Item 1. Report to Shareholders
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
May 31, 2004
Certified Annual Report
This report is certified under the Sarbanes-Oxley Act of 2002, which requires
that public companies, including mutual funds, affirm that the information
provided in their annual and semiannual shareholder reports fully and fairly
represents their financial position.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Annual Report
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 benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
[Graphic Omitted]
GNMA FUND
- --------------------------------------------------------------------------------
As of 5/31/04
GNMA Fund $19,188
Lipper GNMA Funds Average $18,464
Lipper GNMA GNMA
Funds Average Bond Fund
5/94 $ 10,000 $ 10,000
5/95 11,025 11,211
5/96 11,489 11,628
5/97 12,445 12,612
5/98 13,631 13,869
5/99 14,139 14,408
5/00 14,460 14,715
5/01 16,146 16,527
5/02 17,347 17,840
5/03 18,439 19,101
5/04 18,464 19,188
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
Periods Ended 5/31/04 1 Year 5 Years 10 Years
GNMA Fund 0.45% 5.90% 6.73%
Citigroup GNMA Index 1.58 6.29 7.18
Lipper GNMA Funds Average 0.22 5.47 6.31
Returns do not reflect taxes that the shareholder may pay on fund distributions
or the redemption of fund shares. Past performance cannot guarantee future
results.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Annual Report
Dear Shareholder,
Your fund had a positive return of 0.45% during the 12 months ended May 31,
2004, a challenging period for bonds. The fund's return lagged that of the
unmanaged Citigroup GNMA Index but outpaced the Lipper GNMA Funds Average of
similarly managed funds, as shown in the table on the preceding page. The
strengthening economy led to rising interest rates throughout the fund's fiscal
year, putting pressure on most segments of the fixed-income market.
Major Index Returns
- --------------------------------------------------------------------------------
Period Ended 5/31/04 12 Months
- --------------------------------------------------------------------------------
Lehman Brothers Treasury Index -2.64%
Lehman Brothers U.S. Aggregate Index -0.44
Lehman Brothers U.S. Credit Index -0.58
Lehman Brothers Mortgage-Backed
Securities Index 1.50
CS First Boston High Yield Index 13.25
Sources: Lehman Brothers and CS First Boston.
As you know, the fund seeks to provide high current income consistent with
maximum credit protection and moderate price fluctuation by investing at least
80% of net assets in mortgage-backed securities issued by the Government
National Mortgage Association (GNMA). GNMA guarantees the timely payment of
interest and principal on its securities, a guarantee backed by the U.S.
Treasury.
The Major Index Returns table shows how various quality bonds performed over the
fund's fiscal year. High-yield bonds, which tend to act more like equities than
bonds in an improving economy, far outpaced higher-quality bonds such as
Treasuries and higher-rated corporate securities over the 12-month period. In
fact, all fixed-income classes except for mortgage-backed bonds posted negative
returns during the fund's fiscal year.
The Interest Rate Levels chart reflects the pattern of bond yields during the
same period. Yields rose
[Graphic Omitted]
Interest Rate Levels
- --------------------------------------------------------------------------------
Current Coupon GNMA
10-Year Treasury Note
Current 10-Year
Coupon Treasury
GNMA Note
5/31/2003 4.32 3.37
4.51 3.51
5.64 4.41
8/03 5.61 4.46
4.99 3.94
5.28 4.29
11/03 5.36 4.33
5.24 4.25
5.17 4.13
2/04 4.98 3.97
4.90 3.84
5.56 4.51
5/04 5.71 4.65
in general before declining earlier this year, only to spike sharply higher in
April as the economy continued to grow and investors focused their attention on
the threat of higher inflation in the months ahead.
Portfolio Characteristics
- --------------------------------------------------------------------------------
Periods Ended 5/31/03 5/31/04
Price Per Share $ 9.89 $ 9.54
30-Day Standardized 3.41% 3.93%
Yield to Maturity
Weighted Average
Maturity (years) * 2.4 5.8
Weighted Average Quality ** AAA AAA
* Based on prepayment-adjusted life of GNMA securities.
** Based on T. Rowe Price research.
The Portfolio Characteristics table shows various portfolio details as of May
31, 2004, compared with one year earlier. The weighted average maturity of the
portfolio expanded sharply during the year, from 2.4 to 5.8 years, while the
quality of the portfolio's holdings remained stable at AAA. The fund's longer
duration versus the index hampered the fund's relative performance. On a
positive note, we overweighted 15-year GNMAs, which helped performance compared
with our Lipper peer group, as those maturities outperformed 30-year mortgages.
We thank you for your continued support.
Respectfully,
James S. Riepe
Chairman
June 18, 2004
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Annual Report
Financial Highlights For a share outstanding throughout each period
- --------------------------------------------------------------------------------
Year
Ended
5/31/04 5/31/03 5/31/02 5/31/01 5/31/00
NET ASSET VALUE
Beginning of period $ 9.89 $ 9.61 $ 9.40 $ 8.92 $ 9.33
Investment activities
Net investment
income (loss) 0.30 0.37 0.52 0.59 0.60
Net realized and
unrealized gain (loss) (0.26) 0.30 0.21 0.48 (0.41)
Total from
investment
activities 0.04 0.67 0.73 1.07 0.19
Distributions
Net investment
income (0.39) (0.39) (0.52) (0.59) (0.60)
NET ASSET VALUE
End of period $ 9.54 $ 9.89 $ 9.61 $ 9.40 $ 8.92
----------------------------------------------------
Ratios/Supplemental Data
Total return^ 0.45% 7.07% 7.95% 12.31% 2.13%
Ratio of total
expenses to
average net assets 0.69% 0.70% 0.69% 0.70% 0.71%
Ratio of net investment
income (loss)
to average
net assets 3.23% 3.68% 5.33% 6.39% 6.61%
Portfolio turnover
rate 302.1% 385.8% 145.2% 71.2% 63.8%
Net assets,
end of period
(in millions) $ 1,307 $ 1,466 $ 1,223 $ 1,043 $ 1,052
^ 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.
T. Rowe Price GNMA Fund
- -------------------------------------------------------------------------------
Certified Annual Report May 31, 2004
Portfolio of Investments (1) $ Par/Shares Value
- -------------------------------------------------------------------------------
(Amounts in 000s)
U.S. GOVERNMENT & AGENCY
MORTGAGE-BACKED SECURITIES 99.1%
U.S. Government Obligations 99.1%
Government National Mortgage Assn.
5.00%, 3/15/18 - 10/20/33 210,001 204,556
5.50%, 7/15/14 - 4/20/34 ++ 290,167 290,746
6.00%, 11/15/08 - 4/15/34 290,641 298,567
6.50%, 12/15/14 - 3/20/34 102,274 106,624
6.73%, 9/15/30 19,420 21,315
6.75%, 2/15/41 9,838 10,010
7.00%, 3/15/13 - 1/20/34 71,945 76,284
7.50%, 3/15/07 - 9/15/32 35,845 38,452
8.00%, 3/15/14 - 3/15/30 23,101 24,941
8.50%, 12/15/04 - 2/20/23 4,296 4,733
9.00%, 5/15/09 - 9/15/24 2,059 2,304
9.25%, 2/20/16 - 12/15/19 396 444
9.50%, 6/15/09 - 12/15/24 1,271 1,413
9.75%, 8/15/16 - 2/15/21 430 484
10.00%, 2/15/16 - 3/15/26 4,717 5,302
10.25%, 9/20/16 22 24
10.50%, 2/15/13 - 10/15/21 418 472
10.75%, 9/15/17 - 1/15/18 132 150
11.00%, 2/15/10 - 7/20/20 365 414
11.50%, 4/15/10 - 7/15/20 769 882
12.00%, 10/15/10 - 7/15/15 850 977
12.25%, 3/15/14 - 7/20/15 57 66
12.50%, 4/15/10 - 1/20/16 381 439
12.75%, 10/20/13 - 12/20/14 71 81
13.00%, 1/15/11 - 9/20/15 278 320
13.50%, 5/15/10 - 1/15/15 189 217
CMO
2.212%, 10/16/17 3,827 3,844
2.946%, 3/16/19 7,800 7,512
5.00%, 8/16/28 8,431 8,531
5.064%, 9/16/26 13,200 13,201
5.50%, 2/20 - 10/20/30 32,075 31,899
6.00%, 3/16 - 5/20/29 ++ 18,040 18,458
6.50%, 10/20/27 - 3/20/32 14,228 14,760
CMO, IO 6.50%, 1/20 - 8/20/30 2,282 56
CMO, Principal Only, 3/16/28 1,289 1,087
TBA
5.50%, 1/1/34 35,779 35,511
6.00%, 1/1/34 40,379 41,045
6.50%, 1/1/34 25,000 25,980
U.S. Department of Veteran Affairs
CMO
7.25%, 10/15/08 2,255 2,259
VR, 9.61%, 3/15/25 913 987
Total U.S. Government & Agency
Mortgage-Backed Securities
(Cost $1,300,947) 1,295,347
U.S. GOVERNMENT & AGENCY OBLIGATIONS
(EXCLUDING MORTGAGE-BACKED) 0.5%
U.S. Treasury Obligations 0.5%
U.S. Treasury Inflation-Indexed Notes,
1.875%, 7/15/13 6,886 6,850
Total U.S. Government & Agency Obligations
(excluding Mortgage-Backed) (Cost $6,867) 6,850
MONEY MARKET FUNDS 7.7%
T. Rowe Price Government Reserve
Investment Fund, 0.98% # + 100,524 100,524
Total Money Market Funds (Cost $100,524) 100,524
Total Investments in Securities
107.3% of Net Assets (Cost $1,408,338) $ 1,402,721
-----------
Futures Contracts
($ 000s)
Contract Unrealized
Expiration Value Gain (Loss)
------------ --------- -----------
Short, 400 U.S. Treasury 5 Year contracts,
$700 par of Government National
Mortgage Assn. pledged as initial margin 9/04 $ (43,269) $ (175)
Net payments (receipts) of variation
margin to date 319
Variation margin receivable (payable)
on open futures contracts $ 144
--------
(1) Denominated in U.S. dollar unless otherwise noted
# Seven-day yield
++ All or a portion of this security is pledged to cover margin
requirements on futures contracts at May 31, 2004.
+ Affiliated company - See Note 2.
CMO Collateralized Mortgage Obligation
IO Interest Only security for which the fund receives interest on
notional principal (par)
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
- --------------------------------------------------------------------------------
Certified Annual Report May 31, 2004
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
(Amounts in $000s except shares and per share amounts)
Assets
Investments in securities, at value
Affiliated companies (cost $100,524) $ 100,524
Other companies (cost $1,307,814) 1,302,197
Total investments in securities 1,402,721
Other assets 20,933
Total assets 1,423,654
Liabilities
Payable for investment securities purchased 114,780
Other liabilities 2,089
Total liabilities 116,869
NET ASSETS $ 1,306,785
------------
Net Assets Consist of:
Undistributed net investment income (loss) $ (4,688)
Undistributed net realized gain (loss) 6,440
Net unrealized gain (loss) (5,792)
Paid-in-capital applicable to 136,946,560 no par
value shares of beneficial interest outstanding;
unlimited number of shares authorized 1,310,825
NET ASSETS $ 1,306,785
------------
NET ASSET VALUE PER SHARE $ 9.54
------------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Annual Report
Statement of Operations
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
5/31/04
Investment Income (Loss)
Income
Interest $ 51,114
Dividend 2,326
Total income 53,440
Expenses
Investment management 6,366
Shareholder servicing 2,410
Custody and accounting 410
Registration 85
Prospectus and shareholder reports 79
Legal and audit 19
Trustees 8
Miscellaneous 11
Total expenses 9,388
Net investment income (loss) 44,052
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 882
Futures (375)
Net realized gain (loss) 507
Change in net unrealized gain (loss)
Securities (38,458)
Futures (175)
Change in net unrealized gain (loss) (38,633)
Net realized and unrealized gain (loss) (38,126)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 5,926
----------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Annual Report
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
5/31/04 5/31/03
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 44,052 $ 50,899
Net realized gain (loss) 507 39,455
Change in net unrealized gain (loss) (38,633) 924
Increase (decrease) in net assets from operations 5,926 91,278
Distributions to shareholders
Net investment income (55,362) (55,051)
Capital share transactions *
Shares sold 220,259 492,751
Distributions reinvested 49,117 48,335
Shares redeemed (379,489) (333,836)
Increase (decrease) in net assets from capital
share transactions (110,113) 207,250
Net Assets
Increase (decrease) during period (159,549) 243,477
Beginning of period 1,466,334 1,222,857
End of period $ 1,306,785 $ 1,466,334
----------- -----------
(Including undistributed net investment income of
($4,688) at 5/31/04 and ($4,444) at 5/31/03)
*Share information
Shares sold 22,594 50,166
Distributions reinvested 5,061 4,909
Shares redeemed (39,032) (33,935)
Increase (decrease) in shares outstanding (11,377) 21,140
The accompanying notes are an integral part of these financial statements.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Annual Report May 31, 2004
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 (the 1940 Act) as a diversified, open-end management investment
company and commenced operations on November 26, 1985. 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.
The accompanying financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of estimates made by fund management.
Valuation
The fund values its investments and computes its net asset value per share at
the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day
that the NYSE is open for business. Debt securities are generally traded in the
over-the-counter market. Securities with original maturities of one year or more
are valued at prices 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 bid-side money
market yields.
Investments in mutual funds are valued at the mutual fund's closing net asset
value per share on the day of valuation. Financial futures contracts are valued
at closing settlement prices.
Other investments and those 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 the T. Rowe Price Valuation Committee,
established by the fund's Board of Trustees.
Credits
The fund earns credits on temporarily uninvested cash balances at the custodian
that reduce the fund's custody charges. Custody expense in the accompanying
financial statements is presented before reduction for credits.
Investment Transactions, Investment Income, and Distributions
Income and expenses are recorded on the accrual basis. Premiums and discounts on
debt securities are amortized for financial reporting purposes. Dividends
received
from mutual fund investments are reflected as dividend income; capital gain
distributions are reflected as realized gain/loss. Dividend income and capital
gain distributions are recorded on the ex-dividend date. Investment transactions
are accounted for on the trade date. Realized gains and losses are reported on
the identified cost basis. Payments ("variation margin") made or received to
settle the daily fluctuations in the value of futures contracts are recorded as
unrealized gains or losses until the contracts are closed. Unrealized gains and
losses on futures contracts are included in other assets and other liabilities,
respectively, and in the change in net unrealized gain or loss in the
accompanying financial statements. Distributions to shareholders are recorded on
the ex-dividend date. Income distributions are declared on a daily basis and
paid monthly. Capital gain distributions, if any, are declared and paid by the
fund, typically on an annual basis.
Other
In the normal course of business, the fund enters into contracts that provide
general indemnifications. The fund's maximum exposure under these arrangements
is dependent on claims that may be made against the fund in the future and,
therefore, cannot be estimated; however, based on experience, the risk of
material loss from such claims is considered remote.
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.
Futures Contracts
During the year ended May 31, 2004, the fund was a party to futures contracts,
which provide for the future sale by one party and purchase by another of a
specified amount of a specific financial instrument at an agreed upon price,
date, time, and place. Risks arise from possible illiquidity of the futures
market and from movements in security values and/or interest rates.
Repurchase Agreements
All repurchase agreements are fully collateralized by U.S. government
securities. Collateral is in the possession of the fund's custodian or, for
tri-party agreements, the custodian designated by the agreement. Collateral is
evaluated daily to ensure that its market value exceeds the delivery value of
the repurchase agreements at maturity. Although risk is mitigated by the
collateral, the fund could experience a delay in recovering its value and a
possible loss of income or value if the counter-party fails to perform in
accordance with the terms of the agreement.
Affiliated Companies
The fund may invest in certain securities that are considered affiliated
companies. As defined by the 1940 Act, an affiliated company is one in which the
fund owns 5% or more of the outstanding voting securities. At May 31, 2004, the
fund's investment in the T. Rowe Price Government Reserve Investment Fund was
its only affiliated holding and represented 7.2% of the value of the fund's
investments in securities.
Other
Purchases and sales of U.S. government securities aggregated $4,154,270,000 and
$4,303,117,000, respectively, for the year ended May 31, 2004.
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 under Subchapter M of the
Internal Revenue Code and distribute to shareholders all of its taxable income
and gains. Federal income tax regulations differ from generally accepted
accounting principles; therefore, distributions determined in accordance with
tax regulations may differ significantly in amount or character from net
investment income and realized gains for financial reporting purposes. Financial
reporting records are adjusted for permanent book/tax differences to reflect tax
character. Financial records are not adjusted for temporary differences.
Distributions during the year ended May 31, 2004 totaled $55,362,000 and were
characterized as ordinary income for tax purposes. At May 31, 2004, the
tax-basis components of net assets were as follows:
- --------------------------------------------------------------------------------
Unrealized appreciation $ 18,805,000
Unrealized depreciation (28,746,000)
Net unrealized appreciation (depreciation) (9,941,000)
Undistributed ordinary income 14,120,000
Capital loss carryforwards (8,219,000)
Paid-in capital 1,310,825,000
Net assets $ 1,306,785,000
----------------
Pursuant to federal income tax regulations applicable to investment companies,
the fund has elected to treat net capital losses realized between November 1 and
May 31 of each year as occurring on the first day of the following tax year.
Consequently, $3,595,000 of realized losses reflected in the accompanying
financial statements will not be recognized for tax purposes until 2005. The
fund intends to retain realized gains to the extent of available capital loss
carryforwards for federal income tax purposes. As of May 31, 2004, the fund had
$8,219,000 of capital loss carryforwards that expire in fiscal 2012.
For the year ended May 31, 2004, the fund recorded the following permanent
reclassifications to reflect tax character. Reclassifications between income and
gain relate primarily to the character of paydown gains and losses on
asset-backed securities. Results of operations and net assets were not affected
by these reclassifications.
- --------------------------------------------------------------------------------
Undistributed net investment income $ 11,066,000
Undistributed net realized gain (11,066,000)
At May 31, 2004, the cost of investments for federal income tax purposes was
$1,412,487,000.
NOTE 4 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price
Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The
investment management agreement between the fund and the manager provides for an
annual investment management fee, which is computed daily and paid monthly. The
fee consists of an individual fund fee, equal to 0.15% of the fund's average
daily net assets, and the fund's pro-rata share of a group fee. The group fee is
calculated based on the combined net assets of certain mutual funds sponsored by
Price Associates (the group) applied to a graduated fee schedule, with rates
ranging from 0.48% for the first $1 billion of assets to 0.295% for assets in
excess of $120 billion. The fund's portion of the group fee is determined by the
ratio of its average daily net assets to those of the group. At May 31, 2004,
the effective annual group fee rate was 0.32%, and investment management fee
payable totaled $515,000.
In addition, the fund has entered into service agreements with Price Associates
and two wholly owned subsidiaries of Price Associates (collectively, Price).
Price Associates computes the daily share price and maintains the financial
records of the fund. T. Rowe Price Services, Inc., provides shareholder and
administrative
services in its capacity as the fund's transfer and dividend disbursing agent.
T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and
recordkeeping services for certain retirement accounts invested in the fund.
Expenses incurred pursuant to these service agreements totaled $1,080,000 for
the year ended May 31, 2004, of which $91,000 was payable at period-end.
The fund is also one of several mutual funds sponsored by Price Associates
(underlying Price funds) in which the T. Rowe Price Spectrum Funds (Spectrum
Funds) may invest. The Spectrum Funds do not invest in the underlying Price
funds for the purpose of exercising management or control. Pursuant to a special
servicing agreement, expenses associated with the operation of the Spectrum
Funds are borne by each underlying Price fund to the extent of estimated savings
to it and in proportion to the average daily value of its shares owned by the
Spectrum Funds. Expenses allocated under this agreement are reflected as
shareholder servicing expense in the accompanying financial statements. For the
year ended May 31, 2004, the fund was allocated $973,000 of Spectrum Funds'
expenses, of which $771,000 related to services provided by Price and $77,000
was payable at period-end. At May 31, 2004, approximately 37% of the outstanding
shares of the fund were held by the Spectrum Funds.
The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe
Price Government Reserve Investment Fund (collectively, the Reserve Funds),
open-end management investment companies managed by Price Associates. The
Reserve Funds are offered as cash management options to mutual funds, trusts,
and other accounts managed by Price Associates and/or its affiliates, and are
not available for direct purchase by members of the public. The Reserve Funds
pay no investment management fees. During the year ended May 31, 2004, dividend
income from the Reserve Funds totaled $2,326,000.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Annual Report
Report of Independent Registered Public Accounting Firm
- --------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of
T. Rowe Price GNMA Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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, 2004, 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 accounting principles generally accepted in the United States of
America. 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 the standards of the Public Company Accounting Oversight Board
(United States), 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, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
June 22, 2004
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Annual Report
Information on Proxy Voting
- --------------------------------------------------------------------------------
A description of the policies and procedures that the T. Rowe Price GNMA Fund
uses to determine how to vote proxies relating to portfolio securities is
available, without charge, upon request by calling 1-800-225-5132. It also
appears in the fund's Statement of Additional Information (Form 485B), which can
be found on the SEC's Web site, www.sec.gov.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Annual Report
About the Fund's Trustees and Officers
Your fund is governed by a Board of Trustees that meets regularly to review
investments, performance, expenses, and other business matters, and is
responsible for protecting the interests of shareholders. The majority of the
fund's trustees are independent of T. Rowe Price Associates, Inc. (T. Rowe
Price); "inside" trustees are officers of T. Rowe Price. The Board of Trustees
elects the fund's officers, who are listed in the final table. The business
address of each trustee and officer is 100 East Pratt Street, Baltimore, MD
21202. The Statement of Additional Information includes additional information
about the fund trustees and is available without charge by calling a T. Rowe
Price representative at 1-800-225-5132.
Independent Trustees
Name Principal Occupation(s) During Past 5 Years and
(Year of Birth) Directorships of Other Public Companies
Year Elected*
Anthony W. Deering Director, Chairman of the Board, and Chief
(1945) Executive Officer, The Rouse Company, real
1985 estate developers; Director, Mercantile Bank
(4/03 to present)
Donald W. Dick, Jr. Principal, EuroCapital Advisors, LLC, an
(1943) acquisition and management advisory firm
2001
David K. Fagin Director, Golden Star Resources Ltd., Canyon
(1938) Resources Corp. (5/00 to present), and Pacific
2001 Rim Mining Corp. (2/02 to present); Chairman
and President, Nye Corp.
Karen N. Horn Managing Director and President, Global Private
(1943) Client Services, Marsh Inc. (1999-2003); Managing
2003 Director and Head of International Private
Banking, Bankers Trust (1996-1999); Director,
Eli Lilly and Company and Georgia Pacific
F. Pierce Linaweaver President, F. Pierce Linaweaver & Associates,
(1934) Inc., consulting environmental and civil engineers
1985
John G. Schreiber Owner/President, Centaur Capital Partners, Inc.,
(1946) a real estate investment company; Partner,
1992 Blackstone Real Estate Advisors, L.P.; Director,
AMLI Residential Properties Trust and The
Rouse Company, real estate developers
* Each independent trustee oversees 111 T. Rowe Price portfolios and serves
until retirement, resignation, or election of a successor.
Inside Trustees
Name
(Year of Birth)
Year Elected *
[Number of T. Rowe Price Principal Occupation(s) During Past 5 Years
Portfolios Overseen] and Directorships of Other Public Companies
Mary J. Miller, CFA Vice President, T. Rowe Price and
(1955) T. Rowe Price Group, Inc.
2004
[37]
James S. Riepe Director and Vice President, T. Rowe Price;
(1943) Vice Chairman of the Board, Director, and
1985 Vice President, T. Rowe Price Group, Inc.;
[111] Chairman of the Board and Director, T. Rowe Price
Global Asset Management Limited, T. Rowe Price
Global Investment Services Limited, T. Rowe Price
Investment Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe
Price Services, Inc.; Chairman of the Board,
Director, President, and Trust Officer, T. Rowe
Price Trust Company; Director, T. Rowe Price
International, Inc.; Director, The Nasdaq
Stock Market, Inc.; Chairman of the Board,
GNMA Fund
* Each inside trustee serves until retirement, resignation, or election of a
successor.
Officers
Name (Year of Birth)
Title and Fund(s) Served Principal Occupation(s)
Connice A. Bavely, CFA (1951) Vice President, T. Rowe Price and
President, GNMA Fund T. Rowe Price Group, Inc.
Stephen V. Booth, CPA (1961) Vice President, T. Rowe Price, T. Rowe
Vice President, GNMA Fund Price Group, Inc., and T. Rowe Price
Trust Company
Joseph A. Carrier (1960) Vice President, T. Rowe Price, T. Rowe
Treasurer, GNMA Fund Price Group, Inc., T. Rowe Price
Investment Services, Inc., and T. Rowe
Price Trust Company
Roger L. Fiery III, CPA (1959) Vice President, T. Rowe Price, T. Rowe
Vice President, GNMA Fund Price Group, Inc., T. Rowe Price
International, Inc., and T. Rowe Price
Trust Company
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
Officers (continued)
Name (Year of Birth)
Title and Fund(s) Served Principal Occupation(s)
Gregory S. Golczewski (1966) Vice President, T. Rowe Price and
Vice President, GNMA Fund T. Rowe Price Trust Company
Henry H. Hopkins (1942) Director and Vice President, T. Rowe
Vice President, GNMA Fund Price Investment Services, Inc., T. Rowe
Price Services, Inc., and T. Rowe Price
Trust Company; Vice President, T. Rowe
Price, T. Rowe Price Group, Inc.,
T. Rowe Price International, Inc., and
T. Rowe Price Retirement Plan
Services, Inc.
Keir R. Joyce (1972) Assistant Vice President, T. Rowe Price
Assistant Vice President, GNMA Fund
Alan D. Levenson, PhD (1958) Vice President, T. Rowe Price and
Vice President, GNMA Fund T. Rowe Price Group, Inc.
Patricia B. Lippert (1953) Assistant Vice President, T. Rowe Price
Secretary, GNMA Fund and T. Rowe Price Investment
Services, Inc.
Edmund M. Notzon III, PhD, CFA (1945) Vice President, T. Rowe Price, T. Rowe
Vice President, GNMA Fund Price Group, Inc., T. Rowe Price
Investment Services, Inc., and T. Rowe
Price Trust Company
John D. Wells (1960) Vice President, T. Rowe Price
Vice President, GNMA Fund and T. Rowe Price Group, Inc.
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
Item 2. Code of Ethics.
As of the end of the period covered by this report, the registrant has adopted a
code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A copy of this code of
ethics is filed as an exhibit to this Form N-CSR. No substantive amendments were
approved or waivers were granted to this code of ethics during the period
covered by this report.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Directors/Trustees has determined that Mr. David K.
Fagin qualifies as an audit committee financial expert, as defined in Item 3 of
Form N-CSR. Mr. Fagin is considered independent for purposes of Item 3 of Form
N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) - (d) Aggregate fees billed to the registrant for the last two fiscal years
for professional services rendered by the registrant's principal accountant were
as follows:
2004 2003
Audit Fees $10,069 $10,012
Audit-Related Fees 916 --
Tax Fees 2,783 2,696
All Other Fees 124 --
Audit fees include amounts related to the audit of the registrant's annual
financial statements and services normally provided by the accountant in
connection with statutory and regulatory filings. Audit-related fees include
amounts reasonably related to the performance of the audit of the registrant's
financial statements, specifically the issuance of a report on internal
controls. Tax fees include amounts related to tax compliance, tax planning, and
tax advice. Other fees include the registrant's pro-rata share of amounts for
agreed-upon procedures in conjunction with service contract approvals by the
registrant's Board of Directors/Trustees.
(e)(1) The registrant's audit committee has adopted a policy whereby audit and
non-audit services performed by the registrant's principal accountant for the
registrant, its investment adviser, and any entity controlling, controlled by,
or under common control with the investment adviser that provides ongoing
services to the registrant require pre-approval in advance at regularly
scheduled audit committee meetings. If such a service is required between
regularly scheduled audit committee meetings, pre-approval may be authorized by
one audit committee member with ratification at the next scheduled audit
committee meeting. Waiver of pre-approval for audit or non-audit services
requiring fees of a de minimis amount is not permitted.
(2) No services included in (b) - (d) above were approved pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50 percent of the hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees.
(g) The aggregate fees billed for the most recent fiscal year and the preceding
fiscal year by the registrant's principal accountant for non-audit services
rendered to the registrant, its investment adviser, and any entity controlling,
controlled by, or under common control with the investment adviser that provides
ongoing services to the registrant were $819,000 and $671,000 respectively, and
were less than the aggregate fees billed for those same periods by the
registrant's principal accountant for audit services rendered to the T. Rowe
Price Funds.
(h) All non-audit services rendered in (g) above were pre-approved by the
registrant's audit committee. Accordingly, these services were considered by the
registrant's audit committee in maintaining the principal accountant's
independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable. The complete schedule of investments is included in Item 1 of
this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 10. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial officer
have evaluated the registrant's disclosure controls and procedures within 90
days of this filing and have concluded that the registrant's disclosure controls
and procedures were effective, as of that date, in ensuring that information
required to be disclosed by the registrant in this Form N-CSR was recorded,
processed, summarized, and reported timely.
(b) The registrant's principal executive officer and principal financial officer
are aware of no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 11. Exhibits.
(a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is
attached.
(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of
1940, are attached.
(3) Written solicitation to repurchase securities issued by closed-end
companies: not applicable.
(b) A certification by the registrant's principal executive officer and
principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940,
is attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
T. Rowe Price GNMA Fund
By /s/ James S. Riepe
James S. Riepe
Principal Executive Officer
Date July 16, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ James S. Riepe
James S. Riepe
Principal Executive Officer
Date July 16, 2004
By /s/ Joseph A. Carrier
Joseph A. Carrier
Principal Financial Officer
Date July 16, 2004