- --------------------------------------------------------------------------------
T. Rowe Price
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Semiannual Report
Short-Term U.S. Government Fund
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November 30, 1998
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<PAGE>
REPORT HIGHLIGHTS
================================================================================
* Interest rates, particularly on short- and intermediate-term
securities, plunged during last summer's financial rout. In response,
the Federal Reserve lowered key rates three times.
* The fund's 6- and 12-month returns exceeded its Lipper peer group
average.
* Performance benefited from slightly longer duration and our focus on
mortgage-backed securities that can either protect against or take
advantage of prepayments.
* Cash flow into the fund was initially invested in Treasuries but will
be redeployed into higher-yielding mortgage securities.
* We expect economic growth to slow and interest rates to move in a
narrow range during the months ahead, an environment that should favor
your fund.
================================================================================
FELLOW SHAREHOLDERS
Interest rates plunged and Treasury prices soared during last summer's rout
in the financial markets, as investors flocked to the safety of U.S. government
securities amid a series of global economic and financial crises. Rate movements
were greatest among short- and intermediate-term Treasuries leading up to the
Federal Reserve's three rate cuts this fall. Top-quality shorter-term bonds and
your fund provided excellent returns for the 6- and 12-month periods ended
November 30.
<PAGE>
MARKET ENVIRONMENT
[Interest Rate Levels chart showing yields of 5-Year Treasury Note, 2-Year
Treasury Note and 1-Year Treasury Bill from 11/30/97 through 11/30/98)
The environment of the past six months---and especially the anxious
August-through-September period---proved to be ideal for your fund. Concerns
that the U.S. economy would overheat and ignite inflationary pressures,
particularly due to rising employment costs, were overshadowed by fears of
global recession, deflation, and loss of liquidity in the financial markets.
Though the domestic economy continued its record-setting expansion with high
employment and only modest signs of a slowdown, the apparent spread of the Asian
economic crisis caused investors---temporarily, at least---to flee from real and
perceived risks. The subsequent near-failure of a prominent and highly leveraged
hedge fund added fuel to the fire as investors abandoned emerging markets and
lower-quality corporate issues.
================================================================================
PREPARING FOR THE YEAR 2000
---------------------------
The Year 2000 draws closer every day, and it holds
special meaning beyond the arrival of a new millennium.
The issue for investors is that many computer programs
throughout the world use two digits instead of four to
identify the year and may assume the next century
starts with 1900. If these programs are not modified,
they will not be able to correctly handle the century
change when the year changes from "99" to "00" on
January 1, 2000, and they will no longer be able to
perform necessary functions. The Year 2000 issue
affects all companies and organizations.
<PAGE>
T. Rowe Price has been taking steps to assure that
its computer systems and processes are capable of
functioning in the Year 2000. Detailed plans for
remediation efforts have been developed and are
currently being executed.
OUR PLAN OF ACTION
------------------
We began to address these issues several years ago
by requiring that all new systems process and store
four-digit years. We will complete all reprogramming
efforts for the major application systems, including
business applications required to service our customers
and processing infrastructure necessary to ensure the
integrity of customer data and investments, by December
31, 1998, leaving a full 12 months for system testing.
Because we exchange data electronically with customers
and vendors, we are working with them to assess the
adequacy of their own compliance efforts. Our goal is
to ensure the continuation of the same level of service
to all our mutual fund shareholders and clients after
December 31, 1999.
We are asking all vendors and companies we do
business with for a Year 2000 compliance status, with
the expectation that some organizations will not be
able to modify their interface files prior to December
31, 1999. Our goal is to identify any noncompliant
files so that we can implement alternative solutions.
In addition, we are scheduling tests for critical
vendors and companies that claim Year 2000 compliance
to ensure that time-related data and calculations
function properly as we move into the next century.
<PAGE>
SMOOTH TRANSITION PLANNED
-------------------------
We believe our programs and initiatives will
provide a smooth transition into the next millennium.
We are assessing all systems providing products or
services to our retail mutual fund shareholders,
retirement plan sponsors, and participants, and we are
taking steps to modify them where necessary for the
Year 2000. Our plan provides time to develop solutions
for all noncompliant systems and data files from
customers or vendors.
The Securities Industry Association (SIA) is
coordinating Year 2000 testing to assure that
securities markets, clearing corporations,
depositories, and third party service providers can
send, receive, and process files and transactions
accurately. In late July 1998, the SIA completed a beta
test of Year 2000 readiness. The test was considered
successful in terms of transactions completed and will
serve as the basis for the SIA's industry-wide
approach. During October 1998, T. Rowe Price completed
its beta test of Year 2000 readiness with the SIA and
is ready for the industry-wide test that is scheduled
for March and April 1999.
For a more detailed discussion of our Year 2000
effort, as well as continuing updates on our progress,
please check our Web site (www.troweprice.com).
================================================================================
<PAGE>
Most mortgage securities underperformed Treasuries, particularly long-term
bonds, as the decline in interest rates caused homeowners to increase
refinancings and as many hedge funds sold their most liquid assets. The Federal
Reserve cut key short-term interest rates three times in less than two months,
beginning September 29. Prior to that the central bank had kept the federal
funds target rate unchanged at 5.5% since early 1997. As the Fed demonstrated
its determination to restore confidence to financial markets, Treasuries lost
some of their gains and lower-quality bonds regained some strength. From 5.56%
at the beginning of the period, the yield on the two-year Treasury note fell to
4.1% at the end of October before settling at 4.64% on November 30.
PERFORMANCE AND STRATEGY REVIEW
================================================================================
PERFORMANCE COMPARISON
----------------------
Periods Ended 11/30/98 6 Months 12 Months
---------------------- -------- ---------
Short-Term
U.S. Government Fund 4.08% 7.13%
Lipper Average of Short-Term
U.S. Government Funds 2.18 4.82
================================================================================
<PAGE>
The fund's return of 4.08% for the first half of our fiscal year was
generated by both income and share price appreciation from $4.65 on May 31 to
$4.71 on November 30. Despite the sharp decline in interest rates, dividends
remained steady at $0.13 a share for the last six months. Over the past 12
months, dividends fell just a penny to $0.26 per share. Performance for both
periods outstripped our peer group average, as shown in the table, partly
because of our continued focus on higher-yielding securities and slightly longer
duration. (Duration is a measure of a bond fund's sensitivity to interest rates;
for example, a duration of two years means the fund's share price will rise or
fall about two percent for each one-percentage-point fall or rise in interest
rates.)
The greatest contributor to performance was a type of structured mortgage
security called a "principal only" strip (PO). These securities derive their
value from principal payments made on underlying 30-year Freddie Mac securities
and helped us take advantage of rising prepayments. Purchasing these types of
structured, mortgage-backed securities has been a priority since early this
year, as we began increasing our mortgage commitment. Our exposure to POs grew
from 5.8% on May 31 to 9.5% on November 30. We had expected the continued high
level of mortgage prepayments, but anticipated only a slightly downward drift in
interest rates---not the sharp and sudden drop that occurred. POs are acutely
sensitive to both interest rates and the rate of principal prepayments, and, as
a result, these holdings boosted fund returns during the period under review.
==============================
We also benefited from
our emphasis on balloon
mortgages within the
mortgage sector.
==============================
<PAGE>
We also benefited from our emphasis on balloon mortgages within the
mortgage sector. These types of loans have less prepayment risk than other types
of mortgages. Even though the nominal maturity of balloon mortgages may be up to
30 years, their duration is only one to three years because homeowners are
required to pay them off or refinance before the balloon date comes due, usually
within five or seven years. Balloon mortgages also have attractive yields and,
therefore, fit well with the fund's objective of high income and minimal price
fluctuation. Our balloon position also included purchases in the forward market
to increase our positive exposure to declining interest rates. Our holdings of
collateralized mortgage obligations (CMOs), which we increased early in the
year, also afforded us protection against prepayments because of the way they
are structured.
We had expanded our mortgage positions to as much as 77% of fund assets at
the beginning of the period, but the unusually heavy pace of mortgage
refinancings as well as steady inflows of new cash into the fund helped push
that position down to 64% by November 30. Proceeds were invested in Treasuries,
which doubled from 15% of the fund to 30% by the end of the period. These
assets, however, will be redeployed into higher-yielding mortgage securities as
opportunities present themselves. Our holdings of very high-quality corporate
bonds and asset backed securities remained about the same, at 14% of assets.
OUTLOOK
We expect a period of slower economic and corporate earnings growth in
1999, marked by reduced business investment in capital equipment. We are already
seeing signs of a slowdown in the manufacturing sector in the U.S. In addition,
the strong dollar and weakening economic conditions in Latin America and Asia
should continue to constrain U.S. exports. These factors should limit the growth
of personal income. Finally, with consumer credit at record levels, the
likelihood of a slowdown in consumer spending has increased. Growth in real GDP
is likely to remain below 2% at least through the middle of next year, but we
don't expect a recession. Upward pressure on wages and service sector costs
should be reduced. We would expect interest rates to continue to move in a
narrow range, and we do not foresee another Treasury bond rally of the magnitude
witnessed last summer. Such an environment should be beneficial for your fund,
especially if mortgage prepayments can be held at a predictable rate. The fund's
credit quality remains at the highest level, AAA, so a slowdown in the economy
should not significantly affect results.
Respectfully submitted,
[signature]
Peter Van Dyke
President
December 17, 1998
================================================================================
<PAGE>
CHANGE IN MANAGEMENT
Peter Van Dyke, a managing director of T. Rowe Price Associates and
director of the taxable bond department, is retiring at the end of 1998. Mr. Van
Dyke joined the company in 1985. We are grateful for his contributions and wish
him the best for the future. Heather R. Landon has been appointed chairman of
the fund's Investment Advisory Committee. Ms. Landon, who joined the firm in
1979, has been a member of the Advisory Committee since the fund's inception in
1991 and has worked very closely with Mr. Van Dyke on the management of the fund
for a number of years. Other members of Short-Term U.S. Government's committee
include James M. McDonald, Edmund M. Notzon III, Gwendolyn G. Wagner, and
William T. Reynolds.
The preceding updates the Short-Term U.S. Government Fund prospectus of
October 1, 1998.
================================================================================
<PAGE>
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND
PORTFOLIO HIGHLIGHTS
--------------------
KEY STATISTICS
--------------
5/31/98 11/30/98
------- --------
Price Per Share $4.65 $4.71
Dividends Per Share
For 6 months 0.13 0.13
For 12 months 0.27 0.26
Dividend Yield *
For 6 months 5.88% 5.51%
For 12 months 6.04 5.77
30-Day Standardized Yield 5.76 4.92
Weighted Average Maturity (years) 2.8 3.0
Weighted Average Effective Duration (years) 2.2 2.3
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.
================================================================================
<PAGE>
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND
- ---------------------------------------------
PORTFOLIO HIGHLIGHTS
--------------------
SECTOR DIVERSIFICATION
----------------------
Percent of Percent of
Net Assets Net Assets
5/31/98 11/30/98
------- --------
U.S. Government Mortgage-Backed Securities 77% 64%
U.S. Treasury Obligations 15 30
Corporate Bonds and Notes 13 7
Asset-Backed Securities - 6
All Other 6 2
Other Assets Less Liabilities -11 -9
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.
[Short-Term U.S. Government Fund SEC Chart Shown Here]
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.
================================================================================
Since Inception
Periods Ended 11/30/98 1 Year 3 Years 5 Years Inception Date
- ---------------------- ------ ------- ------- --------- ----
Short-Term U.S. Govern-
ment Fund 7.13% 6.02% 5.58% 5.04% 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.
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
Unaudited
For a share outstanding throughout each period
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
6 Months Year 3 Months++ Year
Ended Ended Ended Ended
11/30/98 5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94
-------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE
Beginning of period $ 4.65 $ 4.62 $ 4.59 $ 4.67 $ 4.65 $ 4.75 $ 4.83
- ------------------------------------------------------------------------------------------------------
Investment activities
Net investment income 0.13* 0.27* 0.28* 0.28* 0.26* 0.06* 0.23*
Net realized and
unrealized gain (loss) 0.06 0.03 0.03 (0.08) 0.01 (0.11) (0.08)
- ------------------------------------------------------------------------------------------------------
Total from
investment activities 0.19 0.30 0.31 0.20 0.27 (0.05) 0.15
- ------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.13) (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 (0.13) (0.27) (0.28) (0.28) (0.25) (0.05) (0.23)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 4.71 $ 4.65 $ 4.62 $ 4.59 $ 4.67 $ 4.65 $ 4.75
Ratios/Supplemental=Data==============================================================================
Total returns ^ 4.08%* 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%* 0.70%* 0.59%* 0.50%*+ 0.40%*
- ------------------------------------------------------------------------------------------------------
Ratio of net investment
income to average
net assets 5.40%*+ 5.88%* 6.05%* 5.93%* 5.48%* 4.69%*+ 4.78%*
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate 106.3%+ 107.5% 82.9% 152.8% 100.0% 27.6%+ 70.4%
- ------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $137,315 $ 109,863 $ 92,697 $ 98,529 $ 112,387 $ 187,517 $ 225,154
- ------------------------------------------------------------------------------------------------------
</TABLE>
^ 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, 2000.
+ Annualized
++ The fund's fiscal year-end was changed to May 31.
================================================================================
<PAGE>
UNAUDITED NOVEMBER 30, 1998
STATEMENT OF NET ASSETS
PAR VALUE
IN THOUSANDS
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES==63.5%
U.S. Government Agency ARM 2.4%
Federal National Mortgage Assn.
6.122%, 3/1/20 $ 112 $ 113
- -------------------------------------------------------------------------------
6.125%, 8/1/17 - 7/1/18 262 264
- -------------------------------------------------------------------------------
6.131%, 1/1/19 762 768
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6.132%, 15/1/17 - 8/1/20 415 418
- -------------------------------------------------------------------------------
6.14%, 3/1/18 27 27
- -------------------------------------------------------------------------------
6.141%, 3/1/19 10 10
- -------------------------------------------------------------------------------
6.149%, 12/1/16 - 10/1/27 609 614
- -------------------------------------------------------------------------------
6.159%, 3/1/24 104 105
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6.161%, 11/1/20 - 5/1/31 770 776
- -------------------------------------------------------------------------------
6.817%, 10/1/14 10 10
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7.055%, 11/1/21 124 125
- -------------------------------------------------------------------------------
7.125%, 5/1/17 42 42
- -------------------------------------------------------------------------------
3,272
<PAGE>
U.S. Government Agency Obligations 55.0%
Federal Home Loan Mortgage
5 year balloon
5.00%, 6/1/99 251 251
- -------------------------------------------------------------------------------
5.50%, 3/1 - 12/1/99 3,737 3,738
- -------------------------------------------------------------------------------
6.50%, 6/1/99 - 9/1/02 6,101 6,154
- -------------------------------------------------------------------------------
7.00%, 9/1/01 2,698 2,740
- -------------------------------------------------------------------------------
8.00%, 2/1/00 23 24
- -------------------------------------------------------------------------------
7 year balloon
6.50%, 12/1/99 - 12/1/03 4,074 4,112
- -------------------------------------------------------------------------------
7.00%, 1/1/00 - 8/1/01 2,477 2,505
- -------------------------------------------------------------------------------
REMIC
5.25%, 11/15/16 1,067 1,060
- -------------------------------------------------------------------------------
5.85%, 11/15/17 942 938
- -------------------------------------------------------------------------------
7.50%, 11/15/17 287 287
- -------------------------------------------------------------------------------
7.75%, 8/15/21 3,387 3,513
- -------------------------------------------------------------------------------
Federal National Mortgage Assn.
6.00%, 7/1 - 11/1/13 2,525 2,527
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7.00%, 9/1/03 1,992 2,035
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7 year balloon, 7.50%, 3/1/99 - 8/1/01 704 710
- -------------------------------------------------------------------------------
<PAGE>
Federal National Mortgage Assn.
REMIC
5.75%, 6/25/06 $ 1,315 $ 1,306
- -------------------------------------------------------------------------------
6.00%, 11/18/17 5,000 5,080
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6.10%, 8/25/21 2,453 2,438
- -------------------------------------------------------------------------------
6.50%, 6/18/11 5,000 5,036
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7.00%, 4/18/22 4,000 4,055
- -------------------------------------------------------------------------------
Principal Only, 9/25/00 - 11/25/23 13,640 13,089
- -------------------------------------------------------------------------------
Inverse Floater, 12.806%, 6/25/99 1,333 1,407
- -------------------------------------------------------------------------------
TBA, 6.00%, 1/1/13 12,500 12,551
- -------------------------------------------------------------------------------
75,556
- -------------------------------------------------------------------------------
U.S. Government Guaranteed Obligations 6.1%
Government National Mortgage Assn.
I, 11.50%, 3/15/10 - 12/15/15 2,061 2,344
- -------------------------------------------------------------------------------
Project Loan, I, 9.125%, 12/15/28 1,785 1,835
- -------------------------------------------------------------------------------
REMIC, 9.00%, 7/20/23 4,034 4,198
- -------------------------------------------------------------------------------
8,377
- -------------------------------------------------------------------------------
Total U.S. Government Mortgage-Backed Securities (Cost $86,951) 87,205
- -------------------------------------------------------------------------------
<PAGE>
U.S.=GOVERNMENT=OBLIGATIONS==29.8%=============================================
U.S. Treasury Obligations 29.8%
U.S. Treasury Notes
5.25%, 8/15/03 14,000 14,409
- -------------------------------------------------------------------------------
5.375%, 6/30/03 4,500 4,647
- -------------------------------------------------------------------------------
5.50%, 5/31/03 9,000 9,314
- -------------------------------------------------------------------------------
5.75%, 11/30/02 8,750 9,093
- -------------------------------------------------------------------------------
6.00%, 7/31/02 1,500 1,568
- -------------------------------------------------------------------------------
6.25%, 8/31/02 1,000 1,054
- -------------------------------------------------------------------------------
6.625%, 4/30/02 750 797
- -------------------------------------------------------------------------------
Total U.S. Government Obligations (Cost $39,971) 40,882
- -------------------------------------------------------------------------------
ASSET-BACKED=SECURITIES==5.6%==================================================
Puget Sound Energy Conservation, 6.23%, 7/11/02 3,601 3,675
- -------------------------------------------------------------------------------
IMC Home Equity Loan Trust, 6.36%, 8/20/22 4,000 4,006
- -------------------------------------------------------------------------------
Total Asset-Backed Securities (Cost $4,024) 7,681
- -------------------------------------------------------------------------------
<PAGE>
CORPORATE=BONDS=AND=NOTES==7.5%================================================
Finance and Credit 5.1%
Associates Corp. N.A., MTN, 6.90%, 7/29/02 $ 3,600 $ 3,774
- -------------------------------------------------------------------------------
Ciesco, MTN, (144a), 7.38%, 4/19/00 + 3,250 3,274
- -------------------------------------------------------------------------------
7,048
- -------------------------------------------------------------------------------
Investment Dealers 0.9%
Merrill Lynch, 8.00%, 2/1/02 1,220 1,302
- -------------------------------------------------------------------------------
1,302
- -------------------------------------------------------------------------------
Telephone 1.5%
Southwestern Bell Telephone, 6.375%, 4/1/01 2,000 2,048
- -------------------------------------------------------------------------------
2,048
- -------------------------------------------------------------------------------
Total Corporate Bonds and Notes (Cost $13,853) 10,398
- -------------------------------------------------------------------------------
NON-GOVERNMENT=SECURITIES==0.4%================================================
Non-Government Agency ARM 0.4%
Ryland Mercury Savings Trust, MPC,
6.497%, 10/15/18 378 377
- -------------------------------------------------------------------------------
Salomon Brothers Mortgage Securities, MPC,
6.625%, 7/25/18 164 163
- -------------------------------------------------------------------------------
Total Non-Government Securities (Cost $559) 540
MONEY=MARKET=FUNDS==1.8%=======================================================
Reserve Investment Fund, 5.34% # 2,443 2,443
- -------------------------------------------------------------------------------
Total Money Market Funds (Cost $2,443) 2,443
=Total=Investments=in=Securities===============================================
108.6% of Net Assets (Cost $147,801) $ 149,149
=Other=Assets=Less=Liabilities=================================================
Including $12,552 Payable for
Investment Securities Purchased (11,834)
===============================================================================
NET ASSETS $ 137,315
===============================================================================
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ (530)
Accumulated net realized gain/loss -
net of distributions (23,111)
Net unrealized gain (loss) 1,348
Paid-in-capital applicable to 29,155,674
shares of $0.01 par value capital stock
outstanding; 1,000,000,000 shares authorized 159,608
===============================================================================
NET ASSETS $ 137,315
===============================================================================
NET ASSET VALUE PER SHARE $ 4.71
===============================================================================
+ 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 11/30/98
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 2.4% of net assets.
================================================================================
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
Unaudited
Statement of Operations
In thousands
Ended
11/30/98
--------
Investment Income
Interest income $ 3,825
Expenses
Investment management 221
Shareholder servicing 93
Custody and accounting 69
Prospectus and shareholder reports 22
Registration 17
Legal and audit 7
Directors 3
Proxy and annual meeting 3
Miscellaneous 2
Total expenses 437
Net investment income 3,388
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 106
Change in net unrealized gain or loss on securities 1,212
Net realized and unrealized gain (loss) 1,318
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 4,706
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND
UNAUDITED
STATEMENT OF CHANGES IN NET ASSETS
IN THOUSANDS
6 Months Year
Ended Ended
11/30/98 5/31/98
-------- -------
Increase (Decrease) in Net Assets
Operations
Net investment income ...........................$ 3,388 $ 5,933
Net realized gain (loss) ........................ 106 377
Change in net unrealized gain or loss ........... 1,212 309
Increase (decrease) in net assets from operations 4,706 6,619
Distributions to shareholders
Net investment income ........................... (3,388) (5,933)
Capital share transactions *
Shares sold ..................................... 51,312 45,481
Distributions reinvested ........................ 2,955 5,060
Shares redeemed ................................. (28,133) (34,061)
Increase (decrease) in net assets from capital
share transactions .............................. 26,134 16,480
Net Assets
Increase (decrease) during period ..................... 27,452 17,166
Beginning of period ................................... 109,863 92,697
End of period .........................................$ 137,315 $ 109,863
* Share information
Shares sold ................................. 10,900 9,770
Distributions reinvested .................... 628 1,087
Shares redeemed ............................. (5,979) (7,315)
Increase (decrease) in shares outstanding ... 5,549 3,542
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
Unaudited November 30, 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 with original 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.
<PAGE>
Premiums and Discounts Premiums and discounts on debt securities, other
than mortgage-backed securities (MBS), are amortized for both financial
reporting and tax purposes. Premiums and discounts on all MBS are recognized
upon disposition or principal repayment as gain or loss for financial reporting
purposes. For tax purposes, premiums and discounts on MBS acquired on or before
June 8, 1997, are recognized upon disposition or principal repayments as
ordinary income. For MBS acquired after June 8, 1997, premiums are recognized as
gain or loss; discounts are recognized as gain or loss, except to the extent of
accrued market discount.
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 $4,024,000 and $1,238,000, respectively, for
the six months ended November 30, 1998. Purchases and sales of U.S. government
securities aggregated $94,796,000 and $68,683,000, respectively, for the six
months ended November 30, 1998.
NOTE 3 - FEDERAL INCOME TAXES
<PAGE>
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. As of May 31, 1998 the fund had 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. The fund
intends to retain gains realized in future periods that may be offset by
available capital loss carryforwards.
At November 30, 1998, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$147,801,000. Net unrealized gain aggregated $1,348,000 at period end, of which
$1,704,000 related to appreciated investments and $356,000 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 $45,000 was payable at November 30, 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
November 30, 1998, 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, 2000, which would cause the fund's
ratio of expenses to average net assets to exceed 0.70%. Thereafter, through May
31, 2002, 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, $42,000 of
management fees were not accrued by the fund for the six months ended November
30, 1998. Pursuant to a previous agreement, $266,000 remains subject to
reimbursement through May 31, 2000.
<PAGE>
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 $126,000 for the six months
ended November 30, 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 six months ended November 30, 1998, totaled
$153,000 and are reflected as interest income in the accompanying Statement of
Operations.
================================================================================
<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 [Registration Mark] and
the T. Rowe Price Web site on the Internet. Address: www.troweprice.com
DISCOUNT BROKERAGE*
INDIVIDUAL INVESTMENTS Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
INVESTMENT INFORMATION
<PAGE>
COMBINED STATEMENT Overview of all your accounts with T. Rowe Price.
SHAREHOLDER REPORTS Fund managers' reviews of their strategies and results.
T. ROWE PRICE REPORT Quarterly investment newsletter discussing
markets and financial strategies.
PERFORMANCE UPDATE Quarterly review of all T. Rowe Price fund results.
INSIGHTS Educational reports on investment strategies and
financial markets.
INVESTMENT GUIDES Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal Strategy Planner,
Retirees Financial Guide, and Retirement Planning Kit.
* A division of T. Rowe Price Investment Services, Inc. Member
NASD/SIPC.
================================================================================
<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 500*
Extended Equity Market 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
Total Equity Market Index
Value
INTERNATIONAL/GLOBAL
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
<PAGE>
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 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 Intermediate Bond+
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
INTERNATIONAL/GLOBAL
Emerging Markets Bond
Global Bond++
International Bond
<PAGE>
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 named Equity Index.
** Closed to new investors.
*** Formerly named Florida Insured Intermediate Tax-Free.
+ Formerly named Tax-Free Insured Intermediate Bond.
++ Formerly named Global Government Bond.
+++ Neither the funds nor their share prices are insured or guaranteed by the
U.S. government.
<PAGE>
Please call for a prospectus. Read it carefully before investing.
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.
================================================================================
<PAGE>
ANNUAL MEETING RESULTS
The Short-Term U.S. Government Fund held an annual meeting on October 15,
1998, to elect directors of the fund and to ratify the Board of Directors'
selection of PricewaterhouseCoopers L.L.P. as the fund's independent
accountants.
The results of voting were as follows (by number of shares):
For nominees to the Board of Directors of the
Short-Term U.S. Government Fund:
Calvin W. Burnett
In favor: .........................13,890,472.634
Withheld: ......................... 288,292.351
Anthony W. Deering
In favor: .........................13,894,528.216
Withheld: ......................... 284,236.769
F. Pierce Linaweaver
In favor: .........................13,863,023.729
Withheld: ......................... 315,741.256
William T. Reynolds
In favor: .........................13,917,686.751
Withheld: ......................... 261,078.234
James S. Riepe
In favor: .........................13,891,144.132
Withheld: ......................... 287,620.853
John G. Schreiber
In favor: .........................13,899,121.665
Withheld: ......................... 279,643.320
<PAGE>
M. David Testa
In favor: .........................13,917,686.751
Withheld: ......................... 261,078.234
For PricewaterhouseCoopers L.L.P
as independent accountants:
In favor: .........................13,661,289.230
Withheld: ......................... 114,261.715
Abstained: ........................ 403,214.040
================================================================================
FOR YIELD, PRICE, LAST TRANSACTION,
CURRENT BALANCE, OR TO CONDUCT
TRANSACTIONS, 24 HOURS, 7 DAYS
A WEEK, CALL TELE*ACCESS [REGISTRATION MARK]:
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
<PAGE>
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
T. Rowe Price Investment Services, Inc., Distributor. F69-051 11/30/98
