backed 1.9%
Harley Davidson Eaglemark
5.94%, 2/15/04 750 753
(144a), 6.35%, 10/15/02 2,225 2,242
NPF VI, 6.22%, 6/1/02 3,300 3,300
6,295
Utility "Stranded" Asset Trust 1.2%
California Infrastructure
6.25%, 6/25/04 2,175 2,200
6.28%, 9/25/05 1,900 1,929
4,129
Total Asset-Backed Securities (Cost
$24,927) 25,015
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 22.8%
U.S. Government Agency Asset-Backed 1.0%
Federal Home Loan Mortgage, CMO,
6.92%, 1/25/12 3,440 3,474
3,474
U.S. Government Agency Obligations 20.5%
Federal Home Loan Mortgage
9.00%, 7/1/01 - 7/1/02 1,062 1,094
9.50%, 8/1/01 - 9/1/02 579 604
10.00%, 1/1/01 - 10/1/05 378 398
11.00%, 8/1/00 - 2/1/01 233 249
5 year balloon
5.00%, 5/1 - 6/1/99 3,264 3,260
Federal Home Loan Mortgage
5 year balloon
6.00%, 4/1/99 $ 7,613 $ 7,612
7 year balloon
6.50%, 12/1/99 7,434 7,466
7.00%, 7/1/99 1,067 1,071
REMIC
6.00%, 8/15/06 - 1/15/08 20,500 20,488
6.50%, 1/15/17 4,224 4,236
7.50%, 1/15/21 773 775
Federal National Mortgage Assn.
5.50%, 11/1/05 71 70
7.00%, 4/1/09 9,655 9,885
9.00%, 5/1/05 4,137 4,233
11.00%, 10/1/00 - 1/1/01 102 106
7 year balloon
7.00%, 1/1/00 1,470 1,479
9.00%, 7/1/98 101 101
REMIC, 7.50%, 8/25/05 4,679 4,713
67,840
U.S. Government Guaranteed Obligations 1.3%
Government National Mortgage Assn.
I
8.50%, 2/15/05 - 3/15/06 494 517
10.50%, 11/15/15 128 143
GPM, I
8.50%, 1/15/06 67 70
9.50%, 8/15 - 10/15/09 30 32
11.00%, 8/15/10 57 63
11.25%, 6/15/13 - 1/15/16 394 441
11.75%, 7/15/13 - 11/15/15 1,640 1,856
13.00%, 9/15/11 8 9
GPM, II, 11.00%, 9/20/13 - 4/20/14 12 13
Midget, I
9.00%, 7/15/01 - 2/15/06 554 577
9.50%, 5/15/01 - 4/15/05 166 173
10.00%, 6/15/01 - 10/15/04 402 423
11.50%, 5/15/00 8 9
4,326
Total U.S. Government Mortgage-Backed
Securities (Cost $75,177) 75,640
U.S. GOVERNMENT OBLIGATIONS 11.2%
U.S. Government Agency Obligations 7.9%
Federal National Mortgage Assn.
5.75%, 4/15/03 $ 10,000 $ 9,986
Deb., 6.15%, 12/14/01 4,300 4,283
U.S. Department Housing & Urban Development
6.02%, 8/1/99 11,730 11,904
26,173
U.S. Treasury Obligations 3.3%
U.S. Treasury Notes
5.625%, 5/15/01 6,500 6,515
6.25%, 8/31/02 4,500 4,605
11,120
Total U.S. Government Obligations
(Cost $37,034) 37,293
NON-U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 0.4%
Great Western Bank, ARM, 6.01%, 7/25/17 1,113 1,076
Salomon Mortgage Security VII, CMO, ARM,
7.53%, 11/25/20 62 63
Total Non-U.S. Government Mortgage-Backed
Securities
(Cost $1,177) 1,139
MONEY MARKET FUNDS 7.5%
Reserve Investment Fund, 5.67% # 24,862 24,862
Total Money Market Funds (Cost $24,862) 24,862
Total Investments in Securities
99.9% of Net Assets (Cost $330,072) $ 331,513
Other Assets Less Liabilities 442
NET ASSETS $ 331,955
__________
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ (1,533)
Accumulated net realized gain/loss -
net of distributions (34,763)
Net unrealized gain (loss) 1,441
Paid-in-capital applicable to 70,781,597
shares of $0.01 par value capital stock
outstanding; 1,000,000,000 shares authorized 366,810
NET ASSETS $ 331,955
__________
NET ASSET VALUE PER SHARE $ 4.69
__________
! Private Placement
# Seven-day yield
ARM Adjustable Rate Mortgage
CMO Collateralized Mortgage Obligation
ETC Equipment Trust Certificate
GPM Graduated Payment Mortgage
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
VR Variable Rate
144a Security was purchased pursuant to Rule 144a under the
Securities Act of 1933 and may not be resold subject to that
rule except to qualified institutional buyers- total of such
securities at period-end amounts to 12.3% of net assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
Statement of Operations
In thousands
Year
Ended
5/31/98
Investment Income
Interest income $ 22,803
Expenses
Investment management 1,478
Shareholder servicing 719
Custody and accounting 169
Prospectus and shareholder reports 68
Registration 35
Legal and audit 17
Directors 8
Miscellaneous 7
Total expenses 2,501
Net investment income 20,302
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 1,531
Change in net unrealized gain or loss on securities 1,771
Net realized and unrealized gain (loss) 3,302
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 23,604
___________
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
Statement of Changes in Net Assets
In thousands
Year
Ended
5/31/98 5/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 20,302 $ 24,745
Net realized gain (loss) 1,531 (2,019)
Change in net unrealized
gain or loss 1,771 2,935
Increase (decrease) in net assets
from operations 23,604 25,661
Distributions to shareholders
Net investment income (20,328) (24,117)
Tax return of capital - (628)
Decrease in net assets from
distributions (20,328) (24,745)
Capital share transactions*
Shares sold 95,006 132,508
Distributions reinvested 17,835 21,719
Shares redeemed (157,446) (211,357)
Increase (decrease) in net assets
from capital share transactions (44,605) (57,130)
Net Assets
Increase (decrease) during period (41,329) (56,214)
Beginning of period 373,284 429,498
End of period $331,955 $ 373,284
________________________
*Share information
Shares sold 20,291 28,457
Distributions reinvested 3,809 4,666
Shares redeemed (33,633) (45,418)
Increase (decrease) in shares
outstanding (9,533) (12,295)
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
May 31, 1998
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Short-Term Bond Fund, Inc. (the fund) is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on March 2, 1984.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company
industry; these principles may require the use of estimates by fund
management.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities originally issued with maturities of one
year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity,
and type, as well as prices quoted by dealers who make markets in such
securities. Securities with original maturities of less than one year are
stated at fair value, which is determined by using a matrix system that
establishes a value for each security based on money market yields.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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.
Premiums and Discounts Premiums and discounts on debt securities, other
than mortgage-backed securities, are amortized for both financial
reporting and tax purposes. Premiums and discounts on mortgage-backed
securities are recognized upon principal repayment as gain or loss for
financial reporting purposes and as ordinary income for tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and
losses are reported on the identified cost basis. Distributions to
shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal
income tax regulations and may differ from those determined in accordance
with generally accepted accounting principles.
Note 2 - Investment Transactions
Consistent with its investment objective, the fund engages in the
following practices to manage exposure to certain risks or enhance
performance. The investment objective, policies, program, and risk factors
of the fund are described more fully in the fund's prospectus and
Statement of Additional Information.
Securities Lending The fund lends its securities to approved brokers to
earn additional income and receives cash and U.S. Treasury securities as
collateral against the loans. Cash collateral received is invested in a
money market pooled account by the fund's lending agent. Collateral is
maintained over the life of the loan in an amount not less than 100% of
the value of loaned securities. Although risk is mitigated by the
collateral, the fund could experience a delay in recovering its securities
and a possible loss of income or value if the borrower fails to return
them. At May 31, 1998, the value of loaned securities was $3,245,000;
aggregate collateral consisted of $ 3,376,000 in the securities lending
collateral pool.
Other Purchases and sales of portfolio securities, other than short-term
and U.S. government securities, aggregated $151,754,000 and $178,280,000,
respectively, for the year ended May 31, 1998. Purchases and sales of U.S.
government securities aggregated $87,715,000 and $111,058,000,
respectively, for the year ended May 31, 1998.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends
to continue to qualify as a regulated investment company and distribute
all of its taxable income. The fund has unused realized capital loss
carryforwards for federal income tax purposes of $34,922,000, of which
$964,000 expires in 2001, $4,515,000 in 2002, and $29,443,000 thereafter
through 2005. Capital loss carryforwards utilized in 1998 amounted to
$1,474,000. The fund intends to retain gains realized in future periods
that may be offset by available capital loss carryforwards.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, the following
reclassifications were made during the year ended May 31, 1998. The
results of operations and net assets were not affected by the
increases/(decreases) to these accounts.
Undistributed net investment income $ 366,000
Undistributed net realized gain 430,000
Paid-in-capital (796,000)
At May 31, 1998, the aggregate cost of investments for federal income tax
and financial reporting purposes was $330,072,000, and net unrealized gain
aggregated $1,441,000, of which $2,092,000 related to appreciated
investments and $651,000 to depreciated investments.
Note 4 - Related Party Transactions
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment
management fee, of which $118,000 was payable at May 31, 1998. The fee is
computed daily and paid monthly, and consists of an individual fund fee
equal to 0.10% of average daily net assets and a group fee. The group fee
is based on the combined assets of certain mutual funds sponsored by the
manager or Rowe Price-Fleming International, Inc. (the group). The group
fee rate ranges from 0.48% for the first $1 billion of assets to 0.30% for
assets in excess of $80 billion. At May 31, 1998, and for the year then
ended, the effective annual group fee rate was 0.32%. The fund pays a
pro-rata share of the group fee based on the ratio of its net assets to
those of the group.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund
receives certain other services. The manager computes the daily share
price and maintains the financial records of the fund. T. Rowe Price
Services, Inc., is the fund's transfer and dividend disbursing agent and
provides shareholder and administrative services to the fund. T. Rowe
Price Retirement Plan Services, Inc., provides subaccounting and
recordkeeping services for certain retirement accounts invested in the
fund. The fund incurred expenses pursuant to these related party
agreements totaling approximately $678,000 for the year ended May 31,
1998, of which $64,000 was payable at period-end.
Additionally, the fund is one of several T. Rowe Price-sponsored mutual
funds (underlying funds) in which the T. Rowe Price Spectrum Funds
(Spectrum) may invest. Spectrum does not invest in the underlying funds
for the purpose of exercising management or control. Expenses associated
with the operation of Spectrum are borne by each underlying fund to the
extent of estimated savings to it and in proportion to the average daily
value of its shares owned by Spectrum, pursuant to special servicing
agreements between and among Spectrum, the underlying funds, T. Rowe
Price, and, in the case of T. Rowe Price Spectrum International, Rowe
Price-Fleming International.
For the year ended May 31, 1998, the fund was allocated $45,000 of
Spectrum expenses, $11,000 of which was payable at period-end. No shares
of the fund were held by Spectrum at May 31, 1998.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and
other accounts managed by T. Rowe Price and its affiliates and are not
available to the public. The Reserve Funds pay no investment management
fees. Distributions from the Reserve Funds to the fund for the year ended
May 31, 1998, totaled $727,000 and are reflected as interest income in the
accompanying Statement of Operations.
T. Rowe Price Short-Term Bond Fund
Report of Independent Accountants
To the Board of Directors and Shareholders of T. Rowe Price Short-Term
Bond Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial
position of T. Rowe Price Short-Term Bond Fund, Inc. (the "Fund") at May
31, 1998, and the results of its operations, the changes in its net assets
and the financial highlights for each of the fiscal periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at May 31, 1998 by
correspondence with the custodian and, where appropriate, the application
of alternative auditing procedures for unsettled security transactions,
provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 17, 1998
T. Rowe Price Shareholder Services
Investment Services And Information
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark)
and the T. Rowe Price Web site on the Internet. Address:
www.troweprice.com
Discount Brokerage*
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
Investment Information
Combined Statement Overview of all your accounts with T. Rowe Price.
Shareholder Reports Fund managers' reviews of their strategies and
results.
T. Rowe Price Report Quarterly investment newsletter discussing
markets and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial
markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Short-Term Bond Fund(registered trademark)
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor.
F55-050 5/31/98
