N-CSRS 1 stb.txt T. ROWE PRICE SHORT-TERM BOND FUND Item 1. Report to Shareholders T. Rowe Price Short-Term Bond Fund -------------------------------------------------------------------------------- November 30, 2003 Certified Semiannual Report This report is certified under the Sarbanes-Oxley Act of 2002, which requires that public companies, including mutual funds, affirm that the information provided in their annual and semiannual shareholder reports fully and fairly represents their financial position. T. Rowe Price Short-Term Bond Fund -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) FINANCIAL HIGHLIGHTS For a share outstanding throughout each period -------------------------------------------------------------------------------- 6 Months Year Ended Ended 11/30/03 5/31/03 5/31/02 5/31/01 5/31/00 5/31/99 NET ASSET VALUE Beginning of period $ 4.87 $ 4.75 $ 4.71 $ 4.52 $ 4.63 $ 4.69 Investment activities Net investment income (loss) 0.07* 0.19* 0.25* 0.28* 0.26 0.26 Net realized and unrealized gain (loss) (0.06) 0.12 0.04 0.19 (0.11) (0.06) Total from investment activities 0.01 0.31 0.29 0.47 0.15 0.20 Distributions Net investment income (0.07) (0.19) (0.25) (0.28) (0.26) (0.26) NET ASSET VALUE End of period $ 4.81 $ 4.87 $ 4.75 $ 4.71 $ 4.52 $ 4.63 ------------------------------------------------------------ Ratios/Supplemental Data Total return^ 0.21%* 6.74%* 6.24%* 10.61%* 3.39% 4.23% Ratio of total expenses to average net assets 0.55%*! 0.55%* 0.55%* 0.59%* 0.72% 0.73% Ratio of net investment income (loss) to average net assets 2.71%*! 3.85%* 5.11%* 5.99%* 5.74% 5.44% Portfolio turnover rate 108.5%! 110.1% 49.9% 77.6%CKMK 50.7% 51.6% Net assets, end of period (in millions) $ 1,246 $ 1,052 $ 696 $ 469 $ 287 $ 324 ^ 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 0.55% contractual expense limitation in effect through 9/30/04. CKMK Excludes the effect of the acquisition of Summit Limited-Term Bond Fund's and Short-Term U.S. Government's Fund's assets. ! Annualized The accompanying notes are an integral part of these financial statements. T. Rowe Price Short-Term Bond Fund -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) November 30, 2003 STATEMENT OF NET ASSETS ss. Par/Shares Value -------------------------------------------------------------------------------- In thousands CORPORATE BONDS AND NOTES 41.1% Banking and Finance 12.4% ABN AMRO Bank (Chicago), 7.25%, 5/31/05 $ 3,620 $ 3,895 AIG Sunamerica Global Financing XII, 144A, 5.30%, 5/30/07 3,450 3,665 Allstate Financial Global Funding, 144A, 5.25%, 2/1/07 4,500 4,774 AT&T Capital Corporation, 6.60%, 5/15/05 1,110 1,173 Bank of America, 5.25%, 2/1/07 9,000 9,570 Bank of New York, 2.20%, 5/12/06 6,000 5,949 Bank One Corporation, 6.50%, 2/1/06 3,000 3,232 Bear Stearns, 3.00%, 3/30/06 8,000 8,052 CIT Group, 5.50%, 11/30/07 3,000 3,190 Citigroup 4.125%, 6/30/05 3,000 3,098 5.75%, 5/10/06 6,000 6,424 Countrywide Home Loan, 5.50%, 8/1/06 2,800 2,979 First Union, 7.55%, 8/18/05 4,750 5,178 Goldman Sachs Group, 144A, 6.75%, 2/15/06 !! 8,900 9,664 Household Finance, 5.75%, 1/30/07 4,330 4,636 International Lease Finance, 3.75%, 8/1/07 7,500 7,541 Keycorp, 6.75%, 3/15/06 1,850 1,987 Lehman Brothers, 6.25%, 5/15/06 5,500 5,958 Marsh & McLennan, 3.625%, 2/15/08 4,810 4,788 Marshall & Ilsley Bank, 4.125%, 9/4/07 2,160 2,226 Merrill Lynch, 7.00%, 3/15/06 225 245 Midland Bank, 7.625%, 6/15/06 4,300 4,804 Morgan Stanley Dean Witter, 6.10%, 4/15/06 6,700 7,225 National City Bank, 2.375%, 8/15/06 5,000 4,974 National Rural Utilities, 6.00%, 5/15/06 6,000 6,407 Regions Bank, 2.90%, 12/15/06 5,635 5,629 St. Paul Companies, 5.75%, 3/15/07 2,475 2,653 Travelers Property Casualty, 3.75%, 3/15/08 1,770 1,765 U.S. Bank NA, 2.85%, 11/15/06 9,000 8,974 Wachovia Corporation, 7.45%, 7/15/05 2,000 2,171 Washington Mutual, 5.625%, 1/15/07 5,850 6,264 Zions Bancorporation, 2.70%, 5/1/06 4,800 4,793 153,883 Consumer Products and Services 9.0% Abbott Laboratories, 5.625%, 7/1/06 4,225 $ 4,523 AOL Time Warner, 5.625%, 5/1/05 6,000 6,269 Brown-Forman, 2.125%, 3/15/06 9,000 8,917 Clear Channel Communications, 6.00%, 11/1/06 6,578 7,065 Comcast Cable, 8.375%, 5/1/07 6,000 6,895 Cox Communications, 6.875%, 6/15/05 2,350 2,504 Dayton Hudson Corporation, 7.50%, 7/15/06 2,500 2,796 Diageo Capital, 6.625%, 6/24/04 2,000 2,059 Fred Meyer, 7.375%, 3/1/05 4,700 4,987 General Mills, 3.875%, 11/30/07 5,000 5,052 Gillette, 3.50%, 10/15/07 6,250 6,308 Grand Metropolitan Investment, Zero Coupon, 1/6/04 3,925 3,920 IBM, 2.375%, 11/1/06 5,500 5,429 Kellogg, 2.875%, 6/1/08 5,950 5,716 Kraft Foods, 4.625%, 11/1/06 4,850 5,029 Lenfest Communications, 8.375%, 11/1/05 5,802 6,371 McCormick, 6.40%, 2/1/06 3,400 3,663 Newell Rubbermaid, 2.00%, 5/1/05 1,515 1,504 Ralcorp Holdings, 8.75%, 9/15/04 5,500 5,802 Univision Communications, 2.875%, 10/15/06 4,730 4,692 Viacom, 6.40%, 1/30/06 4,440 4,791 Wal-Mart Stores, 5.45%, 8/1/06 6,750 7,209 111,501 Energy 1.3% BP Canada Finance, 3.375%, 10/31/07 5,700 5,697 Conocophillips, 3.625%, 10/15/07 6,350 6,399 Devon Energy, 2.75%, 8/1/06 4,600 4,558 16,654 Industrial 7.4% Agrium, 7.00%, 2/1/04 1,000 1,005 Alcoa, 4.25%, 8/15/07 2,475 2,558 American Honda Finance, 144A, 2.875%, 4/3/06 4,400 4,417 Boeing Capital, 7.10%, 9/27/05 4,500 4,861 Caterpillar Financial Services, 2.35%, 9/15/06 6,500 6,418 Daimler Chrysler North America, 6.90%, 9/1/04 5,000 5,182 Dow Chemical, 7.00%, 8/15/05 6,000 6,444 Falconbridge, 7.35%, 11/1/06 5,000 5,509 Ford Motor Credit, 6.50%, 1/25/07 3,750 3,935 General Electric, VR, 1.22%, 1/24/04 $ 2,665 $ 2,665 General Electric Capital, 5.00%, 6/15/07 6,000 6,327 GMAC, 7.50%, 7/15/05 5,000 5,353 Hutchison Whampoa Finance, 144A, 6.95%, 8/1/07 4,500 4,983 John Deere Capital, 3.90%, 1/15/08 4,000 4,053 Meadwestvaco Corp, 2.75%, 12/1/05 3,700 3,690 Northrop Grumman, 8.625%, 10/15/04 5,550 5,861 Praxair, VR, 4.75%, 7/15/03 4,000 4,192 Sealed Air, 144A, 5.375%, 4/15/08 6,000 6,243 United Technologies, 6.625%, 11/15/04 3,250 3,398 Weyerhaeuser, 5.50%, 3/15/05 5,000 5,200 92,294 Media and Communications 3.9% Alltel, 6.75%, 9/15/05 3,750 4,032 Bellsouth, 5.00%, 10/15/06 9,000 9,506 British Telecommunications, STEP, 7.875%, 12/15/05 5,000 5,511 SBC Communications, 5.75%, 5/2/06 9,000 9,628 Telefonica Europe, 7.35%, 9/15/05 3,000 3,259 Telefonos de Mexico (Telmex), 144A, 4.50%, 11/19/08 3,545 3,541 U.S. West Communications, 7.20%, 11/1/04 3,500 3,596 Verizon Global Funding, 6.125%, 6/15/07 9,000 9,775 48,848 Transportation Services 0.9% ERAC USA Finance, 144A, 6.625%, 2/15/05 !! 5,665 5,915 Norfolk Southern, 7.875%, 2/15/04 125 126 Union Pacific, 5.84%, 5/25/04 4,500 4,581 10,622 Utilities 6.2% Alabama Power, 5.49%, 11/1/05 4,250 4,501 American Electric Power, 6.125%, 5/15/06 2,055 2,200 Arizona Public Service, 5.875%, 2/15/04 2,750 2,773 CE Electric UK Funding, 144A, 6.853%, 12/30/04 2,370 2,424 CINergy, 6.25%, 9/1/04 3,900 4,014 Consumers Energy Group, 6.00%, 3/15/05 2,150 2,247 Dominion Resources, 4.125%, 2/15/08 3,000 3,048 DTE Energy, 6.00%, 6/1/04 4,500 4,586 Energy East, 5.75%, 11/15/06 5,750 6,111 Entergy Gulf States, 5.20%, 12/3/07 5,310 5,401 FirstEnergy, 5.50%, 11/15/06 3,175 3,299 Niagara Mohawk Power, 5.375%, 10/1/04 $ 5,250 $ 5,375 NISource Financial Corp., VR, 1.919%, 2/4/04 6,000 6,000 Pinnacle West Capital, 6.40%, 4/1/06 3,300 3,524 Potomac Electric Power, 3.75%, 2/15/06 3,800 3,842 PSEG Power, 6.875%, 4/15/06 3,345 3,640 Sempra Energy, 6.925%, 7/1/04 4,950 5,092 Texas-New Mexico Power, 144A, 6.125%, 6/1/08 3,650 3,674 TXU Energy, 6.125%, 3/15/08 2,900 3,099 WPD Holdings, 144A, 6.875%, 12/15/07 2,700 2,772 77,622 Total Corporate Bonds and Notes (Cost $501,068) 511,424 ASSET-BACKED SECURITIES 13.1% Aesop Funding II, 144A, 2.78%, 12/20/07 6,350 6,318 Bank One Auto Securitization Series 2003-1, Class A3, 1.82%, 9/20/07 9,850 9,756 BMW Vehicle Owner Trust Series 2003-A, Class A3, 1.94%, 2/25/07 8,750 8,759 Capital Auto Receivables Asset Trust Series 2002-2, Class A4, 4.50%, 10/15/07 3,000 3,099 Series 2002-2, Class CERT, 4.18%, 10/15/07 1,727 1,760 Chase Manhattan Auto Owner Trust Series 2001-B, Class CTFS, 3.75%, 5/15/08 937 951 CIT RV Trust Series 1997-A, Class A6, 6.35%, 4/15/11 479 490 Series 1998-A, Class A4, 6.09%, 2/15/12 1,849 1,876 Citibank Credit Card Issuance Trust Series 2000-A1, 6.90%, 10/15/07 11,100 12,002 Series 2000-A3, Class A3, 6.875%, 11/16/09 3,700 4,139 Series 2001-A6, Class A6, 5.65%, 6/16/08 7,000 7,507 Comed Transitional Funding Trust Series 1998-1, Class A5, 5.44%, 3/25/07 3,894 4,000 CPL Transition Funding Series 2002-1, Class A1, 3.54%, 1/15/07 3,475 3,516 Harley-Davidson Motorcycle Trust Series 2001-1B, Class CTFS, 5.29%, 1/15/09 1,252 1,292 Series 2003-3, Class A2, 2.76%, 5/15/11 4,700 4,691 Series 2003-3, Class B, 2.28%, 11/15/03 2,507 2,504 Honda Auto Receivables Owner Trust Series 2002-1, Class A4, 4.22%, 4/16/07 $ 6,000 $ 6,171 Household Affinity Credit Card Series 2003-1, Class A, 1.24%, 11/15/03 5,000 5,004 Hyundai Auto Receivables Trust Series 2003-A, Class C, 3.19%, 10/15/10 1,225 1,220 Series 2003-A, Class B, 2.99%, 10/15/10 3,275 3,261 John Deere Owner Trust Series 2001-A, Class A4, 3.78%, 9/15/08 5,175 5,270 Series 2003-A, Class A3, 1.79%, 4/15/07 2,000 1,981 MBNA Master Credit Card Trust Series 1999-M, Class A, 6.60%, 4/16/07 1,150 1,203 Series 2000-C, Class A, 1.32%, 11/15/03 10,600 10,624 Series 2001-1, Class C, VR, 2.17%, 11/17/03 6,000 6,011 Series 2003-2, Class C, 2.72%, 11/15/03 5,000 5,102 Navistar Financial Corp. Owner Trust Series 2003-B, Class A3, 1.32%, 11/17/03 10,000 10,013 Nissan Auto Receivables Owner Trust Series 2002-A, Class A4, 4.28%, 10/16/06 1,000 1,032 Peco Energy Transition Trust, VR, 1.335%, 3/1/04 68 68 Regions Auto Receivables Trust, 2.63%, 1/16/07 5,000 5,044 Reliant Energy Transition Bond Trust Series 2001-1, Class A1, 3.84%, 9/15/07 4,339 4,432 SSB Auto Loan Trust, Series 2002-1, Class C, 4.13%, 2/15/09 1,883 1,904 USAA Auto Owner Trust Series 2003-1, Class A3, 1.58%, 6/15/07 10,000 9,938 WFS Financial Owner Trust Series 2000-4, Class A-4, 7.41%, 9/20/07 2,589 2,636 World Financial Network Series 2003-A, Class A2, VR, 1.49%, 10/15/03 10,000 10,004 Total Asset-Backed Securities (Cost $162,107) 163,578 U.S. GOVERNMENT & AGENCY MORTGAGE- BACKED SECURITIES 13.3% U.S. Government Agency Obligations 12.5% misc. symbol1 Federal Home Loan Mortgage 4.50%, 10/1/07 11,008 11,269 5.00%, 10/1 - 11/1/18 30,665 31,103 6.50%, 12/1/03 $ 23 $ 23 10.00%, 3/1/04 - 10/1/05 7 7 10.75%, 12/1/09 27 29 CMO 4.00%, 1/15/22 9,000 9,101 4.50%, 2/15/13 9,722 9,996 5.00%, 1/15/19 12,000 12,306 6.00%, 1/15/08 1,413 1,433 6.50%, 8/15/23 2,243 2,300 IO, 4.50%, 5/15/16 - 4/15/18 5,700 967 TBA, 6.00%, 1/1/34 2,650 2,714 Federal National Mortgage Assn. 5.00%, 1/1/09 - 11/1/18 11,382 11,558 5.50%, 1/1/17 - 6/1/18 19,960 20,607 6.00%, 7/1 - 11/1/13 343 359 9.00%, 5/1/05 101 103 ARM 2.805%, 11/1/21 111 112 3.173%, 12/1/17 - 8/1/20 71 71 3.196%, 10/1/17 29 29 3.209%, 5/1/17 77 78 3.237%, 7/1/27 190 193 3.24%, 3/1/20 31 31 3.25%, 11/1/17 26 26 3.265%, 3/1/19 4 4 3.268%, 12/1/16 - 11/1/20 60 60 3.276%, 3/1/18 8 8 4.379%, 12/1/32 12,401 12,503 4.75%, 6/1/18 37 37 4.947%, 5/1/24 39 42 5.535%, 1/1/19 192 212 6.817%, 10/1/14 8 8 CMO 4.50%, 6/25/13 12,000 12,321 5.50%, 3/25/30 3,326 3,408 6.00%, 6/25/16 707 724 9.00%, 1/25/08 1,551 1,658 TBA, 4.50%, 1/1/18 10,000 9,937 155,337 U.S. Government Obligations 0.8% Government National Mortgage Assn. 6.00%, 7/15/17 $ 4,190 $ 4,409 7.00%, 9/15/12 - 12/15/13 4,591 4,935 8.00%, 5/15/07 115 121 8.50%, 2/15/05 - 3/15/06 49 50 9.00%, 1/15/05 - 2/15/06 42 43 9.50%, 4/15/05 - 10/15/09 6 6 10.00%, 8/15/04 - 10/15/21 122 135 10.50%, 11/15/15 39 43 11.00%, 4/20/14 2 2 11.25%, 7/15 - 8/15/13 53 60 11.50%, 3/15/10 - 12/15/15 493 556 11.75%, 8/15 - 9/15/13 129 146 10,506 Total U.S. Government & Agency Mortgage- Backed Securities (Cost $165,484) 165,843 NON-U.S. GOVERNMENT MORTGAGE- BACKED SECURITIES 4.7% Banc of America Commercial Mortgage Series 2003-1, Class A1, CMO, 3.878%, 9/11/3 4,726 4,700 Bankboston Home Equity Loan Trust Series 1998-2, Class A6, 6.64%, 12/25/28 5,000 5,303 Chase Funding Mortgage Loan Series 2002-4, Class IIA 1, VR, 1.49%, 11/25/03 8,822 8,837 CWMBS, Series 2001-12, Class Y1 PAC, CMO, 5.75%, 12/31/31 13,000 13,106 DLJ Commercial Mortgage Series 1999-CG2, Class A1B, CMO, 7.30%, 6/10/32 4,200 4,838 Federal Home Loan Mortgage Structured Pass Through Securities Series T-45, Class A3, 4.105%, 10/27/31 5,000 5,095 GMAC Commercial Mortgage Securities, CMO, 6.15%, 5/15/35 1,928 2,018 J.P. Morgan Chase Series 1999-C7, Class A2, CMO, 6.507%, 10/15/35 4,000 4,408 Money Store Home Equity Trust Series 197-C, Class AF8, 6.575%, 1/15/39 2,722 2,737 Morgan Stanley Dean Witter Capital, CMO, 5.38%, 1/15/39 5,646 5,930 Prudential Securities Secured Financing, CMO, 6.074%, 1/15/08 453 478 Ryland Mercury Savings Trust, VR, 4.253%, 6/1/03 $ 22 $ 22 Sovereign Bank Home Equity Loan Trust Series 2000-1, Class A6, 7.25%, 2/25/15 635 684 Summit Mortgage Trust, CMO, 144A, 6.34%, 6/28/16 68 68 Total Non-U.S. Government Mortgage- Backed Securities (Cost $58,115) 58,224 U.S. GOVERNMENT & AGENCY OBLIGATIONS (EXCLUDING MORTGAGE-BACKED) 12.1% U.S. Government Agency Obligations 3.5% misc. symbol1 Federal Home Loan Banks, 3.25%, 8/15/05 10,000 10,204 Federal Home Loan Mortgage, 2.875%, 9/15/05 20,000 20,268 Federal National Mortgage Assn., 3.25%, 8/15/08 14,183 13,958 44,430 U.S. Treasury Obligations 8.6% U.S. Treasury Notes 1.50%, 7/31/05 11,800 11,741 1.625%, 1/31 - 4/30/05 ++ 95,000 95,065 106,806 Total U.S. Government & Agency Obligations (Excluding Mortgage-Backed) (Cost $151,259) 151,236 OTHER 3.2% Bundesobligation, 5.00%, 8/19/05 (EUR) 4,600 5,716 Canada Government 3.50%, 6/1/05 (CAD) 17,540 13,618 5.75%, 9/1/06 (CAD) 17,440 14,228 European Investment Bank, 6.00%, 7/15/05 (AUD) 7,900 5,745 University of Miami, 6.90%, 4/1/04 (MBIA Insured) 50 51 Total Other (Cost $37,023) 39,358 Money Market Funds 12.1% T. Rowe Price Reserve Investment Fund, 1.12% # 150,528 150,528 Total Money Market Funds (Cost $150,528) 150,528 Total Investments in Securities 99.6% of Net Assets (Cost $1,225,584) $ 1,240,191 Forward Currency Exchange Contracts In thousands Unrealized Counterparty Settlement Receive Deliver Gain (Loss) ------------- ----------- ------------ ------------ ----------- Morgan Stanley 12/9/03 USD 10,377 CAD 13,850 $ (293) Net unrealized gain (loss) on open forward currency exchange contracts (293) Futures Contracts Contract Unrealized Expiration Value Gain (Loss) ---------- --------- ---------- In thousands Short, 697 five year U.S. Treasury Note contracts $700,000 par of U.S. Treasury Notes pledged as initial margin 12/03 $(77,824) $ (875) Net payments (receipts) of variation margin to date 1,202 Variation margin receivable (payable) on open futures contracts 327 Other Assets Less Liabilities 5,478 NET ASSETS $ 1,245,703 ----------- Net Assets Consist of: Undistributed net investment income (loss) $ (4,133) Undistributed net realized gain (loss) (16,062) Net unrealized gain (loss) 13,463 Paid-in-capital applicable to 258,916,935 shares of $0.01 par value capital stock outstanding; 1,000,000,000 shares authorized 1,252,435 NET ASSETS $ 1,245,703 ----------- NET ASSET VALUE PER SHARE $ 4.81 ----------- # Seven-day yield ++ All or portion of this security is pledged to cover margin requirements on futures contracts at November 30, 2003. misc. symbol1 The issuer is a publicly-traded company that operates under a congressional charter; its securities are neither issued nor guaranteed by the U.S. government ss. Denominated in USD unless otherwise noted !! Security contains restrictions as to public resale pursuant to the Securities Act of 1933 and related rules -- total of such securities at period-end amounts to $15,579,000 and represents 1.3% of net assets 144A Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration only to qualified institutional buyers -- total of such securities at period-end amounts to $58,458,000 and represents 4.7% of net assets ARM Adjustable Rate Mortgage AUD Australian dollar CAD Canadian dollar CMO Collateralized Mortgage Obligation EUR Euro IO Interest Only security for which the fund receives interest on notional principal (par) MBIA MBIA Insurance Corp. STEP Stepped coupon bond for which the coupon rate of interest will adjust on specified future date(s) TBA To Be Announced security was purchased on a forward commitment basis VR Variable Rate The accompanying notes are an integral part of these financial statements. T. Rowe Price Short-Term Bond Fund -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) STATEMENT OF OPERATIONS -------------------------------------------------------------------------------- In thousands 6 Months Ended 11/30/03 Investment Income (Loss) Income Interest $ 17,876 Dividend 1,048 Securities lending 2 Total income 18,926 Expenses Investment management 2,423 Shareholder servicing 924 Custody and accounting 103 Registration 73 Prospectus and shareholder reports 70 Legal and audit 9 Directors 4 Miscellaneous 4 Reductions/repayments pursuant to expense limitation Investment management fees (waived) repaid (429) Total expenses 3,181 Expenses paid indirectly (2) Net expenses 3,179 Net investment income (loss) 15,747 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 119 Futures 1,944 Foreign currency transactions (592) Net realized gain (loss) 1,471 Change in net unrealized gain (loss) Securities (13,156) Futures (875) Other assets and liabilities denominated in foreign currencies (128) Change in net unrealized gain (loss) (14,159) Net realized and unrealized gain (loss) (12,688) INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 3,059 ---------- The accompanying notes are an integral part of these financial statements. T. Rowe Price Short-Term Bond Fund -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) STATEMENT OF CHANGES IN NET ASSETS -------------------------------------------------------------------------------- In thousands 6 Months Year Ended Ended 11/30/03 5/31/03 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 15,747 $ 33,839 Net realized gain (loss) 1,471 4,778 Change in net unrealized gain (loss) (14,159) 19,675 Increase (decrease) in net assets from operations 3,059 58,292 Distributions to shareholders Net investment income (16,870) (35,336) Capital share transactions * Shares sold 435,208 595,171 Distributions reinvested 15,039 31,620 Shares redeemed (243,000) (293,855) Increase (decrease) in net assets from capital share transactions 207,247 332,936 Net Assets Increase (decrease) during period 193,436 355,892 Beginning of period 1,052,267 696,375 End of period $ 1,245,703 $1,052,267 ---------------------------- *Share information Shares sold 90,092 124,265 Distributions reinvested 3,117 6,594 Shares redeemed (50,332) (61,320) Increase (decrease) in shares outstanding 42,877 69,539 The accompanying notes are an integral part of these financial statements. T. Rowe Price Short-Term Bond Fund -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) November 30, 2003 Notes To Financial Statements -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Short-Term Bond Fund, Inc. (the fund) is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end management investment company and commenced operations on March 2, 1984. The fund seeks a high level of income consistent with minimal fluctuation in principal value and liquidity. The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates made by fund management. Valuation The fund values its investments and computes its net asset value per share at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day that the NYSE is open for business. Debt securities are generally traded in the over-the-counter market. Securities with original maturities of one year or more are valued at prices 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 bid-side money market yields. Investments in mutual funds are valued at the mutual fund's closing net asset value per share on the day of valuation. Financial futures contracts are valued at closing settlement prices. Other investments and those 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 the T. Rowe Price Valuation Committee, established by the fund's Board of Directors. Most foreign markets close before the NYSE. Normally, developments that could affect the values of securities that occur between the close of a foreign market and the close of the NYSE will not be reflected in security valuations used by the fund to compute its share price. However, if developments are so significant that they will, in the judgment of the fund, clearly and materially affect security values, such valuations may be adjusted to reflect the estimated fair value of the securities as of the close of the NYSE, as determined in good faith by the T. Rowe Price Valuation Committee, established by the fund's Board of Directors. Currency Translation Assets, including investments, and liabilities denominated in foreign currencies are translated into U.S. dollar values each day at the prevailing exchange rate, using the mean of the bid and ask prices of such currencies against U.S. dollars as quoted by a major bank. Purchases and sales of securities, income, and expenses are translated into U.S. dollars at the prevailing exchange rate on the date of the transaction. The effect of changes in foreign currency exchange rates on realized and unrealized security gains and losses is reflected as a component of security gains and losses. Expenses Paid Indirectly Credits earned on temporarily uninvested cash balances at the custodian are used to reduce the fund's custody charges. Custody expense in the accompanying statement of operations is presented before reduction for credits, which totaled $2,000 for the six months ended November 30, 2003. 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. Premiums and discounts on debt securities are amortized for financial reporting purposes. Distributions to shareholders are recorded by the fund on the ex-dividend date. Dividends from mutual fund investments are reflected as dividend income; capital gain distributions from mutual fund investments are reflected as realized gain/loss. Payments ("variation margin") made or received by the fund to settle the daily fluctuations in the value of futures contracts are recorded as unrealized gains or losses until the contracts are closed. Unrealized gains and losses on futures contracts are included in Change in net unrealized gain or loss in the accompanying financial statements. In the normal course of business, the fund enters into contracts that provide general indemnifications. The fund's maximum exposure under these arrangements is dependent on claims that may be made against the fund in the future and, therefore, cannot be estimated; however, based on experience, the risk of material loss from such claims is considered remote. NOTE 2 - INVESTMENT TRANSACTIONS Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks or enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund's prospectus and Statement of Additional Information. Forward Currency Exchange Contracts During the six months ended November 30, 2003, the fund was a party to forward currency exchange contracts under which it is obligated to exchange currencies at specified future dates and exchange rates. Risks arise from the possible inability of counterparties to meet the terms of their agreements and from movements in currency values. Futures Contracts During the six months ended November 30, 2003, the fund was a party to futures contracts, which provide for the future sale by one party and purchase by another of a specified amount of a specific financial instrument at an agreed upon price, date, time, and place. Risks arise from possible illiquidity of the futures market and from movements in security values and interest rates. Securities Lending The fund lends its securities to approved brokers to earn additional income. It receives as collateral cash and U.S. government securities valued at 102% to 105% of the value of the securities on loan. Cash collateral is invested in a money market pooled account managed by the fund's lending agent in accordance with investment guidelines approved by fund management. Collateral is maintained over the life of the loan in an amount not less than the value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund the next business day. Although risk is mitigated by the collateral, the fund could experience a delay in recovering its securities and a possible loss of income or value if the borrower fails to return the securities. Securities lending revenue recognized by the fund consists of earnings on invested collateral and borrowing fees, net of any rebates to the borrower and compensation to the lending agent. At November 30, 2003, there were no securities on loan. Other Purchases and sales of portfolio securities, other than short-term and U.S. government securities, aggregated $361,386,000 and $173,491,000, respectively, for the six months ended November 30, 2003. Purchases and sales of U.S. government securities aggregated $338,941,000 and $379,742,000, respectively, for the six months ended November 30, 2003. 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 under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its taxable income and gains. Federal income tax regulations differ from generally accepted accounting principles; therefore, distributions determined in accordance with tax regulations may differ in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. The amount and character of tax-basis distributions and composition of net assets are finalized at fiscal year-end; accordingly, tax-basis balances have not been determined as of November 30, 2003. The fund intends to retain realized gains to the extent of available capital loss carryforwards. As of May 31, 2003, the fund had $19,510,000 of unused capital loss carryforwards, of which $10,744,000 expire in 2004, $2,405,000 expire in 2005, and $6,361,000 thereafter through 2009. At November 30, 2003, the cost of investments for federal income tax purposes was $1,225,584,000. Net unrealized gain aggregated $13,463,000 at period-end, of which $17,817,000 related to appreciated investments and $4,354,000 related to depreciated investments. NOTE 4- RELATED PARTY TRANSACTIONS The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The investment management agreement between the fund and the manager provides for an annual investment management fee, which is computed daily and paid monthly. The fee consists of an individual fund fee, equal to 0.10% of the fund's average daily net assets, and the fund's pro-rata share of a group fee. The group fee is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.295% for assets in excess of $120 billion. The fund's portion of the group fee is determined by the ratio of its average daily net assets to those of the group. At November 30, 2003, the effective annual group fee rate was 0.32%, and investment management fee payable totaled $326,000. The fund is also subject to a contractual expense limitation through September 30, 2004. During the limitation period, the manager is required to waive its management fee and reimburse the fund for any expenses, excluding interest, taxes, brokerage commissions, and extraordinary expenses, that would otherwise cause the fund's ratio of total expenses to average net assets (expense ratio) to exceed its expense limitation of 0.55%. Through September 30, 2006, the fund is required to repay the manager for expenses previously reimbursed and management fees waived to the extent its net assets have grown or expenses have declined sufficiently to allow repayment without causing the fund's expense ratio to exceed its expense limitation. At November 30, 2003, management fees waived remain subject to repayment by the fund in the following amounts: $961,000 through May 31, 2004, and $1,117,000 through September 30, 2006. In addition, the fund has entered into service agreements with Price Associates and two wholly owned subsidiaries of Price Associates (collectively, Price). Price Associates computes the daily share price and maintains the financial records of the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund's transfer and dividend disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. Expenses incurred pursuant to these service agreements totaled $536,000 for the six months ended November 30, 2003, of which $92,000 was payable at period-end. Additionally, the fund is one of several mutual funds in which certain college savings plans managed by Price Associates may invest. As approved by the fund's Board of Directors, shareholder servicing costs associated with each college savings plan are borne by the fund in proportion to the average daily value of its shares owned by the college savings plan. For the six months ended November 30, 2003, the fund was charged $101,000 for shareholder servicing costs related to the college savings plans, of which $73,000 was for services provided by Price and $39,000 was payable at period-end. At November 30, 2003, approximately 8.5% of the outstanding shares of the fund were held by college savings plans. The fund is also one of several mutual funds sponsored by Price Associates (underlying Price funds) in which the T. Rowe Price Spectrum Funds (Spectrum Funds) and T. Rowe Price Retirement Funds (Retirement Funds) may invest. Neither the Spectrum Funds nor the Retirement Funds invest in the underlying Price funds for the purpose of exercising management or control. Pursuant to separate, special servicing agreements, expenses associated with the operation of the Spectrum and Retirement Funds are borne by each underlying Price fund to the extent of estimated savings to it and in proportion to the average daily value of its shares owned by the Spectrum and Retirement Funds, respectively. Expenses allocated under these agreements are reflected as shareholder servicing expenses in the accompanying financial statements. For the six months ended November 30, 2003, the fund was allocated $48,000 of Spectrum Funds' expenses and $46,000 of Retirement Funds' expenses. Of these amounts, $46,000 related to services provided by Price and $43,000 was payable at period-end. At November 30, 2003, approximately 6.8% of the outstanding shares of the fund were held by the Spectrum Funds and 1.9% were held by the Retirement Funds. The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe Price Government Reserve Investment Fund (collectively, the Reserve Funds), open-end management investment companies managed by Price Associates. The Reserve Funds are offered as cash management options only to mutual funds, trusts, and other accounts managed by Price Associates and/or its affiliates, and are not available to the public. The Reserve Funds pay no investment management fees. During the six months ended November 30, 2003, dividend income from the Reserve Funds totaled $1,048,000. T. Rowe Price Short-Term Bond Fund -------------------------------------------------------------------------------- Certified Semiannual Report INFORMATION ON PROXY VOTING A description of the policies and procedures that the T. Rowe Price Short-Term Bond Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request by calling 1-800-225-5132. It also appears in the fund's Statement of Additional Information (Form 485B), which can be found on the SEC's Web site, www.sec.gov. Item 2. Code of Ethics. The registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of this code of ethics will be filed as a required exhibit to the registrant's annual Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the registrant's most recent fiscal half-year. Item 3. Audit Committee Financial Expert. Not effective until registrant's next annual Form N-CSR. Item 4. Principal Accountant Fees and Services. Not effective until registrant's next annual Form N-CSR. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 9. Controls and Procedures. (a) The registrant's principal executive officer and principal financial officer have evaluated the registrant's disclosure controls and procedures within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) The registrant's principal executive officer and principal financial officer are aware of no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 10. Exhibits. (a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR will be filed with the registrant's annual Form N-CSR. (a)(2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached. (b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. T. Rowe Price Short-Term Bond Fund, Inc. By /s/ James S. Riepe James S. Riepe Principal Executive Officer Date January 16, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ James S. Riepe James S. Riepe Principal Executive Officer Date January 16, 2004 By /s/ Joseph A. Carrier Joseph A. Carrier Principal Financial Officer Date January 16, 2004