Annual Report
Short-Term
U.S. Government Fund
May 31, 1998
T. Rowe Price
Report Highlights
Short-Term U.S. Government Fund
o The bond market environment was favorable for most of
your fund's fiscal year ended May 31, although interest
rates declined more in the first half than the second.
o Among high-quality, short-term bonds, corporates posted
the best six-month returns.
o The fund's 6- and 12-month returns of 2.93% and 6.71%,
respectively, exceeded those of its peer group average
for both periods.
o We focused on income, reducing U.S. Treasury bonds in
favor of mortgage-backed securities as their yield
advantage widened.
o Our outlook for the bond market is positive, as we see
little likelihood of a tighter monetary policy unless
inflationary pressures build significantly.
Fellow Shareholders
Against a background of declining interest rates and low
inflation, the bond markets and your fund provided solid
returns for investors for the 6- and 12-month periods ended
May 31. The lion's share of the gains occurred during the
first half of the fund's fiscal year, as interest
rates-short-term rates in particular-fell less in recent
months than in late 1997 and early 1998. That surge in demand
reflected in part a global flight to quality in the wake of
deepening economic crises in Asia.
Although there were no overt signs of rising inflation, the
Federal Reserve remained anxious about the economy's strong
growth, particularly as the turmoil in Asia did not appear to
be having a broad impact. Nevertheless, the Fed took a
wait-and-see stance, maintaining the target federal funds rate
at 5.50% throughout the fund's fiscal year. During the six
months since our last report, long-term
Interest Rate Levels
5-Year 2-Year 1-Year
Treasury Note Treasury Note Treasury Bill
5/31/97 6.6 6.29 5.86
6.31 6.01 5.63
6 5.81 5.48
8/97 6.22 5.98 5.59
5.94 5.76 5.45
5.78 5.66 5.35
11/97 5.82 5.73 5.5
5.71 5.66 5.52
5.48 5.4 5.28
2/98 5.6 5.54 5.42
5.62 5.57 5.39
5.72 5.66 5.45
5/31/98 5.57 5.56 5.43
interest rates continued to decline, but short-term rates
fluctuated in a fairly narrow range before closing the period
10 to 20 basis points lower. (One hundred basis points equal
one percentage point.) Among short, high-quality securities,
corporate bonds provided the best performance, and
mortgage-backed securities as a group lagged slightly because
of the high level of mortgage prepayments by homeowners and
the expectation that prepayments could continue or increase if
rates decline further.
PERFORMANCE AND STRATEGY REVIEW
Performance Comparison
Periods Ended 5/31/98 6 Months 12 Months
Short-Term
U.S. Government Fund 2.93% 6.71%
Lipper Average of Short-Term
U.S. Government Funds 2.67 6.05
The fund's return of 2.93% for the six-month period was generated entirely
by income, as the share price began and ended the period at $4.65. For the
12 months, income per share of $0.27 was augmented by a modest $0.03 rise
in share price. Performance for both periods exceeded our peer group
average, as shown in the table, because of our focus on income and our
slightly longer duration. (Duration is a better measure than maturity of a
fund's price sensitivity to changes in interest rates; for example, a
duration of two years means the fund will rise or fall by two percentage
points for each one-point decline or increase in interest rates. In a very
short-term fund like this one, interest rate sensitivity is not great.)
During the spring, we made several moves in the portfolio to enhance
income, as this is your fund's principal source of return. We sharply
increased our commitment to mortgage-backed securities, which offered an
increasing yield advantage over Treasuries as rising prepayments caused
investors to shy away from them. (Since homeowners pay off their mortgages
at par, this causes a loss for investors who purchased them at a price
above par.) By reducing our Treasury position from 26% to 15% and
redeploying these assets into the mortgage area, we secured higher yields
with virtually no additional credit risk. By May 31, the mortgage position
composed 77% of fund assets, of which about half represented pools of
balloon mortgages, particularly those packaged and sold by Freddie Mac
(Federal Home Loan Mortgage Association). We like balloons because even
though their nominal maturity may be 30 years or less, their duration is
only one to three years due to the speed with which homeowners pay them
off or refinance. Typically, homeowners have to pay off these loans when
the balloon dates come due in five to seven years. Balloon mortgages also
have attractive yields and, therefore, fit well with the fund's objective
of high income consistent with minimal price fluctuation. Our balloon
position included purchases in the forward market to increase our exposure
to any further declines in interest rates. These forward positions account
for the negative Assets Less Liabilities number in the Sector
Diversification table following this letter.
We also increased our holdings of another kind of mortgage security, CMOs
or collateralized mortgage obligations, which offer protection against
prepayments because of the way they are structured. And finally, we have
5.8% of assets in another type of structured security, a PO, which derives
its value from principal payments made on underlying 30-year Freddie Mac
securities and helps us hedge against prepayment risk. POs are bought at a
discount and pay off at par, as homeowners pay off their mortgages, so a
rise in prepayment levels would benefit the fund. These securities plus
the balloons and a smattering of adjustable rate mortgage securities
composed most of the mortgage position. The balance of our holdings
included very high-quality corporate bonds and notes (13% of net assets),
U.S. Treasuries (15%), and some other asset-backed securities.
Outlook
The economy remains in good shape. GDP was strong for the first quarter
and unemployment is at an 18-year low of 4.3%. However, inventories are
building up, and we expect a slowing of growth in the second quarter.
Asia's problems are starting to affect the domestic market and should
remain an issue for at least the next two quarters, preventing our own
economy from overheating and forestalling a tightening of monetary policy
by the Federal Reserve.
We expect stable interest rates but with a slightly downward drift as
inflation remains in check. In this environment, we believe mortgage
prepayments will remain fairly high but feel comfortable with our current
strategy of holding mortgage securities with some protection against
prepayments. The fund's credit quality remains at the highest level, AAA,
so any slowing of the economy should not affect the fund, which we believe
should continue to provide a solid, income-based return in the coming
months.
Respectfully submitted,
Peter Van Dyke
President and Chairman of the Investment Advisory Committee
June 20, 1998
T. Rowe Price Short-Term U.S. Government Fund
Portfolio Highlights
Key statistics
11/30/97 5/31/98
Price Per Share $ 4.65 $ 4.65
Dividends Per Share
For 6 months 0.14 0.13
For 12 months 0.28 0.27
Dividend Yield *
For 6 months 6.02% 5.88%
For 12 months 6.22 6.04
Weighted Average Maturity (years) 2.8 2.8
Weighted Average Effective Duration (years)2.3 2.2
Weighted Average Quality ** AAA AAA
* 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.
Note: An investment in the fund is not insured or guaranteed by the U.S.
government.
T. Rowe Price Short-Term U.S. Government Fund
Portfolio Highlights
SECTOR Diversification
Percent of Percent of
Net Assets Net Assets
11/30/97 5/31/98
U.S. Government Mortgage-Backed Securities 54% 77%
U.S. Treasury Obligations 26 15
Corporate Bonds and Notes 15 13
All Other 4 6
Other Assets Less Liabilities 1 - 11
_____ _____
Total 100% 100%
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.
Salomon Smith Short-Term
Barney 6-Month 2-YearU.S. Government
Treasury Bill Index Treasury Note Fund
09/30/91 $ 10,000 $ 10,000 $10,000
5/92 10,318 10,562 10,440
5/93 10,680 11,325 10,682
5/94 11,038 11,554 10,823
5/95 11,637 12,426 11,488
5/96 12,299 13,035 11,983
5/97 12,961 13,896 12,810
5/98 13,666 14,843 13,670
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 Since Inception
5/31/98 1 Year 3 Years 5 Years Inception Date
Short-Term U.S.
Government Fund6.71% 5.97% 5.06% 4.80% 9/30/91
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
T. Rowe Price Short-Term U.S. Government Fund
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 $4.62 $4.59 $4.67 $4.65 $ 4.75 $4.83
Investment activities
Net investment
income 0.27* 0.28* 0.28* 0.26* 0.06* 0.23*
Net realized and
unrealized gain
(loss) 0.03 0.03 (0.08) 0.01 (0.11) (0.08)
Total from
investment activities0.30 0.31 0.20 0.27 (0.05) 0.15
Distributions
Net investment income(0.27)(0.27)(0.27) (0.24) (0.05) (0.17)
Tax return of capital- (0.01) (0.01) (0.01) - (0.06)
Total distributions(0.27) (0.28) (0.28) (0.25) (0.05) (0.23)
NET ASSET VALUE
End of period $4.65 $4.62 $4.59 $4.67 $ 4.65 $4.75
__________________________________________________
Ratios/Supplemental Data
Total return@ 6.71%*6.90%* 4.31%* 6.14%* (0.97)%*3.11%*
Ratio of expenses to
average net assets 0.70%* 0.70%* 0.70%* 0.59%* 0.50%*! 0.40%*
Ratio of net investment
income to average
net assets 5.88%* 6.05%* 5.93%* 5.48%* 4.69%*! 4.78%*
Portfolio turnover
rate 107.5% 82.9% 152.8% 100.0% 27.6%! 70.4%
Net assets, end
of period
(in thousands)$109,863$92,697 $98,529$112,387$187,517$225,154
@ 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.
* Excludes expenses in excess of 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.
T. Rowe Price Short-Term U.S. Government Fund
May 31, 1998
Statement of Net Assets Par/Shares Value
In thousands
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 76.7%
U.S. Government Agency ARM 3.2%
Federal National Mortgage Assn.
6.125%, 2/1 - 7/1/18 $ 251 $ 252
6.167%, 12/1/17 - 11/1/20 467 470
6.21%, 3/1/18 30 31
6.218%, 12/1/16 - 7/1/27 664 668
6.225%, 3/1/19 13 13
6.226%, 5/1/24 112 113
6.236%, 1/1/19 776 778
6.237%, 5/1/17 - 5/1/31 750 753
6.247%, 3/1/20 118 119
6.25%, 8/1 - 11/1/17 103 102
6.817%, 10/1/14 10 10
7.125%, 5/1/17 43 44
7.305%, 11/1/21 125 127
3,480
U.S. Government Agency Asset-Backed 8.7%
Federal National Mortgage Assn.,
8.00%, 4/25/25 9,500 9,608
9,608
U.S. Government Agency Obligations 57.3%
Federal Home Loan Mortgage
6.50%, 9/1/02 4,968 4,982
5 year balloon
5.00%, 6/1/99 351 350
5.50%, 3/1 - 12/1/99 6,308 6,299
6.50%, 6/1 - 7/1/99 2,995 2,999
7.00%, 9/1/01 3,459 3,459
8.00%, 2/1/00 30 31
7 year balloon
6.50%, 12/1/99 - 12/1/03 5,279 5,307
7.00%, 1/1/00 - 8/1/01 3,557 3,588
REMIC
5.25%, 11/15/16 1,848 1,833
5.85%, 11/15/17 1,266 1,263
7.50%, 11/15/17 1,316 1,325
Federal National Mortgage Assn.
7.00%, 9/1/03 $ 2,710 $ 2,740
7 year balloon
7.50%, 3/1/99 - 8/1/01 1,335 1,346
TBA, 6.00%, 2/25/04 5,000 4,982
REMIC
5.75%, 6/25/06 1,682 1,674
6.50%, 6/18/11 5,000 4,997
Principal Only, 9/25/00 - 10/25/21 6,958 6,367
Inverse Floater, 11.588%, 6/25/99 1,994 2,062
TBA, 6.00%, 7/30/11 7,500 7,411
63,015
U.S. Government Guaranteed Obligations 7.5%
Government National Mortgage Assn.
I, 11.50%, 3/15/10 - 12/15/15 1,255 1,439
Project Loan, I, 9.125%, 12/15/28 1,790 1,922
REMIC, 9.00%, 7/20/23 4,532 4,840
8,201
Total U.S. Government Mortgage-
Backed Securities (Cost $84,316) 84,304
U.S. GOVERNMENT OBLIGATIONS 14.8%
U.S. Treasury Obligations 14.8%
U.S. Treasury Notes
5.75%, 11/30/02 8,750 8,792
6.00%, 7/31/02 1,500 1,521
6.25%, 8/31/02 5,000 5,117
6.625%, 4/30/02 750 776
Total U.S. Government Obligations (Cost
$16,094) 16,206
CORPORATE BONDS AND NOTES 13.3%
Electric Utilities 3.9%
Puget Sound Energy Conservation, 6.23%, 7/11/024,280 4,293
4,293
Finance and Credit 6.4%
Associates Corp. N.A.,
MTN, 6.90%, 7/29/02 $ 3,600 $ 3,724
Ciesco, MTN, (144a), 7.38%, 4/19/00! 3,250 3,303
7,027
Investment Dealers 1.2%
Merrill Lynch, 8.00%, 2/1/02 1,220 1,295
1,295
Telephone 1.8%
Southwestern Bell Telephone, 6.375%, 4/1/012,000 2,022
2,022
Total Corporate Bonds and Notes (Cost $14,559) 14,637
NON-GOVERNMENT ASSET-BACKED
SECURITIES 1.0%
Non-Government Agency ARM 1.0%
Resolution Trust Corp., 7.883%, 12/25/20 363 363
Ryland Mercury Savings Trust,
MPC, 6.430%, 10/15/18 450 449
Salomon Brothers Mortgage Securities,
MPC, 6.75%, 8/25/18 289 281
Total Non-Government Asset-
Backed Securities (Cost $1,135) 1,093
MONEY MARKET FUNDS 4.9%
Reserve Investment Fund, 5.67% # 5,363 5,363
Total Money Market Funds (Cost $5,363) 5,363
Total Investments in Securities
110.7% of Net Assets (Cost $121,467) $ 121,603
Other Assets Less Liabilities
Including $12,389 Payable for
Investment Securities Purchased (11,740)
NET ASSETS $ 109,863
________
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ (530)
Accumulated net realized gain/loss -
net of distributions (23,217)
Net unrealized gain (loss) 136
Paid-in-capital applicable to
23,606,677 shares of $0.01 par
value capital stock outstanding;
1,000,000,000 shares authorized 133,474
NET ASSETS $ 109,863
________
NET ASSET VALUE PER SHARE $ 4.65
________
! Private Placement
# Seven-day yield
ARM Adjustable Rate Mortgage
Inverse FloaterInverse floating rate note; interest rate is inversely
tied to a published index - rate shown reflects current
rate at 5/31/98.
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
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 3.0% of net
assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
Statement of Operations
In thousands
Year
Ended
5/31/98
Investment Income
Interest income $ 6,640
Expenses
Investment management 317
Shareholder servicing 155
Custody and accounting 137
Registration 38
Prospectus and shareholder reports 34
Legal and audit 15
Directors 7
Miscellaneous 4
Total expenses 707
Net investment income 5,933
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 377
Change in net unrealized gain
or loss on securities 309
Net realized and unrealized gain (loss) 686
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 6,619
______
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government 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 $ 5,933 $ 5,723
Net realized gain (loss) 377 (530)
Change in net unrealized gain or loss 309 1,139
Increase (decrease) in net
assets from operations 6,619 6,332
Distributions to shareholders
Net investment income (5,933) (5,567)
Tax return of capital - (156)
Decrease in net assets from distributions(5,933)(5,723)
Capital share transactions*
Shares sold 45,481 25,020
Distributions reinvested 5,060 4,695
Shares redeemed (34,061) (36,156)
Increase (decrease) in net
assets from capital share transactions16,480 (6,441)
Net Assets
Increase (decrease) during period 17,166 (5,832)
Beginning of period 92,697 98,529
End of period $ 109,863 $ 92,697
________ ________
*Share information
Shares sold 9,770 5,409
Distributions reinvested 1,087 1,016
Shares redeemed (7,315) (7,826)
Increase (decrease) in shares outstanding3,542 (1,401)
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
May 31, 1998
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.
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
Purchases and sales of portfolio securities, other than short-term and
U.S. government securities, aggregated $10,293,000 and $6,964,000,
respectively, for the year ended May 31, 1998. Purchases and sales of U.S.
government securities aggregated $122,546,000 and $105,790,000,
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 $23,217,000, of which
$12,330,000 expires in 2000, $5,229,000 in 2001, and $5,658,000 thereafter
through 2005. Capital loss carryforwards utilized in 1998 amounted to
$448,000. 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 $ (59,000)
Undistributed net realized gain 144,000
Paid-in-capital (85,000)
At May 31, 1998, the aggregate cost of investments for federal income tax
and financial reporting purposes was $121,467,000, and net unrealized gain
aggregated $136,000, of which $529,000 related to appreciated investments
and $393,000 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 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.
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, $111,000 of management fees were not accrued
by the fund for the year ended May 31, 1998. Additionally, $155,000 of
unaccrued management fees remains subject to reimbursement through May 31,
2000.
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 $223,000 for the year ended May 31,
1998, of which $23,000 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 year ended
May 31, 1998, totaled $105,000 and are reflected as interest income in the
accompanying Statement of Operations.
T. Rowe Price Short-Term U.S. Government Fund
Report of Independent Accountants
T. Rowe Price Shareholder Services
To the Board of Directors and Shareholders of
T. Rowe Price Short-Term U.S. Government 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 U.S. Government Fund, Inc. (the
"Fund") at May 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the
period ended May 31, 1998, and the financial highlights for each of the
three years in the period ended May 31, 1998, 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 brokers, provide a reasonable basis for the opinion
expressed above. The financial statements of the Fund for the fiscal
periods presented prior to the year ended May 31, 1996, were audited by
other independent accountants whose report dated June 19, 1995, expressed
an unqualified opinion on these statements.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 17, 1998
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Overseas: A Guide to International Investing, Personal Strategy Planner,
Retirees Financial Guide, and Retirement Planning Kit.
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T. Rowe Price Investment Services, Inc., Distributor.F69-050 5/31/98
