<PAGE>
Semiannual Report
GNMA
Fund
-----------------
November 30, 1997
-----------------
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price
<PAGE>
Report Highlights
------------------------------------------------------------------------------
GNMA Fund
. Interest rates declined sharply after peaking in March, responding to low
inflation and turmoil in Asian markets that drove investors into the safety of
U.S. bonds.
. The bond market posted solid returns over the six months ended November 30,
1997, although mortgage-backed bonds trailed Treasuries and corporates because
of prepayment fears.
. Your fund's six-month return surpassed the average performance of similar
funds.
. Relatively strong results were attributed to the fund's focus on lower-coupon
mortgages, CMOs, and long-term government securities, which appreciated
sharply.
. We anticipate slightly lower rates, which should benefit mortgage-backed
securities, particularly when investors realize that prepayment fears are
exaggerated.
<PAGE>
Fellow Shareholders
The bond market and your fund turned in solid performances during the six months
ended November 30, 1997, and attractive results over the past 12 months. With
consumer confidence soaring, unemployment low, and manufacturing near full
capacity, the Federal Reserve had been concerned about a pickup in inflation.
However, despite these conditions, inflation remained subdued due to rising
productivity, freer global trade, and other factors.
MARKET ENVIRONMENT
The yield on the 10-year Treasury note fell from 6.13% a year ago, and 6.75% at
the end of May, to 5.86% at the end of November. The current coupon GNMA yield
followed a similar pattern, first rising and then declining to just below 7%
from a peak of 7.91% in March. (See graph.) The Federal Reserve increased the
key fed funds rate target from 5.25% to 5.50% in March but has been on hold
since then.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date Current Coupon GNMA 10-Year Treasury Note
- ---- ------------------- ---------------------
<S> <C> <C>
11/30/96 7.18% 6.13%
7.60% 6.52%
7.56% 6.59%
2/28/97 7.56% 6.56%
7.91% 6.79%
7.66% 6.69%
5/31/97 7.68% 6.75%
7.43% 6.45%
7.00% 6.11%
8/31/97 7.38% 6.38%
6.98% 6.06%
6.95% 5.90%
11/30/97 6.99% 5.86%
</TABLE>
The interest rate declines since March triggered fears of rising mortgage
prepayments and their negative effect on mortgage-backed bonds. With lower
rates, homeowners are able to either refinance existing mortgages or trade up in
home value with more affordable financing. As the 30-year fixed rate mortgage
fell to around 7.25% at the end of November, we observed an increase in
prepayments in specific mortgage pools and also in the level of mortgage
application indices, which indicate future prepayment levels. However, both
levels are still lower than four years ago when the lowest mortgage rates in 20
years became available. (See chart on page 2.) Since current rates have returned
to 1993 levels,
1
<PAGE>
today's relatively low prepayment activity indicates that a majority of
homeowners have already refinanced their mortgages, and that sluggish new and
secondary housing sales are holding down refinancings related to relocations.
Despite subdued prepayments, mortgage-backed bonds recently underperformed
corporate and Treasury securities, partly because investors anticipated future
prepayment problems. Even seasoned mortgage pools, where prepayments are usually
lower than in newer two- to five-year-old pools, did not appreciate
significantly in price as rates fell. However, we believe that if rates drop
further in response to economic conditions and prospects for a balanced federal
budget, the attractiveness of mortgage-backed bonds as higher-yielding, high-
quality investment alternatives may become more apparent. Until then, the
prepayment issue could continue to exert downward pressure on the mortgage
market relative to Treasuries and investment-grade corporate bonds.
- ---------------
PREPAYMENT RATE
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Moderately Seasoned Seasoned
Date New Mortgages Mortgages Mortgages
- ---- ------------- ------------------- ---------
<S> <C> <C> <C>
11/93 14.30 21.00 17.90
14.00 18.40 19.50
9.20 12.70 14.20
9.80 10.90 12.50
10.00 13.10 15.40
6.60 10.00 12.60
5/94 5.80 10.20 11.60
5.70 10.50 10.60
5.10 8.30 8.50
5.30 9.70 9.80
5.00 7.20 7.90
4.60 7.10 7.70
11/94 4.10 6.00 7.20
4.00 5.40 6.70
3.20 4.20 5.90
3.30 4.50 5.50
4.70 6.20 7.10
4.90 5.90 6.40
5/95 6.00 7.70 8.30
7.00 8.90 8.60
9.20 10.30 9.70
8.00 10.90 10.30
6.70 8.90 8.70
6.10 8.80 9.10
11/95 5.20 8.00 8.90
4.70 8.00 9.20
4.50 7.70 9.10
6.60 10.20 9.90
6.20 11.60 12.20
5.10 11.60 11.30
5/96 4.50 11.60 11.90
3.70 10.70 10.30
3.50 10.30 11.30
3.00 9.50 10.00
2.50 8.40 9.20
2.40 8.50 9.30
11/96 2.70 8.60 8.40
3.20 8.30 8.40
0.40 7.70 7.80
0.30 7.10 7.90
0.40 9.50 10.20
0.70 9.70 9.60
5/97 0.60 9.00 10.00
0.80 9.40 10.40
1.30 10.60 12.30
1.80 10.10 11.10
1.80 11.80 12.40
2.50 12.50 11.70
11/97 3.00 9.80 11.50
6.90 12.00 12.00
7.40 12.00 12.00
6.80 11.60 11.80
7.90 13.30 13.60
7.90 13.30 13.50
5/98 8.30 14.30 14.50
8.60 14.70 15.00
8.50 14.20 14.40
8.90 14.70 14.90
8.20 13.20 13.50
8.50 13.50 13.80
11/98* 8.00 12.40 12.60
</TABLE>
*Projected
PERFORMANCE REVIEW
- ----------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended 11/30/97 6 Months 12 Months
- ------------------------------------------------------------------------------
<S> <C> <C>
GNMA Fund 6.09% 7.32%
..............................................................................
Lipper GNMA Funds Average 5.44 6.97
..............................................................................
</TABLE>
An increase in share price from $9.30 on May 31 to $9.54 at the end of November
accounted for almost half of your fund's solid return for the last six months.
Dividend income was responsible for the other half. The return for the 12-month
period was attributed primarily to income, with only a slight increase in share
value. Results for both periods were well ahead of the average returns for
similar funds, as can be seen in the table.
2
<PAGE>
Low portfolio turnover in your fund's core GNMA holdings tends to stabilize
income, although the trend toward lower rates was reflected in a slight decrease
in dividend income, from $0.33 to $0.32 during the past six months.
STRATEGY
As prepayment fears grew, we emphasized lower-coupon mortgages, collateralized
mortgage obligations (CMOs), and long-term government bonds in the portfolio,
which allowed the fund to benefit from price appreciation when interest rates
fell.
...THE TREASURY AND AGENCY BONDS IN THE PORTFOLIO... ROSE SHARPLY IN DIRECT
PROPORTION TO THE DROP IN RATES.
While our investment decisions continued to take preservation of principal and
income into consideration, the sharp fall in rates provided opportunity as well.
For example, discount coupon mortgages have both low coupon rates and low
principal payments, which increase their sensitivity to changes in interest
rates. Long-term CMOs are backed by GNMAs, but their principal and interest
payments are directed to different tranches of CMOs carved from a single group
of mortgages. Therefore, our purchases of bonds with long average lives and low
exposure to unanticipated principal payments enabled the fund to benefit from
relatively strong price appreciation. In addition, the Treasury and agency
bonds in the portfolio, which are not callable or subject to prepayment risk,
rose sharply in direct proportion to the drop in rates.
We focused recent purchases on lower-coupon mortgage bonds with high interest
rate sensitivity against the backdrop of declining rates. We also held on to
many of our older, higher-coupon mortgage-backed bonds in an effort to stabilize
the fund's dividend income. As we have done before, many of our new mortgage
bond purchases were made in the forward market in anticipation of the receipt of
both coupon and principal payments in future months. In the event that the
income level is not sufficient for us to take delivery in a particular month,
the forward contracts can be rolled out further without a negative impact on
income, since lower future prices, if rates keep falling, make up for any lost
income. (The forward contracts are reflected as Other Assets Less Liabilities
in the Sector Diversification table following this letter.)
3
<PAGE>
OUTLOOK
With prospects looking good for a federal budget nearly in balance in 1998, bond
markets will be looking toward Washington to get an idea of how any future
surpluses will be handled. A combination of tax cuts and debt reduction would
be regarded favorably, while any attempt to raise spending would have the
opposite effect. In the international arena, we believe that the slowdown in
Asian economic growth and its impact on domestic exports has largely been
discounted by the financial markets.
We anticipate a period of interest rate stability, with slightly lower rates
overall than during recent years. Barring a more dramatic falloff in rates than
we expect, which could result from continuing Asian woes and a negative impact
on U.S. economic growth, we are sanguine about the prospects for the mortgage-
backed securities market. Current fears of a surge in prepayments are
exaggerated, in our view, and the high yields of GNMAs compared with other high-
grade securities could make them appealing to investors in the months ahead.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
/s/ Peter Van Dyke
President and Chairman of the Investment Advisory Committee
December 19, 1997
4
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- --------------------
<TABLE>
<CAPTION>
Key statistics
5/31/97 11/30/97
- ---------------------------------------------------------------------------------
<S> <C> <C>
Price Per Share $9.30 $9.54
.................................................................................
Dividends Per Share
.................................................................................
For 6 months 0.33 0.32
............................................................................
For 12 months 0.65 0.65
............................................................................
Dividend Yield *
.................................................................................
For 6 months 7.11% 6.88%
............................................................................
For 12 months 7.20 7.11
............................................................................
Weighted Average Maturity (years) ** 8.3 8.0
.................................................................................
Weighted Average Effective Duration (years) 4.9 3.9
.................................................................................
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.
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
5/31/97 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
GNMA Securities 106% 102%
................................................................................
Other Government Agency Securities 2 3
................................................................................
U.S. Treasury Obligations 1 1
................................................................................
Short-Term Obligations 1 1
................................................................................
Other Assets Less Liabilities -10 -7
- --------------------------------------------------------------------------------
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.
GNMA FUND
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lipper GNMA Fds Average Salomon GNMA Index GNMA Fund
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nov-87 10,000 10,000 10,000
Nov-88 10,949 11,072 10,728
Nov-89 12,282 12,647 12,082
Nov-90 13,327 13,883 13,160
Nov-91 15,119 15,958 14,940
Nov-92 16,349 17,400 16,154
Nov-93 17,502 18,639 17,276
Nov-94 17,023 18,338 16,885
Nov-95 19,725 21,395 19,836
Nov-96 20,976 22,985 20,981
Nov-97 22,503 24,784 22,516
</TABLE>
- ------------------------------------
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.
<TABLE>
<CAPTION>
Periods Ended 11/30/97 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA Fund 7.32% 10.07% 6.87% 8.46%
................................................................................
</TABLE>
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
<TABLE>
<CAPTION>
- --------------------
Financial Highlights For a share outstanding throughout each period
- -----------------------------------------------------------------------------------------------------------------------
6 Months Year 3 Months+++ Year
Ended Ended Ended Ended
11/30/97 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.30 $ 9.19 $ 9.51 $ 9.14 $ 9.60 $ 9.92 $ 9.79
..................................................................................
Investment activities
Net investment income 0.32 0.65 0.67 0.68 0.17 0.68 0.75
Net realized and
unrealized gain (loss) 0.24 0.11 (0.32) 0.37 (0.46) (0.32) 0.13
...................................................................................
Total from
investment activities 0.56 0.76 0.35 1.05 (0.29) 0.36 0.88
...................................................................................
Distributions
Net investment income (0.32) (0.63) (0.67) (0.66) (0.17) (0.68) (0.75)
Tax return of capital -- (0.02) -- (0.02) -- -- --
...................................................................................
Total distributions (0.32) (0.65) (0.67) (0.68) (0.17) (0.68) (0.75)
...................................................................................
NET ASSET VALUE
End of period $ 9.54 $ 9.30 $ 9.19 $ 9.51 $ 9.14 $ 9.60 $ 9.92
----------------------------------------------------------------------------------
Ratios/Supplemental Data
Total return 6.09% 8.46% 3.72% 12.11% (3.03)% 3.71% 9.36%
........................................................................................................................
Ratio of expenses to
average net assets 0.70%+ 0.74% 0.74% 0.76% 0.76%+ 0.77% 0.79%
........................................................................................................................
Ratio of net investment
income to average
net assets 6.78%+ 6.98% 7.04% 7.50% 7.24%+ 6.93% 7.65%
........................................................................................................................
Portfolio turnover rate 62.7% 115.9% 113.6% 121.3% 151.8%+ 92.5% 94.2%
........................................................................................................................
Net assets, end of period
(in thousands) $1,028,938 $944,046 $903,796 $810,467 $802,304 $883,391 $913,722
........................................................................................................................
</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, 1997
<TABLE>
<CAPTION>
- -----------------------
Statement of Net Assets Par Value
- -----------------------------------------------------------------------------------
In thousands
<S> <C> <C>
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 105.5%
U.S. Government Guaranteed Obligations 105.5%
Government National Mortgage Assn.
I
6.00%, 11/15/23 - 6/15/26 $ 59,976 $ 57,795
......................................................................
6.50%, 6/15/23 - 9/15/27 63,883 63,029
......................................................................
7.00%, 4/15/17 - 10/15/27 85,160 85,880
......................................................................
7.50%, 3/15/07 - 8/15/27 107,474 110,497
......................................................................
8.00%, 3/15/14 - 9/15/27 158,905 165,886
......................................................................
8.50%, 12/15/04 - 11/15/27 44,833 47,551
......................................................................
9.00%, 4/15/16 - 9/15/24 54,839 59,417
......................................................................
9.50%, 6/15/09 - 12/15/24 9,438 10,257
......................................................................
10.00%, 10/15/15 - 7/15/24 7,432 8,233
......................................................................
10.50%, 1/15/13 - 11/15/21 3,968 4,451
......................................................................
11.00%, 2/15/10 - 6/15/19 813 923
......................................................................
11.50%, 4/15/10 - 7/15/20 3,691 4,236
......................................................................
12.00%, 5/15/11 - 10/15/15 4,948 5,775
......................................................................
12.50%, 4/15/10 - 7/15/15 1,807 2,125
......................................................................
13.00%, 1/15/11 - 8/15/15 881 1,044
......................................................................
13.50%, 5/15/10 - 1/15/15 1,244 1,477
......................................................................
II
6.50%, 3/20/26 12,413 12,154
......................................................................
7.00%, 9/20/27 9,881 9,864
......................................................................
8.00%, 10/20/24 - 5/20/27 29,798 30,707
......................................................................
8.50%, 4/20/16 - 2/20/23 19,616 20,652
......................................................................
10.00%, 9/20/16 - 5/20/25 1,714 1,880
......................................................................
11.00%, 2/20/14 - 9/20/20 1,747 1,958
......................................................................
11.50%, 12/20/13 - 7/20/20 1,302 1,483
......................................................................
12.50%, 10/20/13 - 1/20/16 167 194
......................................................................
13.00%, 10/20/13 - 9/20/15 674 791
......................................................................
GPM, I
8.75%, 6/15/17 - 6/15/22 646 684
......................................................................
9.00%, 5/15/09 - 3/15/14 308 331
......................................................................
9.25%, 5/15/16 - 8/15/21 5,019 5,404
......................................................................
9.50%, 6/15 - 11/15/09 2,225 2,413
......................................................................
9.75%, 4/15/16 - 8/15/21 5,150 5,611
......................................................................
10.25%, 1/15 - 2/15/18 90 99
......................................................................
10.75%, 2/15/16 - 4/15/19 831 923
......................................................................
</TABLE>
8
<PAGE>
T. Rowe Price GNMA Fund
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- -----------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Government National Mortgage Assn.
GPM, I
11.00%, 8/15 - 9/15/10 $ 246 $ 274
..........................................................................
11.50%, 2/15 - 6/15/13 48 54
..........................................................................
12.00%, 10/15/10 - 2/15/13 390 445
..........................................................................
12.25%, 1/15/14 - 3/15/15 162 186
..........................................................................
12.50%, 4/15/10 - 10/15/12 480 552
..........................................................................
12.75%, 10/15/13 - 5/15/15 302 348
..........................................................................
GPM, II
9.25%, 2/20/16 122 131
..........................................................................
9.75%, 12/20/20 - 7/20/21 205 221
..........................................................................
10.25%, 3/20 - 9/20/16 31 34
..........................................................................
11.00%, 9/20/13 - 1/20/14 54 61
..........................................................................
12.25%, 1/20/14 - 10/20/15 186 216
..........................................................................
12.75%, 10/20/13 - 7/20/15 220 257
..........................................................................
Midget, I
7.00%, 9/15/12 9,783 9,935
..........................................................................
Project Loan, I
6.16%, 6/15/30 15,991 15,112
..........................................................................
6.85%, 8/15/32 12,262 12,392
..........................................................................
7.35%, 7/15/32 5,390 5,615
..........................................................................
7.60%, 6/15/27 6,400 6,790
..........................................................................
7.75%, 3/15/20 3,999 4,244
..........................................................................
7.875%, 6/15/27 2,990 3,193
..........................................................................
8.00%, 11/15/12 - 11/15/17 6,440 6,906
..........................................................................
8.50%, 1/15/27 392 411
..........................................................................
9.25%, 10/15/23 9,722 10,363
..........................................................................
10.75%, 3/15/26 6,095 6,830
..........................................................................
REMIC
6.50%, 10/16/24 33,000 31,123
..........................................................................
7.00%, 10/16/21 - 5/16/24 18,400 18,474
..........................................................................
7.493%, 7/16/24 13,450 14,341
..........................................................................
7.50%, 7/16/12 - 5/16/27 52,570 54,695
..........................................................................
8.00%, 6/20/25 43,810 45,767
..........................................................................
Interest Only, 8.00%, 6/16/23** 8,578 1,394
..........................................................................
TBA, I
7.00%, 7/15/20 40,000 40,165
..........................................................................
7.50%, 7/15/20 25,000 25,540
..........................................................................
8.00%, 7/15/20 10,000 10,363
..........................................................................
</TABLE>
9
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- ----------------------------------------------------------------------------------
In thousands
U. S. Department of Veteran Affairs, REMIC
<S> <C> <C>
7.25%, 10/15/08 $ 10,545 $ 11,039
....................................................................
7.50%, 5/15/24 18,750 19,939
....................................................................
9.54%, 3/15/25 3,823 4,237
.................................................................................
Total U.S. Government Mortgage-Backed Securities
(Cost $1,051,026) 1,085,371
..............
U.S. GOVERNMENT OBLIGATIONS 1.1%
U.S. Treasury Obligations 1.1%
U.S. Treasury Bonds, 6.375%, 8/15/27 11,000 11,438
..................................................................................
Total U.S. Government Obligations (Cost $11,072) 11,438
..............
MONEY MARKET FUNDS 0.6%
Government Reserve Investment Fund, 5.44% # 6,237 6,237
..................................................................................
Total Money Market Funds (Cost $6,237) 6,237
..............
Total Investments in Securities
107.2% of Net Assets (Cost $1,068,335) $ 1,103,046
Other Assets Less Liabilities (74,108)
..............
NET ASSETS $ 1,028,938
--------------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (5,457)
Accumulated net realized gain/loss - net of distributions (24,246)
Net unrealized gain (loss) 34,711
Paid-in-capital applicable to 107,814,100 no par value
shares of beneficial interest outstanding; unlimited
number of shares authorized 1,023,930
..............
NET ASSETS $ 1,028,938
--------------
NET ASSET VALUE PER SHARE $ 9.54
--------------
</TABLE>
** For Interest Only securities, amount represents notional principal,
on which the fund receives interest
# Seven-day yield
GPM Graduated Payment Mortgage
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
$76,165,000 at 11/30/97.
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
11/30/97
<S> <C>
Investment Income
Interest income $ 37,199
...........
Expenses
Investment management 2,358
Shareholder servicing 856
Custody and accounting 162
Prospectus and shareholder reports 48
Registration 17
Legal and audit 10
Trustees 7
Miscellaneous 6
...........
Total expenses 3,464
...........
Net investment income 33,735
...........
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 1,360
Change in net unrealized gain or loss on securities 23,974
...........
Net realized and unrealized gain (loss) 25,334
...........
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 59,069
-----------
</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
11/30/97 5/31/97
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 33,735 $ 64,149
Net realized gain (loss) 1,360 (2,280)
Change in net unrealized gain or loss 23,974 12,761
........................
Increase (decrease) in net assets from operations 59,069 74,630
........................
Distributions to shareholders
Net investment income (33,735) (62,285)
Tax return of capital -- (1,864)
.........................
Decrease in net assets from distributions (33,735) (64,149)
.........................
Capital share transactions *
Shares sold 111,475 158,183
Distributions reinvested 17,014 34,846
Shares redeemed (68,931) (163,260)
.........................
Increase (decrease) in net assets from capital
share transactions 59,558 29,769
.........................
Net Assets
Increase (decrease) during period 84,892 40,250
Beginning of period 944,046 903,796
.........................
End of period $1,028,938 $ 944,046
-------------------------
*Share information
Shares sold 11,782 17,000
Distributions reinvested 1,793 3,746
Shares redeemed (7,281) (17,550)
.........................
Increase (decrease) in shares outstanding 6,294 3,196
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Unaudited November 30, 1997
- -----------------------------
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.
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles for the investment company industry; these
principles may require the use of estimates by fund management.
Valuation Debt securities are generally traded in the over-the-counter market.
Investments in securities originally issued with maturities of one year or more
are stated at fair value as furnished by dealers who make markets in such
securities or by an independent pricing service, which considers yield or price
of bonds of comparable quality, coupon, maturity, and type, as well as prices
quoted by dealers who make markets in such securities. Securities with original
maturities of less than one year are stated at fair value, which is determined
by using a matrix system that establishes a value for each security based on
money market yields.
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.
13
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
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.
Securities Lending The fund lends its securities to approved brokers to earn
additional income and takes cash and U.S. Treasury securities as collateral to
secure the loans. Collateral is maintained at not less than 100% of the value
of loaned securities. At November 30, 1997, the value of securities on loan was
$7,019,000. 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 $703,000,000
and $659,224,000, respectively, for the six months ended November 30, 1997.
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 $25,606,000, of which $1,304,000 expires in 1998,
$248,000 in 1999, and $24,054,000 thereafter through 2005. The fund intends to
retain gains realized in future periods that may be offset by available capital
loss carryforwards.
At November 30, 1997, the aggregate cost of investments for federal income tax
and financial reporting purposes was $1,068,335,000, and net unrealized gain
aggregated $34,711,000, of which $35,959,000 related to appreciated investments
and $1,248,000 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 $399,000 was payable at November 30, 1997. The fee is computed 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 com-
14
<PAGE>
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
bined assets of certain mutual funds sponsored by the manager or Rowe Price-
Fleming International, Inc. (the group). The group fee rate ranges from 0.48%
for the first $1 billion of assets to 0.30% for assets in excess of $80 billion.
At November 30, 1997, and for the six months then ended, the effective annual
group fee rate was 0.32%. The fund pays a pro-rata share of the group fee based
on the ratio of its net assets to those of the group.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and
maintains the financial records of the fund. T. Rowe Price Services, Inc. is
the fund's transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc., provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. The fund incurred expenses pursuant to these
related party agreements totaling approximately $426,000 for the six months
ended November 30, 1997, of which $86,000 was payable at period-end.
Additionally, the fund is one of several T. Rowe Price-sponsored mutual funds
(underlying funds) in which the T. Rowe Price Spectrum Funds (Spectrum) may
invest. Spectrum does not invest in the underlying funds for the purpose of
exercising management or control. Expenses associated with the operation of
Spectrum are borne by each underlying fund to the extent of estimated savings to
it and in proportion to the average daily value of its shares owned by Spectrum,
pursuant to special servicing agreements between and among Spectrum, the
underlying funds, T. Rowe Price, and, in the case of T. Rowe Price Spectrum
International, Rowe Price-Fleming International. Spectrum Income Fund held
approximately 35.2% of the outstanding shares of the GNMA Fund at November 30,
1997. For the six months then ended, the fund was allocated $406,000 of
Spectrum expenses, $49,000 of which was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available to
the public. The Reserve Funds pay no investment management fees. Distributions
from the Reserve Funds to the fund for the six months ended November 30, 1997,
totaled $194,000 and are reflected as interest income in the accompanying
Statement of Operations.
15
<PAGE>
T. Rowe Price Shareholder Services
- --------------------------------------------------------------------------------
Investment Services And Information
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(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.
T. Rowe Price Report Quarterly investment newsletter discussing
markets and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal Strategy Planner,
Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
16
<PAGE>
T. Rowe Price Mutual Funds
- --------------------------------------------------------------------------------
STOCK FUNDS
........................
Domestic
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications*
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons**
Real Estate
Science & Technology
Small-Cap Stock***
Small-Cap Value**
Spectrum Growth
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
BOND FUNDS
........................
Domestic Taxable
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-Free
California Tax-Free Bond
Florida Insured
Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term
Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured
Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term
Tax-Free Bond
Virginia Tax-Free Bond
........................
International/Global
Emerging Markets Bond
Global Government Bond
International Bond
MONEY MARKET FUNDS
........................
Taxable
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
California Tax-Free Money
New York Tax-Free Money
Summit Municipal
Money Market
Tax-Exempt Money
BLENDED ASSET FUNDS
........................
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
T. ROWE PRICE NO-LOAD
VARIABLE ANNUITY
........................
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
* Formerly the closed-end New Age Media Fund; converted to open-end status on
7/28/97.
** Closed to new investors.
*** Formerly the OTC Fund.
Please call for a prospectus. Read it carefully before you invest or send money.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY.
T. Rowe Price refers to the underlying portfolios' investment managers and the
distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance
Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security
Benefit Group of Companies and the T. Rowe Price companies are not affiliated.
The variable annuity may not be available in all states. The contract has
limitations. Call a representative for costs and complete details of the
coverage.
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
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
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.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. ROWE PRICE
T. Rowe Price Investment Services, Inc., Distributor.
