<PAGE>
Semiannual Report
Short-Term
U.S. Government
Fund
-----------------
November 30, 1997
-----------------
[T. ROWE PRICE LOGO APPEARS HERE]
T. ROWE PRICE
<PAGE>
Report Highlights
- --------------------------------
Short-Term U.S. Government Fund
. Short-term bond yields declined during the six months ended November 30,
leading to good returns for fixed income investors.
. During the past six months, U.S. Treasury securities were the main
beneficiaries of the flight to safety following the Asian crisis, but
mortgage-backed securities led the way over the 12-month period.
. The fund's six-month return exceeded that of its Lipper peer group.
. We reduced fund exposure to mortgage-backed securities in favor of both
U.S. Treasuries and corporate notes.
. Prospects for 1998 are good for continued low inflation and moderate
growth, which should be favorable for investors in short-term securities.
<PAGE>
Fellow Shareholders
Interest rates reversed their earlier pattern as yields fell and bond prices
rose during the six months ended November 30, 1997. U.S. government bonds were
especially strong, due largely to the so-called flight to safety when global
stock markets plummeted in the wake of Southeast Asia's financial crisis.
Shorter-term bonds and your fund posted respectable returns for the past six
months.
The economy maintained its momentum over the past six months, rising at a 3.5%
annual rate during the third quarter. Inflation remained subdued, aided by the
dollar's continued strength, which made imports cheaper. The U.S. bond market
and the dollar were both boosted by the currency crises that began in Thailand
in July and spread quickly to other Pacific Rim countries, devastating stock
returns in virtually every market. Investors sought the safe haven of U.S.
dollars and rushed to buy U.S.Treasury securities when domestic stocks caught a
serious case of "Asian Flu" in October. With inflation quiescent and equity
markets in turmoil, the Federal Reserve understandably took no monetary policy
action during this period.
- --------------------
INTEREST RATE LEVELS
- --------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
5-YEAR TREASURY NOTE 2-YEAR TREASURY NOTE 1-YEAR TREASURY BILL
-------------------- -------------------- --------------------
<S> <C> <C> <C>
11/30/96 5.90 5.65 5.41
6.12 5.84 5.50
6.36 6.03 5.62
Feb-97 6.31 6.01 5.60
6.66 6.36 5.94
6.62 6.33 5.93
May-97 6.60 6.29 5.86
6.31 6.01 5.63
6.00 5.81 5.48
Aug-97 6.22 5.98 5.59
5.94 5.76 5.45
5.78 5.66 5.35
11/30/97 5.82 5.73 5.50
</TABLE>
The yield on the five-year Treasury note fell from a peak of 6.66% at the end of
March to 5.82% at the end of November. The two-year Treasury note yield also
fell, but not as far, from 6.36% to 5.73%, while the one-year Treasury bill
yield declined only 44 basis points, from a high of 5.94% at the end of March to
5.50%. (One hundred basis points equal one percent.) The net result of all
these fluctuations was a flatter yield curve.
1
<PAGE>
Among high-grade bond market sectors, corporate bonds provided the best returns
for the six-month period, as investors sought higher income returns in a falling
rate environment. We increased our exposure to corporates in recent months,
which helped performance. Mortgage-backed securities fell to third place during
the period, reflecting investor concern over rising prepayment rates.
(Prepayments typically pick up when rates fall.) For the last 12 months,
however, mortgage-backed securities outstripped both Treasuries and corporates.
Performance and Strategy Review
- ----------------------
Performance Comparison
- ----------------------
<TABLE>
<CAPTION>
Periods Ended 11/30/97 6 Months 12 Months
.......................................................
<S> <C> <C>
Short-Term
U.S. Government Fund 3.67% 5.52%
.......................................................
Lipper Average of Short-Term
U.S. Government Funds 3.27 5.21
.......................................................
</TABLE>
For the six-month period, the fund provided a strong return of 3.67%, generated
by income of $0.14 per share and a $0.03 rise in share value. This surpassed the
average return of competitor funds. Despite the recent rally, the fund's share
price on November 30 was three cents below its level of a year earlier, so total
return for the 12 months was powered by income. For the longer period, the
fund's results also beat the average competitor fund.
The fund's weighted average maturity and duration remained where they were six
months ago, at 2.8 and 2.3 years, respectively. (Duration measures a bond fund's
sensitivity to interest rate changes. A duration of 3.0 years, for instance,
means a fund's price would drop about 3% for each one-percentage-point rise in
interest rates.) Our longer duration posture versus the competition benefited
your fund's relative performance.
The primary changes we made in portfolio composition during the period were to
increase our investment in Treasuries from 25% to 26% and in corporate bonds and
notes from 11% of net assets to 15%, and to reduce the allotment of U.S.
government mortgage-backed securities by five percentage points to 54%. (The
Sector Diversification table following this letter reflects these adjustments.)
2
<PAGE>
Your fund's sector weightings also boosted fund results during the past six
months, since both U.S. Treasury securities and high-grade corporates did well
while mortgage-backed securities lagged.
We were able to capture relatively high yield in an environment of falling
interest rates through our holdings of collateralized mortgage obligations,
high-quality corporates, and similar securities.
Outlook
With prospects looking good for a federal budget nearly in balance in 1998,
fixed income markets will be looking toward Washington to get an idea of how any
future surpluses will be handled. A combination of tax cuts and debt reduction
would be regarded favorably, while any attempt to raise spending would have the
opposite effect.
Despite the economy's strength, we believe the recent developments in Asia and
continued subdued inflation may obviate the need for any immediate action by the
Federal Reserve. Indeed, we do not expect any change in policy for the next
quarter or two, and it is no longer a foregone conclusion that the Fed's next
move will be a tightening. We expect a continuation of good growth, but a touch
slower than the recent pace. This could lead to a period of interest rate
stability, with slightly lower rates overall than during recent years. All this
points to a positive environment for investors in short-term securities over the
coming months, and your fund is positioned to benefit from any further rate
declines.
Respectfully submitted,
/s/ Peter Van Dyke
Peter Van Dyke
President and Chairman of the Investment Advisory Committee
December 19, 1997
3
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- --------------------
<TABLE>
<CAPTION>
Key statistics
5/31/97 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
Price Per Share $4.62 $4.65
................................................................................
Dividends Per Share
................................................................................
For 6 months 0.14 0.14
............................................................................
For 12 months 0.28 0.28
............................................................................
Dividend Yield*
................................................................................
For 6 months 6.22% 6.02%
............................................................................
For 12 months 6.22 6.22
............................................................................
Weighted Average Maturity (years) 2.8 2.8
................................................................................
Weighted Average Effective Duration (years) 2.3 2.3
................................................................................
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
5/31/97 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Mortgage-Backed Securities 59% 54%
................................................................................
U.S. Treasury Obligations 25 26
................................................................................
Corporate Bonds and Notes 11 15
................................................................................
All Other 10 4
................................................................................
Other Assets Less Liabilities -5 1
- --------------------------------------------------------------------------------
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.
SHORT-TERM U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
As of 11/30/97
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Short-Term Salomon 6-Month 2-Year
Date U.S. Government Fund Treasury Bill Index Treasury Note
---- -------------------- ------------------- -------------
<S> <C> <C> <C>
9/30/91 10,000 10,000 10,000
Nov-91 10,153 10,091 10,200
Nov-92 10,545 10,509 10,930
Nov-93 10,846 10,851 11,599
Nov-94 10,841 11,302 11,675
Nov-95 11,940 11,978 12,889
Nov-96 12,586 12,626 13,604
Nov-97 13,280 13,311 14,402
</TABLE>
- ------------------------------------
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 11/30/97 1 Year 3 Years 5 Years Inception Date
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term U.S. Government Fund 5.52% 7.00% 4.72% 4.71% 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.
5
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Unaudited
- --------------------
Financial Highlights For a share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 Months Year 3 Months+++ Year
Ended Ended Ended Ended
11/30/97 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 4.62 $ 4.59 $ 4.67 $ 4.65 $ 4.75 $ 4.83 $ 4.97
...............................................................................
Investment activities
Net investment income 0.14* 0.28* 0.28* 0.26* 0.06* 0.23* 0.29*
Net realized and
unrealized gain (loss) 0.03 0.03 (0.08) 0.01 (0.11) (0.08) (0.13)
...............................................................................
Total from
investment activities 0.17 0.31 0.20 0.27 (0.05) 0.15 0.16
...............................................................................
Distributions
Net investment income (0.14) (0.27) (0.27) (0.24) (0.05) (0.17) (0.28)
Tax return of capital -- (0.01) (0.01) (0.01) -- (0.06) (0.02)
...............................................................................
Total distributions (0.14) (0.28) (0.28) (0.25) (0.05) (0.23) (0.30)
...............................................................................
NET ASSET VALUE
End of period $ 4.65 $ 4.62 $ 4.59 $ 4.67 $ 4.65 $ 4.75 $ 4.83
-------------------------------------------------------------------------------
Ratios/Supplemental Data
Total return 3.67%* 6.90%* 4.31%* 6.14%* (0.97)%* 3.11%* 3.33%*
............................................................................................................
Ratio of expenses to
average net assets 0.70%*+ 0.70%* 0.70%* 0.59%* 0.50%*+ 0.40%* 0.25%*
............................................................................................................
Ratio of net investment
income to average
net assets 5.95%*+ 6.05%* 5.93%* 5.48%* 4.69%*+ 4.78%* 5.96%*
............................................................................................................
Portfolio turnover rate 45.0% 82.9% 152.8% 100.0% 27.6%+ 70.4% 110.8%
............................................................................................................
Net assets, end of period
(in thousands) $ 103,145 $ 92,697 $ 98,529 $112,387 $ 187,517 $225,154 $476,448
............................................................................................................
</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, 1997
<TABLE>
<CAPTION>
- -----------------------
Statement of Net Assets Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 54.3%
U.S. Government Agency ARM 3.6%
Federal National Mortgage Assn.
6.114%, 1/1/19 $ 784 $ 778
...........................................................................
6.122%, 3/1/20 120 119
...........................................................................
6.125%, 8/1 - 11/1/17 104 103
...........................................................................
6.137%, 11/1/20 - 5/1/31 829 826
...........................................................................
6.142%, 3/1/19 13 13
...........................................................................
6.15%, 3/1/18 33 33
...........................................................................
6.154%, 12/1/16 - 7/1/27 719 717
...........................................................................
6.163%, 5/1/24 119 118
...........................................................................
6.191%, 5/1/17 - 8/1/20 451 449
...........................................................................
6.25%, 2/1 - 7/1/18 255 254
...........................................................................
6.817%, 10/1/14 10 10
...........................................................................
7.482%, 11/1/21 214 220
...........................................................................
7.50%, 5/1/17 43 45
................................................................................
3,685
...........
U.S. Government Agency Asset-Backed 9.3%
Federal National Mortgage Assn., 8.00%, 4/25/25 9,500 9,666
................................................................................
9,666
...........
U.S. Government Agency Obligations 37.9%
Federal Home Loan Mortgage
5 year balloon
5.00%, 6/1/99 399 396
...........................................................................
5.50%, 3/1 - 12/1/99 7,553 7,512
...........................................................................
6.50%, 6/1 - 7/1/99 3,652 3,675
...........................................................................
7.00%, 1/1/00 - 9/1/01 5,338 5,384
...........................................................................
8.00%, 1/1/98 - 2/1/00 65 66
...........................................................................
7 year balloon
6.50%, 12/1/99 - 12/1/03 6,053 6,067
...........................................................................
7.00%, 1/1/00 - 8/1/01 3,218 3,248
...........................................................................
REMIC
5.85%, 11/15/17 1,599 1,594
...........................................................................
7.50%, 11/15/17 2,000 2,031
................................................................................
Federal National Mortgage Assn.
7 year balloon, 7.50%, 3/1/99 - 8/1/01 1,792 1,808
..............................................................................
</TABLE>
7
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Federal National Mortgage Assn.
REMIC
5.75%, 6/25/06 $ 2,103 $ 2,090
...........................................................................
Inverse Floater, 11.494%, 12/25/97 2,515 2,592
...........................................................................
Principal Only, Zero Coupon, 9/25/00 2,992 2,637
................................................................................
39,100
...........
U.S. Government Guaranteed Obligations 3.5%
Government National Mortgage Assn.
I, 11.50%, 3/15/10 - 12/15/15 1,456 1,672
..............................................................................
Project Loan, I, 9.125%, 12/15/28 1,795 1,913
................................................................................
3,585
...........
Total U.S. Government Mortgage-Backed Securities (Cost $56,034) 56,036
...........
U.S. GOVERNMENT OBLIGATIONS 25.9%
U.S. Treasury Obligations 25.9%
U.S. Treasury Notes
6.00%, 8/15/00 - 7/31/02 7,500 7,541
...........................................................................
6.125%, 7/31/00 - 12/31/01 7,000 7,055
...........................................................................
6.25%, 8/31/02 9,000 9,141
...........................................................................
6.625%, 6/30/01 - 4/30/02 2,900 2,979
................................................................................
Total U.S. Government Obligations (Cost $26,432) 26,716
...........
CORPORATE BONDS AND NOTES 14.6%
Electric Utilities 4.8%
Puget Sound Energy Conservation, 6.23%, 7/11/02 5,000 4,987
................................................................................
4,987
...........
Finance and Credit 2.9%
Ciesco L.P., MTN, (144a), 7.38%, 4/19/00 + 3,000 3,036
................................................................................
3,036
...........
Industrials 4.9%
General Electric, Deb., 7.875%, 9/15/98 3,000 3,042
................................................................................
Rockwell International, 7.625%, 2/17/98 2,000 2,007
................................................................................
5,049
...........
Telephone 2.0%
Southwestern Bell Telephone, 6.375%, 4/1/01 2,000 2,007
................................................................................
2,007
...........
Total Corporate Bonds and Notes (Cost $15,044) 15,079
...........
</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 1.6%
Home Equity Loans-Backed 0.2%
HFC Home Equity Loan, 4.75%, 12/1/97 $ 186 $ 185
................................................................................
185
...........
Non-Government Agency ARM 1.4%
Resolution Trust Corp., 7.965%, 12/1/97 405 409
................................................................................
Ryland Mercury Savings Trust, MPC, 6.375%, 12/1/97 506 505
................................................................................
Salomon Brothers Mortgage Securities, MPC, 6.588%,
12/1/97 514 493
................................................................................
1,407
...........
Total Non-Government Asset-Backed Securities (Cost $1,654) 1,592
...........
MONEY MARKET FUNDS 2.9%
Reserve Investment Fund, 5.71% # 2,986 2,986
................................................................................
Total Money Market Funds (Cost $2,986) 2,986
...........
</TABLE>
9
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- --------------------------------------------------------------------------------
In thousands
<S> <C>
Total Investments in Securities
99.3% of Net Assets (Cost $102,150) $ 102,409
Other Assets Less Liabilities 736
.............
NET ASSETS $ 103,145
-------------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (471)
Accumulated net realized gain/loss - net of distributions (23,628)
Net unrealized gain (loss) 259
Paid-in-capital applicable to 22,195,624 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares authorized 126,985
.............
NET ASSETS $ 103,145
-------------
NET ASSET VALUE PER SHARE $ 4.65
-------------
</TABLE>
<TABLE>
<S> <C>
+ Private Placement
# Seven-day yield
ARM Adjustable Rate Mortgage
Inverse Floater Inverse floating rate note; interest rate is inversely tied to
a published index - rate shown reflects current rate at
11/30/97.
MPC Mortgage Pass-through Certificate
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
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 2.9% of net assets.
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Unaudited
- -----------------------
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
6 Months
Ended
11/30/97
<S> <C>
Investment Income
Interest income $ 3,244
..........
Expenses
Investment management 152
Custody and accounting 69
Shareholder servicing 66
Prospectus and shareholder reports 20
Registration 20
Legal and audit 8
Directors 4
Miscellaneous 2
..........
Total expenses 341
..........
Net investment income 2,903
..........
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 110
Change in net unrealized gain or loss on securities 432
..........
Net realized and unrealized gain (loss) 542
..........
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 3,445
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Unaudited
- ----------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
6 Months Year
Ended Ended
11/30/97 5/31/97
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 2,903 $ 5,723
Net realized gain (loss) 110 (530)
Change in net unrealized gain or loss 432 1,139
......................
Increase (decrease) in net assets from operations 3,445 6,332
......................
Distributions to shareholders
Net investment income (2,903) (5,567)
Tax return of capital -- (156)
......................
Decrease in net assets from distributions (2,903) (5,723)
......................
Capital share transactions*
Shares sold 23,179 25,020
Distributions reinvested 2,456 4,695
Shares redeemed (15,729) (36,156)
......................
Increase (decrease) in net assets from capital
share transactions 9,906 (6,441)
......................
Net Assets
Increase (decrease) during period 10,448 (5,832)
Beginning of period 92,697 98,529
......................
End of period $ 103,145 $ 92,697
----------------------
*Share information
Shares sold 4,987 5,409
Distributions reinvested 528 1,016
Shares redeemed (3,383) (7,826)
......................
Increase (decrease) in shares outstanding 2,132 (1,401)
</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, 1997
- -----------------------------
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.
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.
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.
13
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term and U.S.
government securities, aggregated $5,000,000 and $687,000, respectively, for the
six months ended November 30, 1997. Purchases and sales of U.S. government
securities aggregated $42,777,000 and $43,589,000, respectively, for the six
months ended November 30, 1997.
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 $23,665,000, of which $12,778,000 expires in
2000, $5,229,000 in 2001, and $5,658,000 thereafter through 2005. The fund
intends to retain gains realized in future periods that may be offset by
available capital loss carryforwards.
At November 30, 1997, the aggregate cost of investments for federal income tax
and financial reporting purposes was $102,150,000, and net unrealized gain
aggregated $259,000, of which $591,000 related to appreciated investments and
$332,000 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 $28,000 was payable at November 30, 1997. 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 November 30, 1997, and for the six months 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.
Under the terms of the investment management agreement, the manager is required
to bear any expenses through May 31, 1998, which would cause the
14
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
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, $54,000 of
management fees were not accrued by the fund for the six months ended November
30, 1997, and $155,000 remains subject to reimbursement through May 31, 2000.
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 $101,000 for the six months
ended November 30, 1997, of which $19,000 was payable at period-end.
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 six months ended November 30, 1997,
totaled $38,000 and are reflected as interest income in the accompanying
Statement of Operations.
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 ($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(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.
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.
16
<PAGE>
T. Rowe Price Mutual Funds
- --------------------------------------------------------------------------------
STOCK FUNDS
......................................
Domestic
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications*
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons**
Real Estate
Science & Technology
Small-Cap Stock***
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
Emerging Markets Bond
Global Government Bond
International Bond
MONEY MARKET FUNDS
......................................
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 FUNDS
......................................
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
T. ROWE PRICE NO-LOAD
VARIABLE ANNUITY
......................................
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced
Portfolio
Prime Reserve Portfolio
* Formerly the closed-end New Age Media Fund; converted to open-end status on
7/28/97.
** Closed to new investors.
*** Formerly the OTC Fund.
Please call for a prospectus. Read it carefully before you invest or send money.
The T. Rowe Price No-load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY.
T. Rowe Price refers to the underlying portfolios' investment managers and the
distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance
Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security
Benefit Group of Companies and the T. Rowe Price companies are not affiliated.
The variable annuity may not be available in all states. The contract has
limitations. Call a representative for costs and complete details of the
coverage.
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
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 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]
