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October 1, 2000
FUND PROFILE
T. ROWE PRICE
GNMA Fund
A bond fund seeking both high income and the highest credit quality.
This profile summarizes key information about the fund that is included in the
fund's prospectus. The fund's prospectus includes additional information about
the fund, including a more detailed description of the risks associated with
investing in the fund that you may want to consider before you invest. You may
obtain the prospectus and other information about the fund at no cost by calling
1-800-638-5660, or by visiting our Web site at www.troweprice.com.
TROWEPRICELOGO
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FUND PROFILE
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What is the fund's objective?
The fund seeks high current income consistent with maximum credit protection
and moderate price fluctuation by investing exclusively in securities backed
by the full faith and credit of the U.S. government and instruments linked to
these securities.
What is the fund's principal investment strategy?
We will invest primarily in mortgage-backed securities issued by the
Government National Mortgage Association (GNMA), an agency of the Department
of Housing and Urban Development. These securities represent "pools" of
mortgage loans that are either guaranteed by the Federal Housing
Administration or the Veterans Administration. Mortgage lenders pool
individual home mortgages to back a certificate or bond, which is then sold
to investors. Interest and principal payments from the underlying mortgages
are passed through to investors.
GNMA guarantees the timely payment of interest and principal on its
securities, a guarantee backed by the U.S. Treasury. The GNMA guarantee does
not apply to the price of GNMA securities or the fund's share price, both of
which will fluctuate with market conditions.
We can also buy bills, notes, and bonds issued by the U.S. Treasury, and
other instruments, including: related futures contracts; other agency
securities backed by the full faith and credit of the U.S. government; shares
of a T. Rowe Price Treasury money fund; and GNMA-related securities such as
collateralized mortgage obligations (CMOs) and "strips," which receive only
the interest or principal portion of the underlying mortgage payments. We may
also purchase new mortgage bonds in the forward market. The fund has no
limitation on its overall maturity.
In selecting securities, fund managers may weigh the characteristics of
various types of mortgage securities and examine yield relationships in the
context of their outlook for interest rates and the economy. For example, if
rates seem likely to fall, mortgage securities expected to have below-average
prepayment rates may be purchased and assets may also be allocated to
Treasury notes or bonds, which could appreciate in that environment.
The fund may sell securities for a variety of reasons, such as to adjust the
portfolio's average maturity or quality, or to shift assets into
higher-yielding securities.
Further information about the fund's investments, including a review of
market conditions and fund strategies and their impact on performance, is
available in the annual and semiannual shareholder reports. To obtain free
copies of either of these documents, call 1-800-638-5660.
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FUND PROFILE
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What are the main risks of investing in the fund?
. Interest rate risk Investors should be concerned primarily with this risk.
An increase in interest rates could cause the fund's share price to fall,
resulting in a loss of principal. That's because the bonds and notes in the
fund's portfolio become less attractive to other investors when securities
with higher yields become available. Even GNMAs and other securities whose
principal and interest payments are guaranteed can decline in price if rates
rise. The longer a bond's maturity, the greater its potential for price
declines if rates rise and for price gains if rates fall.
Historically, GNMAs and other mortgage-backed securities have declined less
in price than comparable Treasuries when rates were rising, and have gained
less in price when rates were falling. This is because mortgage securities
carry their own special risks related to changing interest rates: prepayment
risk and extension risk.
. Prepayment risk and extension risk Because the fund can invest extensively
in mortgage-backed securities, it has special risks related to changing
interest rates. A mortgage-backed bond, unlike most other bonds, can be hurt
when interest rates fall, because homeowners tend to refinance and prepay
principal. The loss of high-yielding, underlying mortgages and the
reinvestment of proceeds at lower interest rates can reduce the bond's
potential price gain in response to falling interest rates, reduce the bond's
yield, or even cause the bond's price to fall below what an investor paid for
it, resulting in a capital loss. Any of these developments could cause a
decrease in the fund's income, share price, or total return.
Extension risk refers to a rise in interest rates that causes a fund's
average maturity to lengthen unexpectedly due to a drop in mortgage
prepayments. This would increase the fund's sensitivity to rising rates and
its potential for price declines.
. Derivatives risk Shareholders are also exposed to the possibility that our
investments in these complex and volatile instruments could affect the fund's
share price. In addition to CMOs and better-known instruments such as
futures, other derivatives used in limited fashion by the fund include
interest-only (IO) and principal-only (PO) securities known as "strips." The
value of these instruments is derived from an underlying pool of
mortgage-backed securities or a CMO. All these instruments can be highly
volatile, and their value can fall dramatically in response to rapid or
unexpected changes in the mortgage or interest rate environment.
To the extent the fund invests in the forward market, it may increase its
price sensitivity in relation to interest rate movements.
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FUND PROFILE
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Since GNMAs and the fund's other investments are backed by the full faith and
credit of the U.S. government, credit risk, or the potential for losses in
principal and income as a result of credit downgrades or defaults, should be
negligible.
As with any mutual fund, there can be no guarantee the fund will achieve its
objective.
. The fund's share price may decline, so when you sell your shares, you may
lose money. An investment in the fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
How can I tell if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. The fund may be appropriate if you are looking for
high current income consistent with the highest credit quality and can accept
fluctuations in share price. Steadily reinvesting the fund's income is a
conservative strategy for building capital over time. If you are investing
primarily for safety and liquidity, you should consider a money market fund.
The fund can be used in both regular and tax-deferred accounts, such as IRAs.
. The fund should not represent your complete investment program or be used
for short-term trading purposes.
How has the fund performed in the past?
The bar chart showing calendar year returns and the average annual total
return table indicate risk by illustrating how much returns can differ from
one year to the next and over time. Fund past performance is no guarantee of
future returns.
The fund can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns during the years depicted in the
chart.
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FUND PROFILE
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LOGO
<TABLE>
<CAPTION>
Calendar Year Total Returns
"90" "91" "92" "93" "94" "95" "96" "97" "98" "99"
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <S> <C>
0 . 2
1
10.01 15.04 6.46 6.15 -1.63 17.81 3.14 9.48 6.56
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</TABLE>
Quarter ended Total return
Best quarter 3/31/95 5.54%
Worst quarter 3/31/94 -2.40%
<TABLE>
Table 1 Average Annual Total Returns
<CAPTION>
Periods ended 09/30/2000
1 year 5 years 10 years
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<S> <C> <C> <C>
GNMA Fund 6.86% 6.00% 7.41%
Salomon Smith Barney GNMA Index 7.73 6.90 8.12
Lipper GNMA Funds Average 6.53 5.90 7.26
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</TABLE>
These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.
What fees or expenses will I pay?
The fund is 100% no load. There are no fees or charges to buy or sell fund
shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
are no 12b-1 fees. Redemption proceeds of less than $5,000 sent by wire are
subject to a $5 fee paid to the fund.
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<TABLE>
Table 2 Fees and Expenses of the Fund
<CAPTION>
Annual fund operating expenses
(expenses that are deducted from fund assets)
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<S> <C>
Management fee 0.47%/ // /
Other expenses 0.24%
Total annual fund operating 0.71%/ // /
expenses
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</TABLE>
Example. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in
this fund with that of other mutual funds. Although your actual costs may be
higher or lower, the table shows how much you would pay if operating expenses
remain the same, you invest $10,000, earn a 5% annual return, and hold the
investment for the following periods and then redeem:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
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<S> <C> <C> <C>
$73 $227 $395 $853
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</TABLE>
Who manages the fund?
The fund is managed by T. Rowe Price Associates, Inc. Founded in 1937, T.
Rowe Price and its affiliates manage investments for individual and
institutional accounts. The company offers a comprehensive array of stock,
bond, and money market funds directly to the investing public.
Connice A. Bavely manages the fund day-to-day and has been chairman of its
Investment Advisory Committee since 2000. Ms. Bavely joined T. Rowe Price in
1998 as a senior portfolio manager. Prior to joining T. Rowe Price, Ms.
Bavely was a partner and senior portfolio manager at Atlantic Asset
Management Partners, LLC for six years.
Note: The following questions and answers about buying and selling shares and
services do not apply to employer-sponsored retirement plans. If you are a
participant in one of these plans, please call your plan's toll-free number for
additional information.
How can I purchase shares?
Fill out the New Account Form and return it with your check in the postpaid
envelope. The minimum initial purchase is $2,500 ($1,000 for IRAs and gifts
or transfers to minors). The minimum subsequent investment is $100 ($50 for
IRAs, gifts or transfers to minors, or Automatic Asset Builder). You can also
open an account by bank wire, by exchanging from another T. Rowe Price fund,
or by transferring assets from another financial institution.
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How can I sell shares?
You may redeem or sell any portion of your account on any business day.
Simply write to us or call. You can also access your account at any time via
Tele*Access /(R)/ or our Web site. We offer convenient exchange among our
entire family of domestic and international funds. Restrictions may apply in
special circumstances, and some redemption requests need a signature
guarantee.
When will I receive income and capital gain distributions?
The fund distributes income monthly and net capital gains, if any, at
year-end. For regular accounts, income and short-term gains are taxable at
ordinary income rates, and long-term gains are taxable at the capital gains
rate. Distributions are reinvested automatically in additional shares unless
you choose another option, such as receiving a check. Distributions paid to
IRAs and employer-sponsored retirement plans are automatically reinvested.
What services are available?
A wide range, including but not limited to:
. retirement plans for individuals and large and small businesses;
. automated information and transaction services by telephone or computer;
. electronic transfers between fund and bank accounts;
. automatic investing and automatic exchange;
. brokerage services; and
. asset manager accounts.
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FUND PROFILE
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T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, MD 21202
www.troweprice.com
LOGO
RPS F70-035
T. Rowe Price Investment Services, Inc., Distributor
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