Annual Report
GNMA Fund
May 31, 1998
T. Rowe Price
REPORT HIGHLIGHTS
GNMA Fund
o Interest rates fell sharply from a year ago but have
moved in a tight range since January, benefiting the bond
market and your fund.
o Your fund's returns of 3.65% and 9.97% over the 6- and
12-month periods were strong. GNMAs trailed Treasuries
because of high prepayment activity.
o Our strategy was unchanged in the face of declining rates
and low inflation as we continued to favor securities
with some protection against prepayment risk.
o The fund's dividend payout fell marginally, reflecting
lower rates, but the share price rose, boosting
performance.
o We anticipate slightly lower rates, a slowing economy,
and a leveling off in prepayment activity, all of which
bode well for GNMA securities.
Fellow Shareholders
Interest rates fell over the last six months, continuing a
trend that began a year ago. As a result, the bond market and
your fund enjoyed good returns for the six-month period and
particularly strong results for the 12 months ended May 31.
While rates are significantly lower than a year ago, they have
been fluctuating in a tight range since the beginning of 1998.
The mortgage-backed bond market has been hindered by
refinancings, with homeowners taking advantage of lower
mortgage rates.
MARKET ENVIRONMENT
During the past 12 months, interest rates declined more than
one percentage point overall, and the yield curve has
flattened as longer-term rates dropped more sharply than
shorter-term rates. The current coupon GNMA yield fell from
7.68% to 6.63% over the year, while the 10-year Treasury note
yield fell from 6.75% to 5.57%. As a result, prices rose more
in the Treasury market and the yield difference between
Treasuries and GNMAs expanded. The performance of mortgage-
backed securities lagged that of similar Treasuries as
investors focused on the adverse impact of rising mortgage
prepayments.
Interest Rate Levels
Current Coupon GNMA 10-Year T-Note
5/31/97 7.68 6.75
7.43 6.45
7 6.11
8/97 7.38 6.38
6.98 6.06
6.95 5.9
11/97 6.99 5.86
6.9 5.75
6.63 5.57
2/98 6.87 5.65
6.62 5.55
6.67 5.68
5/31/98 6.63 5.57
In January the Mortgage Bankers' Association Refinancing Index
jumped to an all-time high, and the fund received some higher-
than-expected prepayments from portions of our seasoned
mortgage holdings. (See chart on page 2.) Very old mortgages
normally offer greater protection against prepayments, but
even they were paid down much faster than anticipated. We do
not expect this spike in seasoned mortgage prepayments to
continue, and if prepayment activity begins to level off, fund
performance could be more robust than it was over the past six
months. Most of the rise in prepayments was triggered by both
an increase in property values and a strong housing market,
which encourage people to take equity out of their homes or to
sell their homes and move. However, despite the record
prepayment activity and investor fears of more to come,
mortgage-backed securities have generally performed well so
far this year.
Prepayment Rates
Moderately
New Seasoned Seasoned
Mortgages Mortgages Mortgages
5/31/94 5.8 2.6 7.7
5.7 2.7 7.8
5.1 2.6 7.2
5.3 2.7 7.5
5 2.7 6.9
4.6 2.7 5.9
11/94 4.1 2.65.1
4 2.4 5.1
3.2 2.2 3.8
3.3 2.3 4.4
4.7 3.1 6
4.9 4.1 5.9
5/95 6 4.6 7.7
7 5.7 9.2
9.2 6.9 10.3
8 6.6 11.1
6.7 6.3 9.3
6.1 6.6 9
11/95 5.2 5.88.2
4.7 6.1 7.9
4.5 6.3 7.6
6.6 7.9 10.2
6.2 9.1 11.5
5.1 8.7 11.9
5/96 4.5 8.9 12.3
3.7 8.2 11.5
3.5 8.2 10.7
3 7.8 9.9
2.5 7.4 8.9
2.4 7.3 9
11/96 2.7 7.79
3.2 7.2 8.7
0.4 7.7 7.8
0.3 7.1 7.9
0.4 9.5 10.2
0.7 9.7 9.6
5/97 0.6 9 10
0.8 9.4 10.4
1.3 10.6 12.3
1.8 10.1 11.1
1.8 11.8 12.4
2.5 12.5 11.7
11/97 3 9.811.5
4.2 10.6 11.7
9 9.6 11.7
18.6 17.9 20.6
19.6 21.4 25.2
17.1 18.5 22.8
5/98 13.4 19.6 19.7
12.6 18.1 18.4
13 17.9 18.1
12 16.1 16.2
12.3 16.4 16.6
11.7 15.2 15.4
11/98* 10.7 13.9 14.2
11.3 13.7 14.1
10.6 13.3 13.6
12.4 15.7 16
12.1 15.8 16.1
12.8 16.9 17.1
5/31/99* 13.1 17.4 17.6
Performance Comparison
Periods Ended 5/31/98 6 Months 12 Months
GNMA Fund 3.65% 9.97%
Lipper GNMA Funds Average 3.72 9.40
PERFORMANCE REVIEW
For the six months ended May 31, your fund returned 3.65%,
slightly less than the Lipper peer group average. During the
12-month period, the fund's return of 9.97% was more than half
a percentage point ahead of the average competitor.
The fund's share price rose three cents to $9.57 over six
months and 27 cents over the fiscal year. Dividends were
marginally lower at $0.31 and $0.63 per share, respectively, a
reflection of the lower interest rate environment.
STRATEGY
Our strategy remained constant in a continuing environment of
decreasing but range-bound interest rates. The primary focus
was on preservation of principal and reduction of prepayment
risk due to mortgage refinancing. Additionally, we favored
higher-coupon but seasoned mortgages to maintain income. Our
holdings in Real Estate Mortgage Investment Conduits (REMICs),
project loans, and construction loans all have protection
against early prepayments, which helps performance. Fund
positions in low loan balance mortgages, as well as mortgages
from specific production years that are less sensitive to
refinancing, accomplish a similar purpose. Also, low coupon
mortgages in the portfolio are insensitive to refinancings and
provide the fund with potential price appreciation. As always,
we continued to look for the right combination of securities
to generate the highest possible return.
As in the past, 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 from these future holdings is not
sufficient, the contracts can be rolled out in an effort to
enhance total return. (These obligations are reflected as
Other Assets Less Liabilities in the Sector Diversification
table following this letter.)
OUTLOOK
The federal budget is more or less in balance, Treasury debt
issuance is decreasing, and inflation remains low while
consumer confidence is high. GDP for the first quarter was
strong, but with a buildup in inventories we expect a slowing
of the economy in the second quarter. Asia's problems are
starting to affect the domestic market and should remain an
issue for at least the next two quarters, preventing our own
economy from overheating as Asian demand for U.S. goods will
not pick up for some time.
We expect stable interest rates, but with a slightly downward
drift as inflation remains in check and the economy slows. We
believe the peak in prepayment activity is now behind us,
although prepayments could remain high with continuing low
rates. Overall, with the high yields and credit ratings of
GNMA securities, along with strong demand for them, we feel
that mortgage bonds and your fund should continue to offer
attractive performance going forward.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
Peter Van Dyke
President and Chairman of the Investment Advisory Committee
June 19, 1998
T. Rowe Price GNMA Fund
Portfolio Highlights
Key statistics
11/30/97 5/31/98
______________________________________________________________
__________
Price Per Share $ 9.54 $ 9.57
Dividends Per Share
For 6 months 0.32 0.31
For 12 months 0.65 0.63
Dividend Yield *
For 6 months 6.88% 6.67%
For 12 months 7.11 6.89
Weighted Average Maturity (years)** 8.0 7.6
Weighted Average Effective Duration (years) 3.93.6
Weighted Average Quality *** AAA AAA
* Dividends earned and reinvested for the periods
indicated are annualized and divided by the average
daily net asset values per share for the same period.
** Based on prepayment-adjusted life of GNMA securities.
*** Based on T. Rowe Price research.
SECTOR Diversification
Percent of Percent of
Net Assets Net Assets
11/30/97 5/31/98
______________________________________________________________
___________
GNMA Securities 102% 104%
Other Government Agency Securities 3 3
Short-Term Obligations 1 1
U.S. Treasury Obligations 1 -
Other Assets Less Liabilities -7 -8
Total 100% 100%
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 SEC Chart
Salomon Lipper GNMA-Line GNMA-Area
5/88 10000 10000 10000 10000
5/89 11188 11048 10861 10861
5/90 12393 12057 11911 11911
5/91 14111 13548 13460 13460
5/92 15942 15124 15083 15083
5/93 17488 16511 16385 16385
5/94 17498 16402 16264 16264
5/95 19477 18071 18234 18234
5/96 20527 18879 18912 18912
5/97 22438 20476 20513 20513
5/98 24580 22447 22557 22557
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 5/31/98 1 Year 3 Years 5 Years 10 Years
GNMA Fund 9.97% 7.35% 6.60% 8.47%
Investment return and principal value represent past
performance and will vary. Shares may be worth more or less at
redemption than at original purchase.
T. Rowe Price GNMA Fund
Financial Highlights For a share outstanding throughout each period
Year 3 Months+ Year
Ended Ended Ended
5/31/98 5/31/975/31/96 5/31/95 5/31/94 2/28/94
NET ASSET VALUE
Beginning of period $ 9.30 $ 9.19 $ 9.51 $ 9.14 $ 9.60$
9.92
Investment activities
Net investment
income 0.63 0.65 0.67 0.68 0.17 0.68
Net realized and
unrealized gain
(loss) 0.27 0.11 (0.32) 0.37 (0.46)
(0.32)
Total from
investment
activities 0.90 0.76 0.35 1.05 (0.29) 0.36
Distributions
Net investment
income (0.63) (0.63) (0.67) (0.66) (0.17)
(0.68)
Tax return
of capital - (0.02) - (0.02) --
Total distributions (0.63) (0.65) (0.67) (0.68)
(0.17) (0.68)
NET ASSET VALUE
End of period $9.57 $9.30 $ 9.19 $ 9.51 $ 9.14 $ 9.60
______________________________________________________________
___________
Ratios/Supplemental Data
Total return* 9.97% 8.46% 3.72% 12.11%
(3.03)% 3.71%
Ratio of expenses to
average net assets 0.70% 0.74% 0.74% 0.76%
0.76%! 0.77%
Ratio of net
investment
income to average
net assets 6.67% 6.98% 7.04% 7.50%
7.24%! 6.93%
Portfolio turnover
rate 120.6% 115.9% 113.6% 121.3% 151.8%! 92.5%
Net assets,
end of period
(in thousands) $1,123,142 $944,046$903,796 $810,467$802,304 $883,391
* 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.
! Annualized.
+ The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price GNMA Fund
May 31, 1998
Statement of Net Assets Par/Shares Value
______________________________________________________________
____________
In thousands
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 107.3%
U.S. Government Guaranteed Obligations 107.3%
Government National Mortgage Assn.
I
6.00%, 11/15/23 - 6/15/26 $ 58,461 $ 57,041
6.50%, 6/15/23 - 5/15/28 77,390 77,162
7.00%, 4/15/17 - 5/15/28 164,627 167,479
7.50%, 3/15/07 - 4/15/28 136,978 141,642
8.00%, 3/15/14 - 5/15/28 172,878 180,684
8.50%, 12/15/04 - 11/15/27 45,994 48,848
9.00%, 4/15/16 - 9/15/24 46,437 50,114
9.50%, 6/15/09 - 12/15/24 9,901 10,760
10.00%, 10/15/15 - 7/15/24 16,601 18,452
10.50%, 1/15/13 - 11/15/21 3,306 3,706
11.00%, 2/15/10 - 6/15/19 742 840
11.50%, 4/15/10 - 7/15/20 3,233 3,704
12.00%, 5/15/11 - 10/15/15 4,397 5,121
12.50%, 4/15/10 - 7/15/15 1,567 1,837
13.00%, 1/15/11 - 8/15/15 750 885
13.50%, 5/15/10 - 1/15/15 1,150 1,362
II
5.50%, 7/20/27 15,076 15,326
6.50%, 3/20/26 11,819 11,719
8.00%, 10/20/24 - 5/20/27 23,889 24,713
8.50%, 4/20/16 - 2/20/23 16,684 17,610
10.00%, 9/20/16 - 5/20/25 1,365 1,496
11.00%, 2/20/14 - 9/20/20 1,572 1,759
11.50%, 12/20/13 - 7/20/20 1,117 1,269
12.50%, 10/20/13 - 1/20/16 152 177
13.00%, 10/20/13 - 9/20/15 528 618
Construction Loan, I
6.875%, 11/15/02 1,265 1,282
7.00%, 4/15/00 4,566 4,670
GPM, I
8.75%, 6/15/17 - 6/15/22 582 620
9.00%, 5/15/09 - 3/15/14 295 317
9.25%, 5/15/16 - 8/15/21 4,588 4,952
9.50%, 6/15 - 11/15/09 1,917 2,079
Government National Mortgage Assn.
GPM, I
9.75%, 4/15/16 - 2/15/21 $ 4,141 $ 4,512
10.25%, 1/15 - 2/15/18 89 98
10.75%, 2/15/16 - 4/15/19 628 696
11.00%, 8/15 - 9/15/10 202 224
11.50%, 2/15 - 6/15/13 47 53
12.00%, 10/15/10 - 2/15/13 383 435
12.25%, 1/15/14 - 2/15/15 118 134
12.50%, 4/15/10 - 10/15/12 415 476
12.75%, 10/15/13 - 7/15/14 269 310
GPM, II
9.25%, 2/20/16 121 129
9.75%, 12/20/20 - 7/20/21 204 220
10.25%, 3/20 - 9/20/16 29 32
11.00%, 9/20/13 - 1/20/14 53 60
12.25%, 1/20/14 - 10/20/15 135 156
12.75%, 10/20/13 - 7/20/15 218 253
Project Loan, I
6.16%, 6/15/30 15,917 15,101
7.35%, 7/15/32 5,373 5,699
7.60%, 6/15/27 6,372 6,784
7.75%, 3/15/20 3,966 4,229
7.875%, 6/15/27 2,978 3,222
8.00%, 11/15/12 - 11/15/17 6,372 6,888
8.50%, 1/15/27 391 413
9.25%, 10/15/23 9,678 10,370
REMIC
6.50%, 10/16/24 - 10/20/27 42,849 42,286
7.00%, 10/16/21 - 5/16/24 18,400 18,721
7.493%, 7/16/24 35,450 38,075
7.50%, 7/16/12 - 5/16/27 52,765 54,562
Interest Only, 8.00%, 6/16/23** 7,261 1,030
TBA, I
6.00%, 9/15/23 15,000 14,578
6.50%, 1/15/24 25,000 24,875
7.00%, 7/15/20 20,000 20,301
8.00%, 7/15/20 14,000 14,551
Construction Loan, 6.875%, 4/30/38 8,093 8,206
Construction Loan, 7.00%, 7/15/38 14,113 14,435
U. S. Department of Veteran Affairs, VR
REMIC
7.25%, 10/15/08 $ 10,545 $ 11,108
7.50%, 5/15/24 18,750 19,664
9.54%, 3/15/25 3,635 4,063
Total U.S. Government Mortgage-Backed Securities
(Cost $1,170,230) 1,205,193
U.S. GOVERNMENT OBLIGATIONS 0.5%
U.S. Treasury Obligations 0.5%
U.S. Treasury Bonds, 6.125%, 11/15/27 5,000 5,224
Total U.S. Government Obligations (Cost $5,171) 5
,
2
2
4
MONEY MARKET FUNDS 0.6%
Government Reserve Investment Fund, 5.46% # 7,419
7,419
Total Money Market Funds (Cost $7,419) 7
,
4
1
9
Total Investments in Securities
108.4% of Net Assets (Cost $1,182,820) $1,217,836
Other Assets Less Liabilities
Including $97,187 Payable for
Investments Securities Purchased (94,694
)
NET ASSETS $1,123,142
__________
Net Assets Consist of:
Accumulated net investment income
- net of distributions $ (6,048
)
Accumulated net realized gain/loss
- net of distributions (19,496
)
Net unrealized gain (loss) 35,016
Paid-in-capital applicable to 117,385,898
no par value shares of beneficial interest
outstanding; unlimited number of shares authorized
1,113,670
NET ASSETS $1,123,142
__________
NET ASSET VALUE PER SHARE $ 9.57
__________
** For Interest Only securities, par 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
VR Variable Rate
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price GNMA Fund
Statement of Operations
______________________________________________________________
____________
In thousands
Year
Ended
5/31/98
Investment Income
Interest income $ 76,792
Expenses
Investment management 4,928
Shareholder servicing 1,854
Custody and accounting 323
Prospectus and shareholder reports 89
Registration 32
Legal and audit 19
Trustees 13
Miscellaneous 12
Total expenses 7,270
Net investment income 69,522
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 3,526
Change in net unrealized gain or loss on securities 24,279
Net realized and unrealized gain (loss) 27,805
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 97,327
_________
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price GNMA Fund
Statement of Changes in Net Assets
______________________________________________________________
____________
In thousands
Year
Ended
5/31/98 5/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 69,522 $ 64,149
Net realized gain (loss) 3,526 (2,280)
Change in net unrealized gain or loss 24,279
12,761
Increase (decrease) in net assets
from operations 97,327 74,630
Distributions to shareholders
Net investment income (69,522)
(62,285)
Tax return of capital - (1,864)
Decrease in net assets from distributions (69,522) (64,149
)
Capital share transactions*
Shares sold 274,655 158,183
Distributions reinvested 34,207 34,846
Shares redeemed (157,571) (163,260
)
Increase (decrease) in net
assets from capital
share transactions 151,291 29,769
Net Assets
Increase (decrease) during period 179,096 40,250
Beginning of period 944,046 903,796
End of period $1,123,142 $ 944,046
______________________
*Share information
Shares sold 28,810 17,000
Distributions reinvested 3,589 3,746
Shares redeemed (16,533)
(17,550)
Increase (decrease) in shares outstanding 15,866
3,196
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price GNMA Fund
May 31, 1998
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.
Investments in mutual funds are valued at the closing net
asset value per share of the mutual fund on the day of
valuation.
Assets and liabilities for which the above valuation
procedures are inappropriate or are deemed not to reflect
fair value are stated at fair value as determined in good
faith by or under the supervision of the officers of the
fund, as authorized by the Board of 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
Purchases and sales of U.S. government securities
aggregated $1,482,538,000 and $1,327,467,000, respectively,
for the year ended May 31, 1998.
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
$19,496,000, of which $9,253,000 expires in 2002,
$1,747,000 in 2003, and $8,496,000 in 2005. Capital loss
carryforwards utilized in fiscal 1998 amounted to
$6,110,000. The fund intends to retain gains realized in
future periods that may be offset by available capital loss
carryforwards.
In order for the fund's capital accounts and distributions
to shareholders to reflect the tax character of certain
transactions, the following reclassifications were made
during the year ended May 31, 1998. The results of
operations and net assets were not affected by the
increases/(decreases) to these accounts.
___________________________________________________________
____________
Undistributed net investment income $ (591,000)
Undistributed net realized gain 2,584,000
Paid-in-capital (1,993,000)
At May 31, 1998, the aggregate cost of investments for
federal income tax and financial reporting purposes was
$1,182,820,000, and net unrealized gain aggregated
$35,016,000, of which $35,718,000 related to appreciated
investments and $702,000 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 $446,000 was
payable at May 31, 1998. 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 combined assets of certain mutual
funds sponsored by the manager or Rowe Price-Fleming
International, Inc. (the group). The group fee rate ranges
from 0.48% for the first $1 billion of assets to 0.30% for
assets in excess of $80 billion. At May 31, 1998, and for
the year 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 $899,000 for the year
ended May 31, 1998, of which $78,000 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 39.1% of the outstanding
shares of the GNMA Fund at May 31, 1998. For the year then
ended, the fund was allocated $888,000 of Spectrum
expenses, $65,000 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 year ended May 31,
1998, totaled $675,000 and are reflected as interest income
in the accompanying Statement of Operations.
T. Rowe Price GNMA Fund
Report of Independent Accountants
To the Board of Trustees and Shareholders of
T. Rowe Price GNMA Fund
In our opinion, the accompanying statement of net assets
and the related statements of operations and of changes in
net assets and the financial highlights present fairly, in
all material respects, the financial position of T. Rowe
Price GNMA Fund (the "Fund") at May 31, 1998, and the
results of its operations, the changes in its net assets
and the financial highlights for each of the fiscal periods
presented, in conformity with generally accepted accounting
principles. These financial statements and financial
highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on
these financial statements based on our audits. We
conducted our audits of these financial statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made
by management, and evaluating the overall financial
statement presentation. We believe that our audits, which
included confirmation of securities at May 31, 1998 by
correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 17, 1998
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(registered trademark) and the T. Rowe Price Web
site on the Internet. Address: www.troweprice.com
Discount Brokerage*
Individual Investments Stocks, bonds, options, precious
metals, and other securities at a savings over regular
commission rates.
Investment Information
Combined Statement Overview of all your accounts with T.
Rowe Price.
Shareholder Reports Fund managers' reviews of their
strategies and results.
T. Rowe Price Report Quarterly investment newsletter
discussing markets and financial strategies.
Performance Update Quarterly review of all T. Rowe Price
fund results.
Insights Educational reports on investment strategies and
financial markets.
Investment Guides Asset Mix Worksheet, College Planning
Kit, Diversifying Overseas: A Guide to International
Investing, Personal Strategy Planner, Retirees Financial
Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc.
Member NASD/SIPC.
T. Rowe Price Shareholder Services
T. Rowe Price Mutual Funds
______________________________________________________________
____________
STOCK FUNDS
Domestic
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index 500*
Extended Equity Market Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications**
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons***
Real Estate
Science & Technology
Small-Cap Stock
Small-Cap Value***
Spectrum Growth
Total Equity Market Index
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
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 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 named Equity Index.
** Formerly the closed-end New Age Media Fund. Converted to
open-end status on 7/28/97.
*** Closed to new investors.
! Formerly named Global Government Bond.
!! Neither the funds nor their share prices are insured or
guaranteed by the U.S. government.
Please call for a prospectus. Read it carefully before
investing.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued
by Security Benefit Life Insurance Company. In New York, it
[#FSB201(11-96)] is issued by First Security Benefit Life
Insurance Company of New York, White Plains, NY. T. Rowe Price
refers to the underlying portfolios' investment managers and
the distributors, T. Rowe Price Investment Services, Inc.; T.
Rowe Price Insurance Agency, Inc.; and T. Rowe Price Insurance
Agency of Texas, Inc. The Security Benefit Group of Companies
and the T. Rowe Price companies are not affiliated. The
variable annuity may not be available in all states. The
contract has limitations. Call a representative for costs and
complete details of the coverage.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
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
T. Rowe Price Investment Services, Inc., Distributor. F70-050 5/31/98
