Annual Report
December 31, 1997
Prime Reserve Portfolio
This report is authorized for distribution only to those who have
received a copy of the portfolio's prospectus.
T. Rowe Price Investment Services, Inc., Distributor
T. Rowe Price
Prime Reserve Portfolio
Annual Report
December 31, 1997
Dear Investor
During the six months ended December 31, 1997, inflation remained
subdued despite strong economic growth. Money market yields
fluctuated within a narrow range until November and December, when
they rose unexpectedly. In this environment, the Prime Reserve
Portfolio boosted its yield and edged out its average peer for both
the 6- and 12-month periods.
Market Environment
At the time of our last report, inflation was a significant concern
to investors. A March 1997 interest rate hike by the Fed, intended
to curb economic growth, crowned a period of rising rates, with
one-year yields peaking near 6%. After that time, the economy
performed well-gross domestic product continued to grow at a more
than 3% annualized rate-but inflation, unexpectedly, seemed to
decelerate.
Interest Rate Levels chart 12/31/97
1-Year 90-Day
Treasury Treasury Federal Funds
Bill Bill Target Rate
12/31/96 5.5 5.1 5.25
5.62 5.18 5.25
5.6 5.19 5.25
3/97 5.94 5.39 5.5
5.93 5.29 5.5
5.86 5.09 5.5
6/97 5.63 5.1 5.5
5.48 5.25 5.5
5.59 5.26 5.5
9/97 5.45 4.98 5.5
5.35 5.18 5.5
5.5 5.27 5.5
12/31/97 5.52 5.4 5.5
A strong bond rally in April, and a subsequent easing of inflation
fears, allowed money market yields to fall back toward year-ago
levels, where they remained in the late summer and fall. A
significant global currency crisis emanating from southeast Asia in
October eliminated the likelihood of a near-term rate hike by the
Fed, helping to keep rates down. However, short-term investments in
this market actually posted yield increases toward the end of the
period. This was largely a return to normalcy after a shortage of
90-day Treasury bills kept prices artifically high (and, therefore,
yields inappropriately low) most of the summer. The yield on 90-day
Treasury bills ended the year 30 basis points higher than its level
six months earlier (100 basis points equal one percentage point).
The effect on one-year Treasury bill yields was far more moderate:
they actually declined a small amount from six months ago.
Performance and Strategy Review
Performance Comparison
Periods Ended 12/31/97 6 Months 12 Months
________________________________________________________
Prime Reserve Portfolio 2.70% 5.33%
Lipper Variable Annuity
Underlying Money Market
Funds Average 2.58 5.13
During the period, we were able both to elevate your fund's yield
and to outperform our peer group. Between June 30 and December 31,
1997, the fund's seven-day compound dividend yield jumped from
5.38% to 5.59%. That increase contributed to a 2.70% total return
for the six-month period, a step above the 2.58% gain notched by
the Lipper Variable Annuity Underlying Money Market Funds Average.
Over the past 12 months, your fund posted a 5.33% return compared
with a 5.13% gain for the Lipper Average.
The fund's increased dividend yield was partly due to modestly
higher interest rates. However, we were also able to add value by
managing the portfolio's maturity structure. After taking a
generally cautious stance in the spring, when interest rates were
rising, we used the past six months to extend the average maturity
of the fund's holdings from 57 to 67 days. We accomplished this by
owning several one-year instruments, which typically have higher
yields than instruments with shorter maturities. To counter the
added interest rate risk of the one-year maturities, we maintained
a significant stake in more defensive one-month instruments. This
"barbell" approach allowed us to increase fund yield over the past
six months, when rates overall were flat to only slightly higher.
Although we shifted among different types of investments during the
period, our asset allocation strategy did not change significantly.
The fund remains heavily weighted toward bank certificates of
deposit (CDs) and commercial paper. We trimmed some of our smaller
commercial paper positions, and some of the proceeds went toward
CDs and telephone issues.
Continuing a long-term trend, we again expanded our combined
holdings in asset-backed securities and asset-backed structured
notes. These two segments now represent 25% of assets, a
significant stake for the fund.
We continue to be interested in the diversification potential and
the competitive yields these securities provide, along with their
high credit quality. Finally, our stake in floating rate
instruments stayed steady at 15% of assets. Although these
securities perform well when rates drift higher (their yields
increase along with interest rates), we did not add to our holdings
because these issues recently have carried unattractive yields
compared with alternative investments.
Outlook
Despite the economy's strength, we believe the recent developments
in Asia and continued subdued inflation may obviate the need for
any action by the Fed. It is no longer a foregone conclusion that
its next move will be a tightening.
Looking further ahead, we expect a continuation of good growth,
although perhaps a touch slower than the recent pace. Consumer
spending on big ticket items may decline, since many individuals
are burdened with high debt and may be worried about volatility in
the stock markets. However, consumer confidence is high and
employment is strong. If growth slows to a sustainable pace, and
inflation does not accelerate, it is likely that the current,
attractive yields on money market instruments will stay within
narrow ranges.
Respectfully submitted,
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
January 28, 1998
Portfolio Highlights
Key Statistics
Periods
Ended
12/31/97
_____________________________________________________
Price Per Share $ 1.00
Dividend Per Share
6 months .027
12 months .052
Dividend Yield (7-Day Compound) * 5.59%
Weighted Average Maturity (days) 67
Weighted Average Quality ** First Tier
*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.
**All securities purchased in the money fund are rated in the two
highest categories (tiers) as established by national rating
agencies or, if unrated, are deemed of comparable quality by T.
Rowe Price.
Portfolio Highlights
Sector Diversification
Percent of Percent of
Net Assets Net Assets
6/30/97 12/31/97
___________________________________________________________
Bank Notes 2% 7%
___________________________________________________________
U.S. Negotiable Bank Notes 2 3
Eurodollar Negotiable
Bank Notes - 2
U.S. Dollar Denominated
Foreign Negotiable Bank Notes - 2
Certificates of Deposit 20% 22%
___________________________________________________________
Domestic Negotiable CDs 2 3
U.S. Dollar-Denominated
Foreign Negotiable CDs 18 19
Commercial Paper and Medium-
Term Notes 71% 67%
___________________________________________________________
Asset-Backed 13 16
Finance and Credit 13 13
Banking 14 13
Asset-Backed Structured Notes 5 9
Telephones 1 4
All Other 25 12
U.S. Government Agency
Obligations 1% -
Foreign Government and
Municipalities 4% 4%
___________________________________________________________
Other Assets Less Liabilities 2% -
___________________________________________________________
Total 100% 100%
___________________________________________________________
Fixed Rate Obligations 89% 85%
Floating Rate Obligations 11% 15%
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.
Prime Reserve Portfolio SEC chart 12/31/97
Lipper Variable
Annuity Underlying
Money Market Prime Reserve
Funds Average Portfolio
12/31/96 $ 10,000 $10,000
3/97 10,120 10,123
6/97 10,248 10,256
9/97 10,379 10,392
12/97 10,514 10,533
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.
Prime Reserve Portfolio
Periods Ended 12/31/97
Since Inception
6 Months Inception Date
_________________________________________________________
2.70% 5.33% 12/31/96
Investment return represents past performance and will vary. While
the fund is managed to maintain a stable share price of $1.00, this
is not guaranteed. An investment in the fund is not insured or
guaranteed by the U.S. government.
Total returns do not include charges imposed by your insurance
company's separate account. If these were included, performance
would have been lower.
Financial Highlights
T. Rowe Price Prime Reserve Portfolio
For a share outstanding
throughout the period
________________________
12/31/96
through
12/31/97
NET ASSET VALUE
Beginning of period $ 1.000
Investment activities
Net investment income 0.052
Distributions
Net investment income (0.052)
NET ASSET VALUE
End of period $ 1.000
________
Ratios/Supplemental Data
Total return 5.33%
Ratio of expenses to
average net assets 0.55%!
Ratio of net investment
income to average
net assets 5.24%!
Net assets, end of period
(in thousands) $ 10,964
! Annualized.
The accompanying notes are an integral part of these financial
statements.
Statement of Net Assets
T. Rowe Price Prime Reserve Portfolio
December 31, 1997
Shares/Par Value
In thousands
BANK NOTES 6.8%
Depfa Bank, VR
5.715%, 1/7/98 $ 200 $ 200
First America Bank
6.15%, 3/27/98 100 100
National Bank of Commerce, VR
6.031%, 1/26/98 250 250
Westpac Banking
6.07%, 5/27/98 200 200
Total Bank Notes (Cost $750) 750
CERTIFICATES OF DEPOSIT 22.5%
ABN AMRO, 5.85%, 8/7/98 250 250
Bank of Nova Scotia
5.89%, 8/27/98 200 200
Bankers Trust Company
5.98%, 12/10/98 100 100
Banque National de Paris
5.87%, 8/20/98 100 100
Barclays Bank PLC
5.94%, 6/19/98 250 250
Bayerische Vereinsbank
5.77%, 10/6/98 100 100
Canadian Imperial Bank
5.685%, 3/2/98 64 64
5.915%, 8/12/98 100 100
Commerzbank
5.90%, 9/10/98 100 100
5.93%, 6/26/98 100 100
First National Bank of Maryland
5.95%, 10/22/98 150 150
Hessische Landesbank
6.13%, 4/7/98 100 100
National Westminster Bank PLC
5.66%, 2/11/98 100 100
Rabobank Nederland N.V.
5.99%, 3/24/98 54 54
Royal Bank of Canada
5.91%, 6/17/98 100 100
Svenska Handelsbanken
5.78%, 2/27/98 200 200
Swiss Bank
5.75%, 2/11/98 $ 200 $ 200
5.98%, 3/19/98 100 100
Union Bank of California
5.80%, 10/6/98 100 100
Total Certificates of Deposit
(Cost $2,468) 2,468
COMMERCIAL PAPER 58.4%
Allied Signal, 4(2)
5.85%, 1/13/98 150 150
Associates Finance Services
5.73%, 2/2/98 200 199
Banque Nationale de Paris
5.75%, 5/15/98 234 229
BBL North America
6.07%, 1/6/98 275 275
Beta Finance, 4(2)
5.80%, 2/20/98 250 248
Caisse D'Amortissement
5.80%, 2/23/98 100 99
Caterpillar Financial Services
6.00%, 1/27/98 125 124
Corporate Asset Funding, 4(2)
5.65%, 1/22/98 262 261
Countrywide Funding
5.90%, 1/7/98 150 150
Cregem N.A.
5.56%, 2/23/98 300 298
Daimler-Benz North America
5.60%, 2/12/98 150 149
Delaware Funding, 4(2)
5.80%, 1/30/98 350 348
Den Danske, 5.85%, 1/7/98 225 225
Falcon Asset Securitization, 4(2)
6.00%, 1/13/98 350 349
Finova Capital
5.80%, 2/12/98 100 99
Ford Motor Credit
5.65%, 3/23/98 180 178
General Electric Capital
5.85%, 1/15/98 250 249
Golden Managers Acceptance
5.86%, 1/23/98 419 417
Halifax, 5.90%, 1/5/98 $ 150 $ 150
Island Finance of Puerto Rico
5.68%, 2/17/98 200 199
KFW International Finance
5.60%, 1/12/98 320 319
Market Street Funding, 4(2)
6.20%, 1/7/98 325 325
Merrill Lynch, 5.64%, 9/4/98 100 96
Metlife Funding
5.70%, 1/23/98 300 299
Nordbanken North America
5.55%, 1/8/98 200 200
Safeco Credit, 5.67%, 2/5/98 150 149
Southern New England
Telecommunications, 4(2)
5.80%, 2/20/98 125 124
Telstra, 5.74%, 3/12/98 300 297
Yorkshire Building Society
5.55%, 1/13/98 200 200
Total Commercial Paper
(Cost $6,405) 6,405
MEDIUM-TERM NOTES 11.1%
Chrysler Financial
7.26%, 7/1/98 50 50
Goldman Sachs, VR
5.961%, 1/6/98 125 125
5.969%, 1/6/98 100 100
PHH, VR, 6.00%, 1/12/98 150 150
Rabobank Optional Redemption
Trust, VR
5.961%, 1/20/98! 191 191
Short Term Card Account Trust
VR, (144a)
6.000%, 1/15/98 $ 100 $ 100
SMM Trust, VR
6.00%, 1/12/98 250 250
Tiers Trust, VR, (144a)
5.980%, 1/15/98 250 250
Total Medium-Term Notes
(Cost $1,216) 1,216
FUNDING AGREEMENTS 1.4%
General American Life Insurance, VR
5.89%, 2/1/98! 150 150
Total Funding Agreements
(Cost $150) 150
Total Investments in Securities
100.2% of Net Assets (Cost $10,989) $ 10,989
Other Assets Less Liabilities (25)
NET ASSETS $ 10,964
Net Assets Consist of:
Paid-in-capital applicable to 10,964,369
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
Corporation authorized 10,964
NET ASSETS $ 10,964
_________
NET ASSET VALUE PER SHARE $ 1.00
_________
! Private Placement
VR Variable Rate
4(2) Commercial Paper sold within terms of a private placement
memorandum, exempt from registration under section 4.2 of
the Securities Act of 1933, as amended, and may be sold
only to dealers in that program or other "accredited
investors."
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 3.2% of net
assets.
The accompanying notes are an integral part of these financial
statements.
Statement of Operations
T. Rowe Price Prime Reserve Portfolio
In thousands
12/31/96
through
12/31/97
Investment Income
Income
Interest income $ 455
Expenses
Investment management and
administrative 43
Net investment income 412
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 412
_________
The accompanying notes are an integral part of these financial
statements.
Statement of Changes in Net Assets
T. Rowe Price Prime Reserve Portfolio
In thousands
12/31/96
through
12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 412
Distributions to shareholders
Net investment income (412)
Capital share transactions*
Shares sold 24,498
Distributions reinvested 412
Shares redeemed (13,946)
Increase (decrease) in net assets
from capital share transactions 10,964
Net Assets
Increase (decrease) during period 10,964
Beginning of period -
End of period $ 10,964
_________
*Share information
Shares sold 24,498
Distributions reinvested 412
Shares redeemed (13,946)
Increase (decrease) in shares
outstanding 10,964
The accompanying notes are an integral part of these financial
statements.
Notes to Financial Statements
T. Rowe Price Prime Reserve Portfolio
December 31, 1997
Note 1 - Significant Accounting Policies
T. Rowe Price Fixed Income Series, Inc. (the corporation) is
registered under the Investment Company Act of 1940. The Prime
Reserve Portfolio (the fund), a diversified, open-end management
investment company, is one of the portfolios established by the
corporation and commenced operations on December 31, 1996. The
shares of the fund are currently being offered only to separate
accounts of certain insurance companies as an investment medium for
both variable annuity contracts and variable life insurance
policies.
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 Securities are valued at amortized cost. Assets and
liabilities for which such valuation procedures 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
are amortized for both financial reporting and 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 - Federal Income Taxes
No provision for federal income taxes is required since the fund
intends to qualify as a regulated investment company and distribute
all of its taxable income.
At December 31, 1997, the aggregate cost of investments for federal
income tax and financial reporting purposes was $10,989,000.
Note 3 - Related Party Transactions
The investment management and administrative agreement between the
fund and T. Rowe Price Associates, Inc. (the manager) provides for
an all-inclusive annual fee, computed daily and paid monthly, equal
to 0.55% of the fund's average daily net assets. Pursuant to the
agreement, investment management, shareholder servicing, transfer
agency, accounting, and custody services are provided to the fund,
and interest, taxes, brokerage commissions, and extraordinary
expenses are paid directly by the fund.
Report of Independent Accountants
To the Board of Directors of T. Rowe Price Fixed Income Series,
Inc. and Shareholders of Prime Reserve Portfolio
In our opinion, the accompanying statement of net assets and the
related statements of operations and changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of Prime Reserve Portfolio (one of the
portfolios constituting T. Rowe Price Fixed Income Series, Inc.,
hereafter referred to as the "Fund") at December 31, 1997, and the
results of its operations, the changes in its net assets and the
financial highlights for the period December 31, 1996 (commencement
of operations) through December 31, 1997, 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 audit. We conducted our audit 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 audit, which included confirmation of securities at
December 31, 1997 by correspondence with the custodian, provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
January 21, 1998
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to those who have
received a copy of the portfolio's prospectus.
T. Rowe Price Investment Services, Inc., Distributor
TRP658 (12/97)
K15-069 12/31/97
