<PAGE>
Annual Report
GNMA
FUND
May 31, 1999
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. ROWE PRICE
<PAGE>
Report Highlights
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GNMA Fund
. Mortgage-backed securities outpaced Treasuries during the past six months,
but the period was generally weak for fixed income markets.
. The fund surpassed the average for similar funds during the 6- and 12-month
periods ended May 31, 1999, with returns of 0.43% and 3.88%, respectively.
. Weakness in the second half of the fiscal year partially offset the gains
of the first half. However, our management of prepayment risk and duration
helped us relative to our peers.
. We will continue to seek value among mortgage-backed securities in an
effort to add value for shareholders.
. We believe bond yields are currently appealing, and the advantage offered
by mortgage-backed bonds should provide attractive returns.
<PAGE>
FELLOW SHAREHOLDERS
The fiscal year ended May 31, 1999, was volatile as mortgage-backed securities
outpaced Treasuries during the second half after lagging during the first.
However, during the past six months, fixed income investments in general fared
poorly as prices fell and interest rates rose across all maturities because of
fears of accelerating inflation. Your fund's returns reflected the rising
interest rate environment of the last six months, which caused bonds to give
back a substantial portion of the gains achieved during the previous six-month
period.
MARKET ENVIRONMENT
The domestic economy continued strong as foreign economies weakened. An
overseas liquidity crisis last summer spurred cuts in short-term interest
rates by the Federal Reserve last fall, which, along with a strong dollar
and low inflation through 1998, helped fuel the powerful U.S. economy. With
the economy growing briskly, some troublesome news appearing on the
inflation front, and stability returning to foreign markets, fixed income
markets took a bearish turn during the past six months.
Overall, it was a challenging year for the fund as interest rates fell
during the first six months before reversing direction. February alone
witnessed the highest monthly increase in rates in 20 years. From the end
of last November through the end of May, the 10-year Treasury yield rose 90
basis points. (One hundred basis points equal one percentage point.) During
the same period, the two-year yield rose 88 basis points while the 30-year
Treasury yield advanced 75, causing
[CHART APPEARS HERE]
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INTEREST RATE LEVELS
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Current Coupon GNMA 10-Year Treasury Note
5/31/98 6.65 5.55
6.59 5.45
6.6 5.5
8/31/98 6.33 4.98
5.96 4.42
6.25 4.61
11/30/98 6.25 4.72
6.26 4.65
6.22 4.65
2/28/99 6.7 5.29
6.65 5.24
6.68 5.35
5/31/99 7.05 5.62
1
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a narrowing in the difference between short- and long-term rates -- or a
flattening of the yield curve. On May 31, the 10-year Treasury yield ended
at 5.62%, up seven basis points from a year earlier.
Yields on current coupon GNMAs tightened about 10 basis points versus the
10-year Treasury yield, enabling the fund to outperform the Treasury
market. Over the year, however, the yield difference actually widened 33
basis points, a reflection of the volatility mentioned earlier. The 30-year
mortgage rate remained fairly low through April before rising about 30
basis points in May. The net effect was an increase from 6.71% last
November to 7.23% at the end of May after reaching a low of 6.49% last
October. One year ago the 30-year rate was 7.05%.
Before rates began to climb, the mortgage market experienced massive
refinancings, which peaked in February. Fortunately, your fund suffered
only slightly from mortgage prepayments as the structure of our portfolio
insulated us from refinancing activity. The fund holds mortgage securities
that, for the most part, are protected from prepayments, including project
loans and collateralized mortgage obligations (CMOs) with provisions
preventing early prepayments. (Prepayments can impair returns when
homeowners refinance high-rate mortgages, which are cashed out at par,
depriving shareholders of both premium bond prices and higher yields.) Most
of this refinancing activity is now behind us, and mortgage rates would
have to drop substantially to reignite another refinancing surge.
PERFORMANCE REVIEW
For the 6- and 12-month periods ended May 31, 1999, the fund returned 0.43%
and 3.88%, respectively, surpassing the performance of the Lipper GNMA
Funds Average in both periods. (The strategies that were largely
responsible for the better relative results are described in the following
section.) During the past six months, the fund's price per share declined
$0.26 to $9.33, due to falling bond prices in the face of higher interest
rates. Dividends per share dropped by $0.01 to $0.30, reflecting the loss
of some higher coupon securities in the portfolio that were affected by
refinancing activity. For the year as a whole, the fund's share price fell
$0.24, and
----------------------
PERFORMANCE COMPARISON
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Periods Ended 5/31/99 6 Months 12 Months
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GNMA Fund 0.43% 3.88%
Lipper GNMA Funds Average 0.36 3.62
2
<PAGE>
dividends per share dropped two cents to $0.61 but more than offset the
drop in share price to provide a positive return.
STRATEGY
WE EXPECT THE FED TO RAISE SHORT-TERM RATES IN THE NEAR TERM BUT DON'T
EXPECT AN EXTENDED TREND OF RISING INTEREST RATES.
Our investment strategy in the rising interest rate environment of the last
six months focused on improving the portfolio's liquidity and reducing our
duration exposure, which we did in incremental steps discussed below.
(Duration is a measure of a bond or bond fund's sensitivity to interest
rates. For example, a fund with a duration of four years can be expected to
rise about 4% in response to a one-percentage-point fall in interest rates
and fall about 4% in response to a one-percentage-point rise in interest
rates.)
We maintained a slightly longer duration than our peers through April
before moving to a neutral duration versus competing funds. Over the last
six months, we sold long-term Treasuries and bought select high-coupon
mortgage securities, which we felt had less prepayment risk than comparable
securities as well as shorter duration and higher yield premiums. This
strategy helped reduce the portfolio's duration. We also sold some CMOs and
bought pass-through securities to improve liquidity. In addition, we
increased our holdings in project loans because of their stable duration
and legal provisions against prepayments. In the present environment, we
will continue to look for new opportunities among mortgage-backed
securities to increase shareholder value while vigilantly monitoring both
prepayment risk and duration.
OUTLOOK
With global issues beginning to take a back seat, growth in domestic demand
continuing virtually unabated, and some slight increases in the previously
stellar inflation figures, the market has effectively reversed last fall's
interest rate cuts by the Fed. We expect the Fed to raise short-term rates
in the near term but don't expect an extended trend of rising interest
rates. Although the economy remains quite strong, there are some signs of
slowing and inflation numbers are currently quite contained. For these
reasons, along with the still relevant
3
<PAGE>
issues plaguing foreign economies and the inability of many corporations to
increase prices, we believe interest rates offer attractive values near
current levels.
As always, the credit quality of your fund is exceptionally high and will
remain so. We are encouraged by the results of the strategies we
implemented to minimize prepayments over the last year, and at present
interest rate levels refinancing activity is a minimal threat. Looking
ahead, we believe the yield advantage offered by mortgage-backed securities
over Treasuries should provide investors with attractive income and overall
returns.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
/s/ Deborah L. Boyer
Deborah L. Boyer
Chairman of the Investment Advisory Committee
June 18, 1999
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T. ROWE PRICE GNMA FUND
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PORTFOLIO HIGHLIGHTS
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KEY STATISTICS
11/30/98 5/31/99
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Price Per Share $9.59 $9.33
Dividends Per Share
For 6 months 0.31 0.30
For 12 months 0.62 0.61
Dividend Yield *
For 6 months 6.45% 6.56%
For 12 months 6.66 6.70
30-Day Standardized Yield 6.23 6.08
Weighted Average Maturity (years)** 7.1 8.4
Weighted Average Effective Duration (years) 3.2 4.4
Weighted Average Quality *** AAA AAA
* Dividends earned and reinvested for the periods indicated are
annualized and divided by the fund's net asset value per share at the
end of the 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
11/30/98 5/31/99
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GNMA Securities 102% 100%
Other Government Agency Securities 3 3
U.S. Treasury Obligations 2 1
Money Market Funds 2 1
Other Assets Less Liabilities -9 -5
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Total 100% 100%
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T. ROWE PRICE GNMA FUND
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PERFORMANCE COMPARISON
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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.
[CHART APPEARS HERE]
GNMA FUND
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Salomon Smith Barney Lipper GNMA
GNMA Index Funds Average GNMA Fund
May-89 10,000 10,000 10,000 10,000
May-90 11,077 10,906 10,966 10,966
May-91 12,613 12,251 12,393 12,393
May-92 14,249 13,682 13,887 13,887
May-93 15,631 14,943 15,085 15,085
May-94 15,640 14,847 14,974 14,974
May-95 17,409 16,388 16,788 16,788
May-96 18,347 17,113 17,413 17,413
May-97 20,055 18,563 18,886 18,886
May-98 21,970 20,357 20,769 20,769
May-99 23,057 21,140 21,575 21,575
- ------------------------------------
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 5/31/99 1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
GNMA Fund 3.88% 7.41% 7.58% 7.99%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
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T. ROWE PRICE GNMA FUND
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--------------------
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.57 $ 9.30 $ 9.19 $ 9.51 $ 9.14
Investment activities
Net investment income 0.61 0.63 0.65 0.67 0.68
Net realized and
unrealized gain (loss) (0.24) 0.27 0.11 (0.32) 0.37
Total from
investment activities 0.37 0.90 0.76 0.35 1.05
Distributions
Net investment income (0.61) (0.63) (0.63) (0.67) (0.66)
Tax return of capital - - (0.02) - (0.02)
Total distributions (0.61) (0.63) (0.65) (0.67) (0.68)
NET ASSET VALUE
End of period $ 9.33 $ 9.57 $ 9.30 $ 9.19 $ 9.51
Ratios/Supplemental Data
Total return* 3.88% 9.97% 8.46% 3.72% 12.11%
Ratio of total expenses to
average net assets 0.71% 0.70% 0.74% 0.74% 0.76%
Ratio of net investment
income to average
net assets 6.36% 6.67% 6.98% 7.04% 7.50%
Portfolio turnover rate 86.7% 120.6% 115.9% 113.6% 121.3%
Net assets, end of period
(in millions) $ 1,111 $ 1,123 $ 944 $ 904 $ 810
</TABLE>
+ 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.
The accompanying notes are an integral part of these financial statements.
7
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T. ROWE PRICE GNMA FUND
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May 31, 1999
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS Par/Shares Value
-------------------------------------------------------------------------------
In thousands
<S> <C> <C>
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 103.5%
U.S. Government Guaranteed Obligations 103.5%
Government National Mortgage Assn.
I
6.00%, 11/15/23 - 3/15/29 $ 93,321 $ 88,576
6.50%, 6/15/23 - 5/15/29 164,810 161,004
7.00%, 4/15/17 - 4/15/29 199,467 200,058
7.50%, 3/15/07 - 4/15/29 168,999 173,218
8.00%, 11/15/12 - 5/15/29 133,994 139,971
8.50%, 12/15/04 - 12/15/21 19,862 21,105
9.00%, 4/15/16 - 9/15/24 30,220 32,457
9.50%, 6/15/09 - 12/15/24 5,911 6,408
10.00%, 10/15/15 - 3/15/26 24,136 26,405
10.50%, 1/15/13 - 10/15/21 2,110 2,340
11.00%, 2/15/10 - 6/15/19 531 594
11.50%, 4/15/10 - 7/15/20 2,285 2,589
12.00%, 5/15/11 - 8/15/15 2,831 3,264
12.50%, 4/15/10 - 7/15/15 1,076 1,245
13.00%, 1/15/11 - 8/15/15 468 546
13.50%, 5/15/10 - 1/15/15 803 937
II
6.50%, 3/20/26 - 11/20/28 19,703 19,250
8.00%, 10/20/24 - 5/20/29 19,859 20,675
8.50%, 4/20/16 - 2/20/23 10,021 10,631
10.00%, 9/20/16 - 5/20/25 872 953
11.00%, 2/20/14 - 9/20/20 1,118 1,254
11.50%, 12/20/13 - 7/20/20 825 938
12.50%, 10/20/13 - 1/20/16 97 113
13.00%, 10/20/13 - 9/20/15 355 415
Construction Loan, I
6.625%, 5/15/01 - 1/15/29 10,022 9,621
6.67%, 2/15/01 - 6/15/38 12,737 12,382
6.73%, 8/15/01 9,590 9,260
6.75%, 7/15/00 - 5/15/29 22,029 21,367
6.875%, 11/15/00 - 4/15/38 9,358 9,261
7.00%, 4/15/00 16,724 16,693
</TABLE>
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T. ROWE PRICE GNMA FUND
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<TABLE>
<CAPTION>
Par/Shares Value
-------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Government National Mortgage Assn.
GPM, I
8.75%, 6/15/17 - 11/15/21 $ 291 $ 310
9.00%, 5/15/09 178 192
9.25%, 5/15/16 - 8/15/21 3,244 3,503
9.50%, 6/15 - 11/15/09 1,481 1,607
9.75%, 4/15/16 - 2/15/21 2,106 2,296
10.25%, 2/15/18 29 32
10.75%, 2/15/16 - 4/15/19 467 521
11.00%, 8/15 - 9/15/10 88 98
11.50%, 2/15 - 6/15/13 41 47
12.00%, 10/15/10 - 2/15/13 210 242
12.25%, 1/15/14 - 2/15/15 101 117
12.50%, 4/15/10 - 10/15/12 360 416
12.75%, 11/15/13 - 6/15/14 148 172
GPM, II
9.25%, 2/20/16 60 64
9.75%, 3/20 - 7/20/21 80 86
10.25%, 3/20 - 9/20/16 26 28
11.00%, 9/20/13 - 1/20/14 33 36
12.25%, 1/20/14 - 10/20/15 124 142
12.75%, 10/20/13 - 2/20/15 148 171
Project Loan, I
6.30%, 11/15/33 3,584 3,436
6.50%, 3/15/34 3,396 3,295
6.70%, 4/15/34 2,399 2,339
7.05%, 11/15/38 6,058 6,054
7.75%, 3/15/20 3,896 4,025
8.00%, 11/15/17 5,787 6,051
REMIC
6.50%, 10/20/27 9,849 9,509
7.00%, 10/16/21 - 5/16/24 18,400 18,456
7.50%, 7/16/12 - 5/16/23 31,179 31,726
Interest Only, 8.00%, 6/16/23 ** 5,048 499
TBA, I
Construction Loan, 6.73%, 12/15/99 10,233 9,881
Construction Loan, 7.00%, 12/15/99 1,955 1,952
Construction Loan, 8.50%, 1/1/26 - 1/1/29 10,719 11,315
TBA, II, 8.00%, 5/20/99 3,600 3,728
</TABLE>
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T. ROWE PRICE GNMA FUND
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<TABLE>
<CAPTION>
Par/Shares Value
- ------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
U.S. Department of Veteran Affairs
REMIC
VR, 9.558%, 3/15/25 $ 2,876 $ 3,091
7.25%, 10/15/08 10,545 10,968
7.50%, 5/15/24 18,750 19,310
Total U.S. Government Mortgage-Backed Securities
(Cost $1,147,194) 1,149,245
U.S. GOVERNMENT OBLIGATIONS 0.8%
U.S. Treasury Obligations 0.8%
U.S. Treasury Bond Strip, Zero Coupon, 2/15/16 24,000 8,531
Total U.S. Government Obligations (Cost $9,951) 8,531
MONEY MARKET FUNDS 0.7%
Government Reserve Investment Fund, 4.70% # 8,408 8,408
Total Money Market Funds (Cost $8,408) 8,408
Total Investments in Securities
105.0% of Net Assets (Cost $1,165,553) $ 1,166,184
Other Assets Less Liabilities
Including $60,196 payable for investment securities purchased (55,420)
NET ASSETS $ 1,110,764
------------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (5,445)
Accumulated net realized gain/loss - net of distributions (11,813)
Net unrealized gain (loss) 631
Paid-in-capital applicable to 119,029,543 no par value shares of
beneficial interest outstanding; unlimited number of shares authorized 1,127,391
NET ASSETS $ 1,110,764
------------
NET ASSET VALUE PER SHARE $ 9.33
------------
</TABLE>
** 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.
10
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T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
- -----------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/99
Investment Income
Interest income $ 80,879
Expenses
Investment management 5,388
Shareholder servicing 2,204
Custody and accounting 340
Prospectus and shareholder reports 83
Registration 68
Proxy and annual meeting 31
Legal and audit 16
Trustees 9
Miscellaneous 7
Total expenses 8,146
Net investment income 72,733
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 6,212
Change in net unrealized gain or loss on securities (34,385)
Net realized and unrealized gain (loss) (28,173)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 44,560
------------
The accompanying notes are an integral part of these financial statements.
11
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T. ROWE PRICE GNMA FUND
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- ----------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/99 5/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 72,733 $ 69,522
Net realized gain (loss) 6,212 3,526
Change in net unrealized gain or loss (34,385) 24,279
Increase (decrease) in net assets from operations 44,560 97,327
Distributions to shareholders
Net investment income (72,733) (69,522)
Capital share transactions*
Shares sold 211,218 274,655
Distributions reinvested 43,992 34,207
Shares redeemed (239,415) (157,571)
Increase (decrease) in net assets from capital
share transactions 15,795 151,291
Net Assets
Increase (decrease) during period (12,378) 179,096
Beginning of period 1,123,142 944,046
End of period $1,110,764 $ 1,123,142
---------- -----------
* Share information
Shares sold 22,140 28,810
Distributions reinvested 4,624 3,589
Shares redeemed (25,120) (16,533)
Increase (decrease) in shares outstanding 1,644 15,866
The accompanying notes are an integral part of these financial statements.
12
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T. ROWE PRICE GNMA FUND
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May 31, 1999
- -----------------------------
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 with original 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 debt securities, other
than mortgage-backed securities (MBS), are amortized for both financial
reporting and tax purposes. Premiums and discounts on all MBS are
recognized upon disposition or principal repayment as gain or loss for
financial reporting purposes. For tax purposes, premiums and discounts on
MBS acquired on or before June 8, 1997, are recognized upon disposition or
principal repayment as ordinary income. For MBS acquired after June 8,
1997, premiums are recognized as gain or loss; discounts are recognized as
gain or loss, except to the extent of accrued market discount.
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
13
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T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
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. Credits earned on daily univested cash balances at
the custodian are used to reduce the fund's custody charges.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of U.S. government securities aggregated $1,056,058,000
and $1,080,348,000, respectively, for the year ended May 31, 1999.
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 utilized capital loss carryforwards of
$7,683,000 in fiscal year 1999. As of May 31,1999, the fund has capital
loss carryforwards for federal income tax purposes of $11,813,000, of which
$1,569,000 expires in 2002, $1,748,000 in 2003, and $8,496,000 in 2005. 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, 1999. The results
of operations and net assets were not affected by the increases/(decreases)
to these accounts.
---------------------------------------------------------------------------
Undistributed net investment income $ 603,000
Undistributed net realized gain 1,471,000
Paid-in-capital (2,074,000)
At May 31, 1999, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled
$1,165,553,000. Net unrealized gain aggregated $631,000 at period-end, of
which $15,560,000 related to appreciated investments and $14,929,000 to
depreciated investments.
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T. ROWE PRICE GNMA FUND
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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 $439,000 was payable at May 31, 1999. 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, 1999, 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 $1,090,000 for the year ended May 31, 1999, of which $110,000
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 35.6% of the
outstanding shares of the fund at May 31, 1999. For the year then ended,
the fund was allocated $1,025,000 of Spectrum expenses, $81,000 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
15
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T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
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,
1999, totaled $1,007,000 and are reflected as interest income in the
accompanying Statement of Operations.
16
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T. ROWE PRICE GNMA FUND
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REPORT OF INDEPENDENT ACCOUNTANTS
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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, 1999, 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, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
June 17, 1999
17
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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 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 appropriate to the fund or funds
covered in this report
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
4200 West Cypress St.
10th Floor
Tampa, FL 33607
4410 ArrowsWest Drive
Colorado Springs, CO 80907
Warner Center Plaza 5
Mezzanine Level
21800 Oxnard Street, Suite 270
Woodland Hills, CA 91367
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor. F70-050 5/31/99
