<PAGE>
Semiannual Report
SHORT-TERM
U.S. GOVERNMENT
FUND
NOVEMBER 30, 1996
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. ROWE PRICE
<PAGE>
REPORT HIGHLIGHTS
-----------------------------------------------------------------------------
. Bond markets rebounded from their first-half weakness to provide strong
returns for the six months ended November 30, 1996, and positive returns for
the past 12 months.
. Corporate bonds generated the best results for six months, followed by
mortgage-backed securities, but the latter outperformed for the 12-month
period.
. Your fund's 6- and 12-month returns of 5.03% and 5.41%, respectively,
exceeded its Lipper peer group average for both periods.
. We increased our holdings of mortgage-backed securities primarily by
establishing a large position in securities backed by short-duration balloon
mortgages.
. We expect the economic environment of 1997 to remain favorable for fixed
income investments, with income largely determining performance.
<PAGE>
FELLOW SHAREHOLDERS
The fixed income market turned around during the six months ended November 30 as
interest rates retreated and bond prices rose. The pace of consumer spending,
which had invigorated the economy in the first half, slowed sharply in the third
quarter, as did employment growth. This assuaged fears that the Federal Reserve
would tighten monetary policy and paved the way for strong six-month bond
performance, but 12-month results still reflected the unfavorable bond
environment of early 1996.
The yield on the one-year Treasury bill ended the period almost exactly where it
began a year ago, as shown in the chart, but was as much as 40 basis points
higher during the summer. (One hundred basis points equal one percentage point.)
Rates on two- and five-year securities rose on balance for the 12-month period
but declined sharply from their summer peaks, providing good price appreciation.
Gratifying as this rally was, it did not fully recoup the price losses
experienced in the first five months of 1996.
[LINE GRAPH APPEARS HERE]
Corporate bonds outperformed both Treasuries and mortgage-backed securities
during the past six months, as mortgages lost some luster when falling interest
rates sparked prepayment concerns. For the 12-month period, however, mortgage-
backed securities were the clear winner among high-quality bonds, surpassing
returns on comparable Treasuries by 200 basis points and corporate returns by
about 100.
PERFORMANCE AND STRATEGY REVIEW
For the six-month period ended November 30, 1996, your fund's income of $0.14
per share was augmented by a $0.09 increase in share
1
<PAGE>
<TABLE>
<S> <C> <C>
PERFORMANCE COMPARISON
Periods Ended 11/30/96 6 Months 12 Months
- ---------------------------------------------------------
Short-Term
U.S. Government Fund 5.03% 5.41%
.........................................................
Lipper Average of Short-Term
U.S. Government Funds 4.04 5.09
.........................................................
</TABLE>
price to generate a strong total return of 5.03%. Reflecting the unfavorable
fixed income environment earlier in the year, the fund's 12-month return was
only slightly higher as income of $0.27 was slightly offset by a $0.03 net
decline in share price over the period. For both periods your fund's results
surpassed the average return of our Lipper peer group, shown in the table.
The major portfolio changes during the six months reflected efforts to increase
the fund's yield and reduce "extension risk" -- the lengthening of a mortgage
security's effective maturity when interest rates rise. We raised our holdings
of mortgage-backed securities sharply from 34% of net assets to 61% and trimmed
positions in Treasuries, other government agency securities, and high-quality
corporates, some of which were called. The mortgage securities' increase
consisted primarily of new positions in Freddie Mac securities backed by balloon
mortgages, now about 29% of net assets. These securities were attractively
priced at the time of purchase, providing about 35 basis points of additional
yield over Treasuries. Furthermore, their short durations (about 1.3 years) fit
well with your fund's investment objective of high income with minimal price
fluctuation. A balloon mortgage amortizes over 30 years, but the homeowner must
pay it off in either five or seven years, so balloons' average life and
durations are short. (Duration measures a bond's price sensitivity to interest
rate changes. A duration of two years, for example, means the fund's price could
be expected to rise or fall approximately 2% for each percentage point fall or
rise in interest rates.)
We also established a small position, 3.6% of net assets, in a Fannie Mae
collateralized mortgage obligation (CMO) inverse floater based on LIBOR,* a type
of derivative security whose coupon value moves in the opposite direction of
interest rates. This security offers high income with minimal extension risk
because it is collateralized with balloon mortgages that mature in three years;
however, it does represent additional interest rate risk if rates were to rise
more than three percentage points within one year, which we do not expect.
*London interbank offered rate
2
<PAGE>
These and other smaller adjustments reduced the portfolio's overall
duration from 2.6 years to 2.2, but did not affect the average credit
quality, which remains high at AAA-.
OUTLOOK
While there will doubtless be variations from quarter to quarter, we look
for 1997 to be a repeat of 1996 on balance, with low unemployment,
inflation just edging up, and moderate overall growth. Through most of
1996, the bond market's response to the economic climate assisted the Fed
in keeping the economy on a moderate growth track, which is appropriate for
this phase of the business cycle. Until either growth or inflation deviates
from its current path, we believe interest rates will continue to fluctuate
in the same ranges as during the past six months.
Against this benign backdrop, we would expect income to be the determining
factor in your fund's total return over the coming months. With its focus
on high-quality securities and attractive income, the fund should perform
well in this environment.
Respectfully submitted,
/s/ Peter Van Dyke
Peter Van Dyke
President and Chairman of the Investment Advisory Committee
December 20, 1996
3
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS
<TABLE>
<CAPTION>
KEY STATISTICS
5/31/96 11/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
Price Per Share $4.59 $4.68
................................................................................
Dividends Per Share
................................................................................
For 6 months 0.14 0.14
........................................................................
For 12 months 0.28 0.27
........................................................................
Dividend Yield *
................................................................................
For 6 months 5.88% 6.04%
........................................................................
For 12 months 6.07 6.05
........................................................................
Weighted Average Maturity (years) 2.8 2.8
................................................................................
Weighted Average Effective
Duration (years) 2.6 2.2
................................................................................
Weighted Average Quality ** AAA- AAA-
................................................................................
</TABLE>
* 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.
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
5/31/96 11/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government
Mortgage-Backed Securities 34% 61%
................................................................................
U.S. Treasury Obligations 23 16
................................................................................
Corporate Bonds and Notes 22 14
................................................................................
Federal National Mortgage
Association (Fannie Mae)
Debentures 16 5
................................................................................
Home Equity Loan-Backed
Securities 4 4
................................................................................
Commercial Paper - 4
................................................................................
Nongovernment Agency
Adjustable Rate Mortgages 3 2
................................................................................
Federal Home Loan Mortgage
(Freddie Mac) Securities 4 -
................................................................................
Other Assets Less
Liabilities -6 -6
- --------------------------------------------------------------------------------
Total 100% 100%
</TABLE>
4
<PAGE>
T. Rowe Price Short-Term U.S. Government 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.
Note: The fund's investment program was broadened on April 1, 1995, to
focus on a variety of short-term U.S. government securities rather than
primarily on adjustable rate mortgages. Since the fund's average
maturity and duration are now longer than before April 1995, we show
both six-month and two-year benchmarks.
SHORT-TERM U.S. GOVERNMENT FUND
------------------------------------------------------------------------
[GRAPH APPEARS HERE]
Salomon 2-Year Fund-Line
9/30/91 10,000 10,000 10,000
11/91 10,091 10,200 10,153
11/92 10,511 10,929 10,546
11/93 10,854 11,598 10,846
11/94 11,304 11,674 10,841
11/95 11,980 12,962 11,940
11/96 12,627 13,682 12,586
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.
<TABLE>
<CAPTION>
Since Inception
Periods Ended 11/30/96 1 Year 3 Years 5 Years Inception Date
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term U.S. Government Fund 5.41% 5.08% 4.39% 4.55% 9/30/91
.......................................................................................
</TABLE>
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase. The
fund is neither insured nor guaranteed by the U.S. government.
5
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Unaudited
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
- --------------------------------------------------------------------------------
6 Months Year 3 Months++ Year 9/30/91
Ended Ended Ended Ended to
11/30/96 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 2/29/92
NET ASSET VALUE
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning of period $ 4.59 $ 4.67 $ 4.65 $ 4.75 $ 4.83 $ 4.97 $ 5.00
................................................................................
Investment activities
Net investment income 0.14* 0.28* 0.26* 0.06* 0.23* 0.29* 0.16*
Net realized and
unrealized gain (loss) 0.09 (0.08) 0.01 (0.11) (0.08) (0.13) (0.03)
................................................................................
Total from
investment activities 0.23 0.20 0.27 (0.05) 0.15 0.16 0.13
................................................................................
Distributions
Net investment income (0.14) (0.27) (0.24) (0.05) (0.17) (0.28) (0.16)
Tax return of capital - (0.01) (0.01) - (0.06) (0.02) -
................................................................................
Total distributions (0.14) (0.28) (0.25) (0.05) (0.23) (0.30) (0.16)
................................................................................
NET ASSET VALUE
End of period $ 4.68 $ 4.59 $ 4.67 $ 4.65 $ 4.75 $ 4.83 $ 4.97
--------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data
<S> <C> <C> <C> <C> <C> <C> <C>
Total return 5.03%* 4.31%* 6.14%* (0.97)%* 3.11%* 3.33%* 2.58%*
.............................................................................................................
Ratio of expenses to
average net assets 0.70%*+ 0.70%* 0.59%* 0.50%*+ 0.40%* 0.25%* 0.00%*+
.............................................................................................................
Ratio of net investment
income to average
net assets 5.96%*+ 5.93%* 5.48%* 4.69%*+ 4.78%* 5.96%* 7.45%*+
.............................................................................................................
Portfolio turnover rate 85.7%+ 152.8% 100.0% 27.6%+ 70.4% 110.8% 98.4%+
.............................................................................................................
Net assets, end of period
(in thousands) $ 97,542 $ 98,529 $112,387 $ 187,517 $225,154 $476,448 $342,939
.............................................................................................................
</TABLE>
* The manager agreed to bear all expenses of the fund through June 30, 1992.
Excludes expenses in excess of a 0.20% voluntary expense limitation in effect
July 1, 1992 through July 31, 1992, a 0.30% voluntary expense limitation in
effect August 1, 1992 through August 31, 1992, a 0.40% voluntary expense
limitation in effect September 1, 1992 through February 28, 1994, a 0.50%
voluntary expense limitation in effect March 1, 1994 through August 31, 1994,
a 0.60% voluntary expense limitation in effect September 1, 1994 through
February 28, 1995, and a 0.70% voluntary expense limitation in effect
March 1, 1995 through May 31, 1998.
+ Annualized.
++ The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Unaudited November 30, 1996
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS Par Value
- --------------------------------------------------------------------------------
In thousands
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 60.7%
U.S. Government Agency ARM 4.1%
Federal National Mortgage Assn.
<S> <C> <C>
6.069%, 11/1/20 - 5/1/31 $ 880 $ 878
.........................................................................
6.08%, 3/1/18 37 37
.........................................................................
6.084%, 5/1/17 - 8/1/20 491 490
.........................................................................
6.089%, 12/1/16 - 7/1/27 803 802
.........................................................................
6.09%, 3/1/19 17 17
.........................................................................
6.101%, 5/1/24 132 132
.........................................................................
6.122%, 3/1/20 143 143
.........................................................................
6.124%, 1/1/19 815 810
.........................................................................
6.125%, 8/1/17 - 7/1/18 370 367
.........................................................................
6.817%, 10/1/14 10 11
.........................................................................
6.875%, 5/1/17 48 48
.........................................................................
7.482%, 11/1/21 217 220
................................................................................
3,955
...........
U.S. Government Agency Asset-Backed 10.1%
Federal National Mortgage Assn., 8.00%, 4/25/25 9,500 9,862
................................................................................
9,862
...........
U.S. Government Agency Obligations 42.4%
Federal Home Loan Mortgage
5.85%, 11/15/17 2,296 2,295
.........................................................................
7.50%, 11/15/17 2,000 2,060
.........................................................................
5 year balloon
5.00%, 6/1/99 493 486
.........................................................................
6.50%, 6/1/99 3,833 3,881
.........................................................................
7.00%, 1/1/00 - 9/1/01 6,374 6,455
.........................................................................
8.00%, 3/1/97 - 2/1/00 1,571 1,576
.........................................................................
7 year balloon
6.50%, 12/1/99 - 10/1/03 5,291 5,329
.........................................................................
7.00%, 1/1/00 - 8/1/01 3,882 3,961
.........................................................................
TBA, 6.50%, 7/1/02 6,500 6,502
................................................................................
Federal National Mortgage Assn.
7 year balloon, 7.50%, 3/1/99 - 8/1/01 2,191 2,242
.............................................................................
CMO, Inverse Floater, 12.431%, 6/25/99 3,170 3,477
.............................................................................
REMIC, 5.75%, 6/25/06 3,145 3,129
................................................................................
41,393
...........
</TABLE>
7
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- --------------------------------------------------------------------------------
In thousands
U.S. Government Guaranteed Obligations 4.1%
Government National Mortgage Assn.
<S> <C> <C>
I, 11.50%, 3/15/10 - 12/15/15 $ 1,837 $ 2,116
.............................................................................
Project Loan, I, 9.125%, 12/15/28 1,804 1,914
................................................................................
4,030
...........
Total U.S. Government Mortgage-Backed Securities (Cost $58,691) 59,240
...........
U.S. GOVERNMENT OBLIGATIONS 21.7%
U.S. Government Agency Obligations 5.1%
Federal National Mortgage Assn., MTN, 5.22%, 7/10/98 5,000 4,971
................................................................................
4,971
...........
U.S. Treasury Obligations 16.6%
U.S. Treasury Notes
6.125%, 3/31/98 - 7/31/00 13,100 13,251
.........................................................................
6.25%, 5/31/00 2,000 2,031
.........................................................................
6.625%, 6/30/01 900 929
................................................................................
16,211
...........
Total U.S. Government Obligations (Cost $20,950) 21,182
...........
CORPORATE BONDS AND NOTES 13.7%
Finance and Credit 6.4%
Associates Corporation of North America, Sr. Notes,
8.80%, 8/1/98 3,000 3,137
................................................................................
Ciesco L.P., MTN, (144a), 7.38%, 4/19/00+ 3,000 3,110
................................................................................
6,247
...........
Industrials 5.3%
General Electric, Deb., 7.875%, 9/15/98 3,000 3,104
................................................................................
Rockwell International, Notes, 7.625%, 2/17/98 2,000 2,042
................................................................................
5,146
...........
Telephone 2.0%
Southwestern Bell Telephone, Notes, 6.375%, 4/1/01 2,000 2,012
................................................................................
2,012
...........
Total Corporate Bonds and Notes (Cost $13,227) 13,405
...........
</TABLE>
8
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
NON-GOVERNMENT ASSET-BACKED SECURITIES 6.1%
Home Equity Loans-Backed 4.1%
HFC Home Equity Loan, 4.75%, 5/20/08 $ 951 $ 944
................................................................................
Vanderbilt Mortgage & Finance, 6.475%, 6/7/03 3,000 3,026
................................................................................
3,970
...........
Non-Government Agency ARM 2.0%
Resolution Trust Corp., 7.808%, 12/25/20 472 478
................................................................................
Ryland Mercury Savings Trust, MPC, 6.578%, 10/15/18 633 631
................................................................................
Ryland Mortgage Securities, MPC, 7.672%, 5/25/17 172 163
................................................................................
Salomon Brothers Mortgage Securities, MPC, 6.625%, 8/25/18 743 714
................................................................................
1,986
...........
Total Non-Government Asset-Backed Securities (Cost $6,032) 5,956
...........
COMMERCIAL PAPER 3.7%
Investments in Commercial Paper through a joint account,
5.70 - 5.90%, 12/2/96 3,558 3,558
................................................................................
Total Commercial Paper (Cost $3,557) 3,558
...........
</TABLE>
9
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- --------------------------------------------------------------------------------
In thousands
<S> <C>
Total Investments in Securities
105.9% of Net Assets (Cost $102,457) $ 103,341
Other Assets Less Liabilities (5,799)
...........
NET ASSETS $ 97,542
-----------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (486)
Accumulated net realized gain/loss - net of distributions (23,769)
Net unrealized gain (loss) 884
Paid-in-capital applicable to 20,856,667 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares authorized 120,913
...........
NET ASSETS $ 97,542
-----------
NET ASSET VALUE PER SHARE $ 4.68
-----------
</TABLE>
+ Private Placement
ARM Adjustable Rate Mortgage
CMO Collateralized Mortgage Obligation
MPC Mortgage Pass-through Certificate
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
TBA To be announced security was purchased
on a forward commitment basis; the
aggregate liability for securities purchased
under such agreements totaled $6,516,000
at 11/30/96.
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 year-end amounts to
3.2% of net assets.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Unaudited
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
<S> <C>
6 Months
Ended
11/30/96
Investment Income
Interest income $ 3,191
...........
Expenses
Investment management 125
Shareholder servicing 88
Custody and accounting 77
Registration 21
Legal and audit 12
Directors 3
Prospectus and shareholder reports 3
Miscellaneous 6
...........
Total expenses 335
...........
Net investment income 2,856
...........
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (417)
Change in net unrealized gain or loss on securities 2,196
...........
Net realized and unrealized gain (loss) 1,779
...........
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 4,635
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Unaudited
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
11/30/96 5/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 2,856 $ 6,297
Net realized gain (loss) (417) 415
Change in net unrealized gain or loss 2,196 (2,154)
....................
Increase (decrease) in net assets from operations 4,635 4,558
....................
Distributions to shareholders
Net investment income (2,856) (5,995)
Tax return of capital - (304)
....................
Decrease in net assets from distributions (2,856) (6,299)
....................
Capital share transactions *
Shares sold 11,654 19,825
Distributions reinvested 2,306 5,139
Shares redeemed (16,726) (37,081)
....................
Increase (decrease) in net assets from capital
share transactions (2,766) (12,117)
....................
Net Assets
Increase (decrease) during period (987) (13,858)
Beginning of period 98,529 112,387
....................
End of period $ 97,542 $ 98,529
--------------------
*Share information
Shares sold 2,520 4,245
Distributions reinvested 499 1,101
Shares redeemed (3,627) (7,939)
....................
Increase (decrease) in shares outstanding (608) (2,593)
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Unaudited November 30, 1996
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Short-Term U.S. Government 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 September 30,
1991.
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.
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
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate
13
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
balance of which is invested in high-grade commercial paper. All securities
purchased by the joint account satisfy the fund's criteria as to quality,
yield, and liquidity.
Other Purchases and sales of portfolio securities, other than short-term and
U.S. government securities, aggregated $1,962,000 and $7,980,000,
respectively, for the six months ended November 30, 1996. Purchases and
sales of U.S. government securities aggregated $38,553,000 and $35,053,000,
respectively, for the six months ended November 30, 1996.
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 $23,349,000, of which $12,778,000 expires
in 2000, $5,229,000 in 2001, and $5,342,000 thereafter through 2004. The
fund intends to retain gains realized in future periods that may be offset
by available capital loss carryforwards.
At November 30, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $102,457,000, and net unrealized
gain aggregated $884,000, of which $1,176,000 related to appreciated
investments and $292,000 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 $26,000 was payable at November 30, 1996. The fee is computed
daily and paid monthly, and 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 0.305% for assets in excess
of $50 billion. At November 30, 1996, and for the six months then ended, the
effective annual group fee rate was 0.33%. The fund pays a pro-rata share of
the group fee based on the ratio of its net assets to those of the group.
14
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Under the terms of the investment management agreement, the manager is
required to bear any expenses through May 31, 1998, which would cause the
fund's ratio of expenses to average net assets to exceed 0.70%. Thereafter,
through May 31, 2000, the fund is required to reimburse the manager for
these expenses, provided that average net assets have grown or expenses have
declined sufficiently to allow reimbursement without causing the fund's
ratio of expenses to average net assets to exceed 0.70%. Pursuant to this
agreement, $81,000 of management fees were not accrued by the fund for the
six months ended November 30, 1996. Additionally, $779,000 of unaccrued
management fees related to a previous expense limitation are subject to
reimbursement through May 31, 1998.
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 $115,000 for the six months ended November 30, 1996, of which
$24,000 was payable at period-end.
During fiscal year 1996, Price Waterhouse LLP succeeded Coopers & Lybrand
L.L.P. as independent accountants for the Short-Term U.S. Government Fund, a
decision that was approved by the fund's Board of Directors. During the two
fiscal years preceding the change, the fund received unqualified opinions
and had no disagreements with Coopers & Lybrand L.L.P. or reportable events
that caused the change.
15
<PAGE>
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.
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(R) and
T. Rowe Price OnLine.
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 your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and
results.
The 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, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
16
<PAGE>
T. Rowe Price Mutual Funds
- ---------------------------------------------------
MUTUAL FUNDS
STOCK FUNDS
.........................
Domestic
Balanced
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
OTC
Science & Technology
Small-Cap Value*
Spectrum Growth
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
BOND FUNDS
.........................
Domestic Taxable
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-free
California Tax-Free Bond
Florida Insured Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
.........................
International/Global
Global Government Bond
Emerging Markets Bond
International Bond
MONEY MARKET
.........................
Taxable
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
BLENDED ASSET
.........................
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
T. ROWE PRICE NO-LOAD
VARIABLE ANNUITY
.........................
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
*Closed to new investors.
17
<PAGE>
For yield, price, last transaction,
current balance or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(R):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://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 U.S. Government Fund.
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
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor
