<PAGE>
Semiannual Report
GNMA
Fund
November 30, 1996
[ART OF LUCKY APPEARS HERE]
T. Rowe Price
<PAGE>
Report Highlights
- -----------------
. Bonds bounced back in the second half of 1996, erasing negative first half
performance and producing strong returns for the last six months.
. A robust rate of economic growth in the second quarter triggered concerns
that the Fed might tighten, but moderate growth during the summer calmed
investors.
. Your fund's return was solid during the past six months (7.22%), exceeding
that of the 12-month period (5.77%), a reflection of weak bond markets
earlier in the year.
. Mortgage prepayments picked up in recent months when rates declined but
were nowhere near the high levels of three years ago.
. We expect economic growth in 1997 to repeat this year's pattern and long-
term Treasury yields to range between 6% and 7%. In that environment, GNMA
securities should continue to provide attractive returns.
<PAGE>
Fellow Shareholders
The bond market and your fund rebounded during the second half of the year,
erasing the negative returns of the first half and producing strong six-month
returns and reasonable 12-month returns. When the economy slowed during the
summer, fears abated that the Fed would tighten monetary policy following robust
growth in the second quarter.
MARKET ENVIRONMENT
With inflation in the 2.5% to 3% range for several years, and the economy
producing strong job growth and full employment, concerns abounded that any
uptick in inflation beyond that range would be met with higher short-term rates
from the Fed. During the second quarter the economy registered an annualized
growth rate of 4.7%, well above the level considered compatible with moderate
inflation. As a result, long-term Treasury yields rose to more than 7%. However,
signs of accelerating inflation failed to materialize. With economic growth
slowing to around 2% in the third quarter, longer-term rates fell below 6.5% at
the end of November. The federal funds rate target, controlled by the Fed, has
remained at 5.25% for almost a year, and we see no compelling reason at this
time for the Fed to push it either higher or lower.
[LINE GRAPH APPEARS HERE]
Current Coupon GNMA 10-Year Treasury Note
11/30/95 7 5.74
2/29 6.86 5.62
5/31 6.82 5.6
8/31 7.22 6.1
11/30/96 7.64 6.4
7.99 6.86
7.96 6.79
7.81 6.72
7.9 6.8
8.04 6.95
7.79 6.71
7.44 6.35
7.14 6.05
The rise in interest rates during the first half drove mortgage prepayments down
to extremely low levels, but the more recent rate declines have led to higher
prepayments from both home sales and mortgage refinancings. However, prepayment
levels at the end of November remain-ed well below the levels of two to three
years ago. The market normally factors anticipated prepayments into the prices
of GNMAs; therefore, as rates began to decline in recent months, the mortgage-
backed securities market underperformed. Should rates decline further, we
1
<PAGE>
Prepayment Rates
[LINE GRAPH APPEARS HERE]
would not expect GNMAs to appreciate as much as securities with no early call or
prepayment exposure. In a stable rate environment, however, with yields around
current levels, GNMAs could perform well because of their higher coupon income
relative to Treasuries.
The more subdued prepayment level at this juncture compared with three years ago
indicates that a majority of homeowners have already refinanced their mortgages.
Further, the moderate level of new and existing home sales has served to crimp
prepayment activity because of relocations.
Performance Review
Your fund provided a solid return during the six months ended November 30 and a
respectable return over the past 12 months, with recent performance coming
almost equally from income and capital appreciation.
Returns exceeded the Lipper benchmark over the shorter period and lagged it
slightly over the year. The fund's exposure to lower-coupon GNMAs, which
underperformed higher coupons in the first half, hindered performance earlier
but helped it during the past six months. This exposure was represented both by
securities in the portfolio and in the form of forward contracts, reflected in
the Sector Diversification table following this letter.
Performance Comparison
Periods Ended 11/30/96 6 Months 12 Months
- -------------------------------------------------------------
GNMA Fund 7.22% 5.77%
.............................................................
Lipper GNMA Funds Average 6.71 5.87
.............................................................
2
<PAGE>
STRATEGY
Against the backdrop of fairly high interest rate volatility during the past 12
months, we reduced fund exposure to long-term Treasuries from 12% to zero, then
lifted it back to 5% by the end of November. We replaced this position initially
with higher-coupon mortgage securities, then bought lower-coupon mortgages and
long-term Treasuries when slower growth seemed evident and interest rates
peaked.
Our investment decisions continued to emphasize protection of principal and a
relatively high level of income. Therefore, we responded to the volatility in
rates by maintaining our core holdings and making peripheral changes according
to our interest rate outlook. This basic strategy involved holding onto our
older, higher-coupon mortgage-backed securities for their coupon income, and
directing new investments to lower-coupon mortgages when rates fell.
The new mortgage positions were made in the forward market, in anticipation of
coupon and principal payments. When the level of income is not sufficient to
take delivery of securities in a particular month, the forward positions can be
rolled out to future months without a negative impact on income, since lower
futures prices make up for lost coupon income.
OUTLOOK
We expect 1997 to repeat this year's economic pattern, with low unemployment,
barely rising inflation, and moderate growth overall, but varying from quarter
to quarter. Through most of this year, the bond market's response to the
economic climate assisted the Federal Reserve in keeping the economy on its
moderate growth track, which is appropriate at this phase of the business cycle.
Until either growth or inflation deviates from its current path, we expect long-
term Treasury yields to move in a range between 6% and 7%.
The recent drop in rates following the November elections reflected an
expectation by the electorate of progress toward a balanced budget. Fed Chairman
Alan Greenspan has stated that a measure of fiscal restraint in Washington could
lead to lower short-term rates, and prospects of a balanced budget in the not-
too-distant future should increase the likelihood of subdued inflation over the
long term.
Our investment decisions continued to emphasize protection of principal and a
relatively high level of income.
3
<PAGE>
Barring a surge in prepayments because of significantly lower rates, which we do
not expect, GNMA securities and your fund should continue to provide attractive
returns in this type of environment.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
/s/ Peter Van Dyke
Peter Van Dyke
President and Chairman of the Investment Advisory Committee
December 20, 1996
4
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Key statistics
5/31/96 11/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
Price Per Share $ 9.19 $ 9.52
................................................................................
Dividends Per Share
................................................................................
For 6 months 0.33 0.32
................................................................................
For 12 months 0.67 0.66
................................................................................
Dividend Yield *
................................................................................
For 6 months 7.04% 7.05%
................................................................................
For 12 months 7.26 7.17
................................................................................
Weighted Average Maturity (years) ** 7.9 9.3
................................................................................
Weighted Average Effective Duration (years) 5.4 5.0
................................................................................
Weighted Average Quality *** AAA AAA
................................................................................
</TABLE>
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the average daily net asset values per share for the same
period.
** Based on prepayment-adjusted life of GNMA securities.
*** Based on T. Rowe Price research.
SECTOR DIVERSIFICATION
<TABLE>
<CAPTION>
Percent of Percent of
Net Assets Net Assets
5/31/96 11/30/96
- ------------------------------------------------------------------------------------
<S> <C> <C>
GNMA Securities 103% 104%
....................................................................................
U.S. Treasury Obligations 6 5
....................................................................................
Other Government Agency Securities 1 1
....................................................................................
Other Assets Less Liabilities -10 -10
- ------------------------------------------------------------------------------------
Total 100% 100%
</TABLE>
5
<PAGE>
T. Rowe Price GNMA 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.
[GRAPH OF GNMA FUND APPEARS HERE]
Salomon GNMA Index Lipper GNMA Funds Average GNMA Funds
11/86 10,000 10,000 10,000
11/87 10,288 10,119 10,070
11/88 11,390 11,031 10,803
11/89 13,011 12,402 12,166
11/90 14,282 13,440 13,252
11/91 16,417 15,255 15,044
11/92 17,900 16,473 16,267
11/93 19,175 17,587 17,396
11/94 18,865 17,123 17,002
11/95 22,010 19,855 19,974
11/96 23,646 21,114 21,127
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Periods Ended 11/30/96 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
GNMA Fund 5.77% 6.69% 7.03% 7.77%
................................................................................
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
6
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Unaudited November 30, 1996
Financial Highlights For a share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 Months Year 3 Months++ Year
Ended Ended Ended Ended
11/30/96 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 2/29/92
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.19 $ 9.51 $ 9.14 $ 9.60 $ 9.92 $ 9.79 $ 9.47
........................................................................................................
Investment activities
Net investment income 0.32 0.67 0.68 0.17 0.68 0.75 0.80
Net realized and
unrealized gain (loss) 0.33 (0.32) 0.37 (0.46) (0.32) 0.13 0.32
........................................................................................................
Total from
investment activities 0.65 0.35 1.05 (0.29) 0.36 0.88 1.12
........................................................................................................
Distributions
Net investment income (0.32) (0.67) (0.66) (0.17) (0.68) (0.75) (0.80)
Tax return of capital - - (0.02) - - - -
........................................................................................................
Total distributions (0.32) (0.67) (0.68) (0.17) (0.68) (0.75) (0.80)
........................................................................................................
NET ASSET VALUE
End of period $ 9.52 $ 9.19 $ 9.51 $ 9.14 $ 9.60 $ 9.92 $ 9.79
========================================================================================================
Ratios/Supplemental Data
Total return 7.22% 3.72% 12.11% (3.03)% 3.71% 9.36% 12.28%
..................................................................................................................................
Ratio of expenses to
average net assets 0.75%+ 0.74% 0.76% 0.76%+ 0.77% 0.79% 0.86%
..................................................................................................................................
Ratio of net investment
income to average
net assets 6.95%+ 7.04% 7.50% 7.24%+ 6.93% 7.65% 8.25%
..................................................................................................................................
Portfolio turnover rate 133.2%+ 113.6% 121.3% 151.8%+ 92.5% 94.2% 66.0%
..................................................................................................................................
Net assets, end of period
(in thousands) $941,505 $903,796 $810,467 $802,304 $883,391 $913,722 $715,249
..................................................................................................................................
</TABLE>
+ Annualized.
++ The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Unaudited November 30, 1996
Statement of Net Assets Par Value
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 104.4%
U.S. Government Guaranteed Obligations 104.4%
Federal Housing Authority, PLC, 9.95%, 10/1/32 $ 4,966 $ 5,227
Government National Mortgage Assn.
I
<S> <C> <C>
6.00%, 12/15/23 - 6/15/26 56,525 53,871
.....................................................................
6.50%, 6/15/23 - 5/15/26 46,370 45,398
.....................................................................
7.00%, 4/15/17 - 3/15/26 121,942 121,751
.....................................................................
7.50%, 3/15/07 - 3/15/26 99,149 101,341
.....................................................................
8.00%, 3/15/14 - 9/15/25 175,215 182,483
.....................................................................
8.50%, 12/15/04 - 6/15/26 46,732 49,456
.....................................................................
9.00%, 4/15/16 - 9/15/24 67,039 72,131
.....................................................................
9.50%, 6/15/09 - 5/15/25 20,993 22,825
.....................................................................
10.00%, 10/15/15 - 7/15/24 9,537 10,519
.....................................................................
10.50%, 1/15/13 - 11/15/21 5,090 5,663
.....................................................................
11.00%, 2/15/10 - 6/15/19 1,127 1,275
.....................................................................
11.50%, 4/15/10 - 7/15/20 4,611 5,311
.....................................................................
12.00%, 5/15/11 - 10/15/15 6,147 7,214
.....................................................................
12.50%, 4/15/10 - 7/15/15 2,317 2,753
.....................................................................
13.00%, 1/15/11 - 8/15/15 1,090 1,307
.....................................................................
13.50%, 5/15/10 - 1/15/15 1,602 1,947
II
6.50%, 3/20/26 8,877 8,602
.....................................................................
8.00%, 10/20/24 - 9/20/26 21,471 22,061
.....................................................................
8.50%, 4/20/16 - 2/20/23 23,384 24,315
.....................................................................
10.00%, 9/20/16 - 5/20/25 2,376 2,591
.....................................................................
11.00%, 2/20/14 - 9/20/20 2,238 2,552
.....................................................................
11.50%, 12/20/13 - 7/20/20 1,630 1,886
.....................................................................
12.50%, 10/20/13 - 1/20/16 219 258
.....................................................................
13.00%, 10/20/13 - 9/20/15 837 999
GPM, I
8.75%, 6/15/17 - 6/15/22 1,127 1,202
.....................................................................
9.00%, 5/15/09 - 3/15/14 439 469
.....................................................................
9.25%, 5/15/16 - 8/15/21 5,827 6,236
.....................................................................
9.50%, 6/15/09 - 11/15/09 2,483 2,705
.....................................................................
9.75%, 4/15/16 - 8/15/21 6,719 7,318
.....................................................................
10.75%, 2/15/16 - 4/15/19 1,457 1,648
.....................................................................
</TABLE>
8
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- --------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
11.00%, 8/15/10 - 9/15/10 $ 383 $ 436
..........................................................................................
12.00%, 10/15/10 - 2/15/13 456 535
..........................................................................................
12.25%, 9/15/13 - 3/15/15 231 272
..........................................................................................
12.50%, 4/15/10 - 10/15/12 570 672
..........................................................................................
12.75%, 10/15/13 - 5/15/15 359 427
..........................................................................................
GPM, II
9.75%, 12/20/20 - 7/20/21 368 398
..........................................................................................
10.25%, 3/20/16 - 9/20/16 41 46
..........................................................................................
11.00%, 9/20/13 - 1/20/14 137 155
..........................................................................................
12.25%, 1/20/14 - 12/20/15 314 367
..........................................................................................
12.75%, 10/20/13 - 7/20/15 266 315
..........................................................................................
Project Loan, I
8.00%, 11/15/12 480 493
..........................................................................................
8.50%, 1/15/27 395 413
..........................................................................................
9.25%, 10/15/23 - 1/15/36 13,939 14,691
..........................................................................................
10.75%, 3/15/26 6,125 6,810
..........................................................................................
REMIC
6.50%, 10/16/24 33,000 30,515
..........................................................................................
7.493%, 7/16/24 13,450 13,942
..........................................................................................
7.50%, 5/16/23 25,444 26,048
..........................................................................................
Interest Only, 8.00%, 6/16/23 ** 11,972 1,746
..........................................................................................
TBA, I
6.00%, 9/15/23 10,000 9,500
..........................................................................................
6.50%, 1/15/24 40,000 38,912
..........................................................................................
7.00%, 7/15/20 30,000 29,844
..........................................................................................
8.00%, 7/15/20 10,000 10,315
..........................................................................................
8.50%, 7/15/20 17,000 17,772
..........................................................................................
U. S. Department of Veteran Affairs, REMIC, 9.54%, 3/15/25 4,266 4,744
............................................................................................
Total U.S. Government Mortgage-Backed Securities (Cost $952,140) 982,682
...........
U.S. GOVERNMENT OBLIGATIONS 5.4%
U.S. Treasury Obligations 5.4%
U.S. Treasury Bonds
6.50%, 11/15/26 26,000 26,475
..........................................................................................
6.75%, 8/15/26 23,200 24,201
..........................................................................................
Total U.S. Government Obligations (Cost $ 49,410) 50,676
...........
</TABLE>
9
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- --------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
REPURCHASE AGREEMENTS 0.4%
Investments in Repurchase Agreements through a joint account,
5.51%, 12/2/96 $ 3,989 $ 3,989
..............................................................................................
Total Repurchase Agreements (Cost $3,989) 3,989
..............
Total Investments in Securities
110.2% of Net Assets (Cost $1,005,539) $ 1,037,347
Other Assets Less Liabilities (95,842)
..............
NET ASSETS $ 941,505
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (5,340)
Accumulated net realized gain/loss - net of distributions (28,577)
Net unrealized gain (loss) 31,808
Paid-in-capital applicable to 98,927,914 no par value shares of
beneficial interest outstanding; unlimited number of shares authorized 943,614
..............
NET ASSETS $ 941,505
NET ASSET VALUE PER SHARE $ 9.52
</TABLE>
** For Interest Only securities, par represents notional principal, on
which the fund receives interest
GPM Graduated Payment Mortgage
PLC Permanent Loan Certificate
REMIC Real Estate Mortgage Investment Conduit
TBA To be announced security was purchased on a forward commitment basis;
the aggregate liability for securities purchased under such agreements
totaled $105,908,000 at 11/30/96.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Unaudited
Statement Of Operations
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
6 Months
Ended
11/30/96
<S> <C>
Investment Income
Interest income $ 35,214
..............
Expenses
Investment management 2,190
Shareholder servicing 914
Custody and accounting 251
Prospectus and shareholder reports 39
Registration 28
Legal and audit 14
Trustees 6
Miscellaneous 7
..............
Total expenses 3,449
..............
Net investment income 31,765
..............
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (1,838)
Change in net unrealized gain or loss on securities 33,832
..............
Net realized and unrealized gain (loss) 31,994
..............
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 63,759
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
T. Rowe Price GNMA Fund
- -------------------------------------------------------------------------------
Unaudited
Statement Of Changes In Net Assets
- -------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
6 Months Year
Ended Ended
11/30/96 5/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 31,765 $ 61,167
Net realized gain (loss) (1,838) (5,065)
Change in net unrealized gain or loss 33,832 (27,261)
--------------------------
Increase (decrease) in net assets from operations 63,759 28,841
--------------------------
Distributions to shareholders
Net investment income (31,765) (61,156)
Capital share transactions*
Shares sold 65,623 245,262
Distributions reinvested 17,662 43,549
Shares redeemed (77,570) (163,167)
--------------------------
Increase (decrease) in net assets from capital
share transactions 5,715 125,644
--------------------------
Net Assets
Increase (decrease) during period 37,709 93,329
Beginning of period 903,796 810,467
--------------------------
End of period $941,505 $ 903,796
--------------------------
* Share information
Shares sold 7,065 25,637
Distributions reinvested 1,898 4,578
Shares redeemed (8,359) (17,153)
--------------------------
Increase (decrease) in shares outstanding 604 13,062
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
T. Rowe Price GNMA Fund
- -------------------------------------------------------------------------------
Unaudited November 30, 1996
Notes to Financial Statements
- -------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price GNMA Fund (the fund) is registered under the Investment Company
Act of 1940 as a diversified, open-end management investment company and
commenced operations on November 26, 1985.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities originally issued with maturities of one
year or more are stated at fair value as furnished by dealers who make markets
in such securities or by an independent pricing service, which considers yield
or price of bonds of comparable quality, coupon, maturity, and type, as well
as prices quoted by dealers who make markets in such securities. Securities
with original maturities of less than one year are stated at fair value, which
is determined by using a matrix system that establishes a value for each
security based on money market yields.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Trustees.
Premiums and Discounts Premiums and discounts on mortgage-backed securities
are recognized upon principal repayment as gain or loss for financial
reporting purposes and as ordinary income for tax purposes. Premiums and
discounts on debt securities, other than mortgage-backed 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 - 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.
13
<PAGE>
T. Rowe Price GNMA Fund
- -------------------------------------------------------------------------------
Repurchase Agreements The fund, and other affiliated funds, may transfer
uninvested cash into a joint account, the daily aggregate balance of which is
invested in one or more overnight repurchase agreements collaterallized by
U.S. government securities. Collateral is in the possession of the fund's
custodian and is evaluated daily by the fund to ensure that its market value
exceeds the delivery value of the repurchase agreements at maturity. All
repurchase agreements purchased by the joint account satisfy the fund's
criteria as to quality, yield, and liquidity.
Securities Lending To earn additional income, the fund lends its securities
to approved brokers. At November 30, 1996, the market value of securities on
loan was $49,633,000, which was fully collateralized with cash. Although the
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 them.
Other Purchases and sales of U.S. government securities aggregated
$685,280,000 and $642,188,000, respectively, for the six months ended November
30, 1996.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The fund has unused realized capital loss carryforwards
for federal income tax purposes of $18,542,000, of which $1,432,000 expires in
1997, $1,304,000 in 1998, and $15,806,000 thereafter through 2003. The fund
intends to retain gains realized in future periods that may be offset by
available capital loss carryforwards.
At November 30, 1996, the aggregate cost of investments for federal income tax
and financial reporting purposes was $1,005,539,000, and net unrealized gain
aggregated $31,808,000, of which $35,061,000 related to appreciated
investments and $3,253,000 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 $366,000 was payable at November 30, 1996. The fee is computed
14
<PAGE>
T. Rowe Price GNMA Fund
- -------------------------------------------------------------------------------
daily and paid monthly, and consists of an individual fund fee equal to 0.15%
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 0.305% for assets in excess of $50
billion. At November 30, 1996, and for the six months then ended, the
effective annual group fee rate was 0.33%. The fund pays a pro-rata share of
the group fee based on the ratio of its net assets to those of the group.
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.
(TRPS) 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. Additionally, the fund is
one of several T. Rowe Price mutual funds (the underlying funds) in which the
T. Rowe Price Spectrum Income Fund (Spectrum) invests. In accordance with an
agreement among Spectrum, the underlying funds, the manager, and TRPS,
expenses from the operation of Spectrum are borne by the underlying funds
based on each underlying fund's proportionate share of assets owned by
Spectrum. The fund incurred expenses pursuant to these related party
agreements totaling approximately $835,000 for the six months ended November
30, 1996, of which $152,000 was payable at period-end.
15
<PAGE>
T. Rowe Price GNMA Fund
- -------------------------------------------------------------------------------
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.
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(R) and
T. Rowe Price OnLine.
DISCOUNT BROKERAGE*
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
INVESTMENT INFORMATION
Combined Statement Overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and
results.
The 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, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
16
<PAGE>
T. Rowe Price GNMA Fund
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mutual Funds
STOCK FUNDS BOND FUNDS
............................ .............................. ................................
<S> <C> <C>
Domestic Domestic Taxable International/Global
Balanced Corporate Income Global Government Bond
Blue Chip Growth GNMA Emerging Markets Bond
Capital Appreciation High Yield International Bond
Capital Opportunity New Income
Dividend Growth Short-Term Bond MONEY MARKET
Equity Income Short-Term U.S. Government ................................
Equity Index Spectrum Income Taxable
Financial Services Summit GNMA Prime Reserve
Growth & Income Summit Limited-Term Bond Summit Cash Reserves
Growth Stock U.S. Treasury Intermediate U.S. Treasury Money
Health Sciences U.S. Treasury Long-Term
Mid-Cap Growth Tax-Free
Mid-Cap Value Domestic Tax-free California Tax-Free Money
New America Growth California Tax-Free Bond New York Tax-Free Money
New Era Florida Insured Summit Municipal
New Horizons Intermediate Tax-Free Money Market
OTC Georgia Tax-Free Bond Tax-Exempt Money
Science & Technology Maryland Short-Term
Small-Cap Value Tax-Free Bond BLENDED ASSET
Spectrum Growth Maryland Tax-Free Bond ................................
Value New Jersey Tax-Free Bond Personal Strategy Income
New York Tax-Free Bond Personal Strategy Balanced
International/Global Summit Municipal Income Personal Strategy Growth
Emerging Markets Stock Summit Municipal Intermediate
European Stock Tax-Free High Yield T. ROWE PRICE NO-LOAD
Global Stock Tax-Free Income VARIABLE ANNUITY
International Discovery Tax-Free Insured ................................
International Stock Intermediate Bond Equity Income Portfolio
Japan Tax-Free Short-Intermediate International Stock Portfolio
Latin America Virginia Short-Term Limited-Term Bond Portfolio
New Asia Tax-Free Bond New America Growth Portfolio
Spectrum International Virginia Tax-Free Bond Personal Strategy Balanced Portfolio
</TABLE>
17
<PAGE>
For yield, price, last transaction,
current balance or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(R):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price GNMA Fund.
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor RPRTGNMA 11/30/96
