N-CSR 1 nif.txt T. ROWE PRICE NEW INCOME FUND 5-31-03 Item 1. Report to Shareholders -------------------------------------------------------------------------------- T. Rowe Price New Income Fund Certified Shareholder Report and Financials T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials 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. [LINE GRAPH OMITTED] NEW INCOME FUND -------------------------------------------------------------------------------- As of 5/31/03 Lipper Lehman Average of New Income Brothers U.S. Corporate Bond Fund Aggregate Index Funds A-Rated 5/31/93 10000 10000 10000 5/31/94 10140 10071 10040 5/31/95 11268 11227 11176 5/31/96 11684 11720 11588 5/31/97 12583 12694 12518 5/31/98 13947 14080 13972 5/31/99 14089 14693 14319 5/31/00 14249 15002 14320 5/31/01 16036 16970 16112 5/31/02 17267 18345 17207 5/31/03 19085 20469 19239 Note: Performance for the Advisor Class and R Class will vary due to their differing fee structures. See return table below. Average Annual Compound Total Return -------------------------------------------------------------------------------- Periods Ended Since Inception 5/31/03 1 Year 5 Years 10 Years Inception Date -------------------------------------------------------------------------------- New Income Fund 10.52% 6.47% 6.68% -- -- New Income Fund- Advisor Class -- -- -- 7.02% 9/30/02 New Income Fund-R Class -- -- -- 6.84 9/30/02 Lehman Brothers U.S. Aggregate Index 11.58 7.77 7.43 5.77* -- Lipper Average of Corporate Bond Funds A-Rated 11.39 6.46 6.74 6.74* -- *Benchmark performance data are from 9/30/02 to 5/31/03. 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 New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials Dear Shareholder, We are pleased that the New Income Fund, New Income Fund-Advisor Class, and New Income Fund-R Class generated solid returns during the period ended May 31, 2003. As shown in the table on the preceding page, we underperformed the unmanaged Lehman Brothers U.S. Aggregate Index and the Lipper Average of Corporate Bond Funds A-Rated during the period. [LINE GRAPH OMITTED] Interest Rate Levels -------------------------------------------------------------------------------- Lehman Bros. Baa U.S. 10-Year Credit Index Treasury Note 5/31/02 7.16 5.04 7.35 4.8 7.59 4.46 8/02 7.09 4.14 6.88 3.59 6.98 3.89 11/02 6.56 4.21 6.04 3.81 6.02 3.96 2/03 5.68 3.69 5.62 3.8 5.28 3.84 5/31/03 4.77 3.37 As you know, the fund seeks to provide the highest level of income consistent with the preservation of capital over time by investing in a diversified portfolio of investment-grade (BBB rated and higher) bonds. The portfolio's holdings include U.S. Treasuries, agencies, mortgages, and corporate bonds. The Portfolio Characteristics table shows various portfolio characteristics as of May 31, 2003, compared with one year earlier. The portfolio's weighted average maturity fell to 6.3 years from 7.6 years, and the fund's weighted average quality was unchanged from one year ago at AA+. Portfolio Characteristics -------------------------------------------------------------------------------- Periods Ended 5/31/02 5/31/03 -------------------------------------------------------------------------------- New Income Fund Share Price $ 8.70 $ 9.21 30-Day Standardized Yield to Maturity 5.08% 3.13% New Income Fund-Advisor Class Share Price -- $ 9.21 30-Day Standardized Yield to Maturity -- 2.99% New Income Fund-R Class Share Price -- $ 9.21 30-Day Standardized Yield to Maturity -- 2.73% Weighted Average Maturity (years) 7.6 6.3 Weighted Average Quality * AA+ AA+ * Based on T. Rowe Price research. Yields will vary and are not guaranteed. Major Index Returns -------------------------------------------------------------------------------- Period Ended 5/31/03 12 Months -------------------------------------------------------------------------------- Lehman Brothers U.S. Treasury Securities Index 14.22% Lehman Brothers U.S. Aggregate Index 11.58 Lehman Brothers U.S. Credit Index 16.06 Lehman Brothers Mortgage-Backed Securities Index 6.42 Lehman Brothers Baa U.S. Credit Index 17.03 Source: Lehman Brothers. The Major Index Returns table shows how various bond indexes performed over the fund's fiscal year. Investment-grade corporate bonds performed better than Treasuries and mortgage-backed securities-the Baa segment of the investment-grade market performed best-over the 12-month period. As shown in the Quality Diversification chart, more than 80% of the portfolio was invested in bonds rated A or higher. [PIE GRAPH OMITTED] Quality diversification -------------------------------------------------------------------------------- AAA Rated 58% AA Rated 14% A Rated 14% BBB Rated 14% Based on T. Rowe Price research. We thank you for your continued support. Respectfully submitted, James S. Riepe Chairman June 9, 2003 T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials Financial Highlights For a share outstanding throughout each period -------------------------------------------------------------------------------- New Income shares Year Ended 5/31/03 5/31/02 5/31/01 5/31/00 5/31/99 NET ASSET VALUE Beginning of period $ 8.70 $ 8.53 $ 8.07 $ 8.50 $ 9.09 Investment activities Net investment income (loss) 0.37 0.47 0.53 0.52 0.54 Net realized and unrealized gain (loss) 0.52 0.17 0.46 (0.43) (0.45) Total from investment activities 0.89 0.64 0.99 0.09 0.09 Distributions Net investment income (0.38) (0.47) (0.53) (0.52) (0.54) Net realized gain -- -- -- -- (0.14) Total distributions (0.38) (0.47) (0.53) (0.52) (0.68) NET ASSET VALUE End of period $ 9.21 $ 8.70 $ 8.53 $ 8.07 $ 8.50 ----------------------------------------------------------------- Ratios/Supplemental Data Total return^ 10.52% 7.68% 12.54% 1.13% 1.02% Ratio of total expenses to average net assets 0.74% 0.72% 0.73% 0.73% 0.72% Ratio of net investment income (loss) to average net assets 4.23% 5.38% 6.30% 6.32% 6.16% Portfolio turnover rate 221.2% 222% 112.1% 83.6% 94.3% Net assets, end of period (in millions) $ 2,266 $ 1,863 $ 1,684 $ 1,633 $ 1,942 ^ 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 New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials Financial Highlights For a share outstanding throughout each period -------------------------------------------------------------------------------- New Income-Advisor class shares 9/30/02 Through 5/31/03 NET ASSET VALUE Beginning of period $ 8.84 Investment activities Net investment income (loss) 0.23* Net realized and unrealized gain (loss) 0.38 Total from investment activities 0.61 Distributions Net investment income (0.24) NET ASSET VALUE End of period $ 9.21 ---------- Ratios/Supplemental Data Total return^ 7.02%* Ratio of total expenses to average net assets 0.90%!* Ratio of net investment income (loss) to average net assets 2.61%!* Portfolio turnover rate 221.2%! Net assets, end of period (in thousands) $ 107 * Excludes expenses in excess of a 0.90% contractual expense limitation in effect through 9/30/04. ^ 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 accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials Financial Highlights For a share outstanding throughout each period -------------------------------------------------------------------------------- New Income-R class shares 9/30/02 Through 5/31/03 NET ASSET VALUE Beginning of period $ 8.84 Investment activities Net investment income (loss) 0.22* Net realized and unrealized gain (loss) 0.38 Total from investment activities 0.60 Distributions Net investment income (0.23) NET ASSET VALUE End of period $ 9.21 ---------- Ratios/Supplemental Data Total return^ 6.84%* Ratio of total expenses to average net assets 1.15%!* Ratio of net investment income (loss) to average net assets 2.32%!* Portfolio turnover rate 221.2%! Net assets, end of period (in thousands) $ 321 * Excludes expenses in excess of a 1.15% contractual expense limitation in effect through 9/30/04. ^ 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 accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials May 31, 2003 Portfolio of Investments Par/Shares Value -------------------------------------------------------------------------------- In thousands CORPORATE BONDS AND NOTES 24.9% Aerospace & Defense 0.4% Boeing, 5.125%, 2/15/13 $ 3,075 $ 3,212 Lockheed Martin, 7.25%, 5/15/06 5,450 6,247 9,459 Automobiles and Related 0.7% DaimlerChrysler, 7.30%, 1/15/12 2,740 3,220 General Motors Acceptance Corp. 5.85%, 1/14/09 5,800 5,899 6.125%, 8/28/07 5,595 5,850 14,969 Banking 2.0% Bank of America, 4.875%, 9/15/12 8,035 8,504 Bank of New York, 2.20%, 5/12/06 4,150 4,162 Bank One, 5.25%, 1/30/13 5,300 5,737 BB&T, 6.50%, 8/1/11 2,000 2,340 Citigroup 3.50%, 2/1/08 5,230 5,385 5.625%, 8/27/12 7,300 8,129 First Union, 6.40%, 4/1/08 2,215 2,547 Sovereign Bank, 5.125%, 3/15/13 2,195 2,274 Washington Mutual, 5.50%, 1/15/13 5,000 5,467 44,545 Beverages 0.7% Bottling Group, 144A, 4.625%, 11/15/12 4,675 4,921 Coca Cola Enterprises, 6.125%, 8/15/11 4,500 5,216 Diageo, 3.50%, 11/19/07 4,700 4,881 15,018 Broadcasting 0.2% AOL Time Warner, 7.625%, 4/15/31 4,415 5,137 5,137 Cable Operators 0.9% Clear Channel Communications, 4.625%, 1/15/08 8,300 8,703 Comcast 5.50%, 3/15/11 1,500 1,602 5.85%, 1/15/10 8,450 9,286 19,591 Computer Service & Software 0.2% IBM, 4.25%, 9/15/09 $ 5,155 $ 5,492 5,492 Consumer Products 0.2% Masco, 5.875%, 7/15/12 5,190 5,771 5,771 Container 0.1% Sealed Air, 144A, 5.375%, 4/15/08 3,200 3,367 3,367 Diversified Chemicals 0.2% Potash Corp./Saskatchewan, 4.875%, 3/1/13 4,445 4,592 4,592 Electric Utilities 3.8% American Electric Power, Series C, 5.375%, 3/15/10 3,095 3,312 Appalachian Power, Series E, 4.80%, 6/15/05 5,115 5,391 Black Hills, 6.50%, 5/15/13 2,640 2,669 Cincinnati Gas & Electric, 5.70%, 9/15/12 4,025 4,452 ComEd Financing III, 6.35%, 3/15/33 2,100 2,162 Consolidated Edison, 4.875%, 2/1/13 3,000 3,188 Consumers Energy, Series A, 144A, 4.25%, 4/15/08 2,145 2,233 DPL, 6.875%, 9/1/11 2,000 2,180 Entergy Gulf States, 144A, 5.20%, 12/3/07 4,675 4,893 FirstEnergy, Series C, 7.375%, 11/15/31 4,470 5,061 Mirant Americas Generation, 8.30%, 5/1/11 1,750 1,111 NiSource Finance, 7.625%, 11/15/05 3,990 4,430 Oncor Electric Delivery, 7.00%, 9/1/22 5,000 5,738 Pinnacle West Capital, 6.40%, 4/1/06 4,165 4,491 Potomac Electric Power, 3.75%, 2/15/06 4,125 4,264 PPL Energy, 6.40%, 11/1/11 4,870 5,479 PSEG Power 6.875%, 4/15/06 1,930 2,153 8.625%, 4/15/31 2,605 3,497 Public Service Company of Colorado, 7.875%, 10/1/12 5,000 6,360 Sempra Energy, 6.00%, 2/1/13 4,780 5,320 Southern Power, 6.25%, 7/15/12 3,565 4,101 TXU Energy, 144A, 7.00%, 3/15/13 3,120 3,482 85,967 Energy 0.5% Noram Energy, 6.50%, 2/1/08 $ 2,247 $ 2,426 PDVSA Finance, 6.80%, 11/15/08 4,705 4,117 YPF Sociedad Anonima, 10.00%, 11/2/28 4,660 5,173 11,716 Entertainment and Leisure 0.1% Viacom, 5.625%, 8/15/12 2,805 3,164 3,164 Exploration and Production 0.3% Canadian Natural Resources, 7.20%, 1/15/32 5,200 6,589 6,589 Finance and Credit 2.6% American Express, 3.00%, 5/16/08 3,455 3,481 CIT Group, 7.75%, 4/2/12 6,805 8,105 Colonial Bank, 9.375%, 6/1/11 3,980 4,630 Countrywide Home Loans, 5.50%, 2/1/07 3,860 4,257 GE Capital 3.50%, 5/1/08 5,860 6,015 6.00%, 6/15/12 9,800 11,129 Household Finance 5.75%, 1/30/07 2,925 3,233 6.375%, 11/27/12 1,550 1,764 International Lease Finance, 6.375%, 3/15/09 5,520 6,177 Northern Trust, 4.60%, 2/1/13 3,075 3,216 Wells Fargo Financial, 5.50%, 8/1/12 7,265 8,134 60,141 Food Processing 0.9% Kellogg, Series B, 6.60%, 4/1/11 5,000 5,895 McCormick, 6.40%, 2/1/06 7,300 7,996 Unilever, 5.90%, 11/15/32 5,035 5,634 19,525 Food/Tobacco 0.3% UST, 6.625%, 7/15/12 5,400 6,315 6,315 Gas & Gas Transmission 0.3% Kinder Morgan, 6.50%, 9/1/12 5,000 5,773 5,773 Insurance 2.6% AIG Sunamerica Global Financing XII, 144A, 5.30%, 5/30/07 $ 6,070 $ 6,676 Allstate Financial Global Funding, 144A, 5.25%, 2/1/07 5,200 5,682 CIGNA, 7.40%, 5/15/07 2,000 2,306 Fund American Companies, 5.875%, 5/15/13 2,185 2,274 Jefferson Pilot Capital Trust A, 144A, 8.14%, 1/15/46 3,000 3,700 Marsh & McLennan, 3.625%, 2/15/08 4,720 4,910 Nationwide Financial Services, 5.90%, 7/1/12 6,535 7,128 Principal Life Global, 144A, 5.25%, 1/15/13 4,900 5,207 Prudential, 3.75%, 5/1/08 4,520 4,658 Sun Life of Canada U.S. Capital Trust, 144A, 8.526%, 5/29/49 7,000 8,651 XL Capital Finance, 6.50%, 1/15/12 6,570 7,519 58,711 Investment Dealers 1.3% Credit Suisse First Boston USA, 6.50%, 1/15/12 4,700 5,314 Franklin Resources, 3.70%, 4/15/08 1,650 1,689 Goldman Sachs Group 4.125%, 1/15/08 1,400 1,474 6.125%, 2/15/33 2,065 2,255 6.60%, 1/15/12 5,000 5,808 Lehman Brothers, 4.00%, 1/22/08 3,045 3,190 Morgan Stanley 3.625%, 4/1/08 3,165 3,271 6.60%, 4/1/12 4,900 5,712 28,713 Long Distance 0.4% Sprint, 6.375%, 5/1/09 8,300 8,750 8,750 Manufacturing 0.5% Caterpillar Financial Services, 2.59%, 7/15/06 4,000 4,052 John Deere Capital, 7.00%, 3/15/12 5,250 6,311 10,363 Media and Communications 0.5% Cox Enterprises, 144A, 4.375%, 5/1/08 5,500 5,689 News America 6.75%, 1/9/38 1,705 1,934 7.625%, 11/30/28 2,160 2,611 144A, 6.55%, 3/15/33 1,260 1,353 11,587 Metals and Mining 0.6% BHP Billiton Finance, 4.80%, 4/15/13 $ 4,240 $ 4,471 Inco, 7.75%, 5/15/12 5,100 6,163 WMC Finance USA, 144A, 5.125%, 5/15/13 2,975 3,098 13,732 Paper and Paper Products 0.6% Celulosa Arauco Y Constitucion, 8.625%, 8/15/10 7,500 8,950 Weyerhaeuser, 5.95%, 11/1/08 5,000 5,573 14,523 Petroleum 0.9% ConocoPhillips, 5.90%, 10/15/32 4,560 5,013 Devon Financing, 6.875%, 9/30/11 4,035 4,773 Occidental Petroleum, 4.25%, 3/15/10 2,125 2,215 Pemex Project Funding Master Trust 7.375%, 12/15/14 4,350 4,823 144A, 7.375%, 12/15/14 1,620 1,791 PF Export Receivables Master Trust, Series A 144A, 6.436%, 6/1/15 2,940 2,969 21,584 Railroads 0.7% Canadian National Railway, 4.40%, 3/15/13 3,980 4,075 Norfolk Southern, 6.00%, 4/30/08 6,175 7,006 Union Pacific, 6.50%, 4/15/12 5,020 5,882 16,963 Savings and Loan 0.2% Webster Capital Trust I, 144A, 9.36%, 1/29/27 3,200 3,691 3,691 Services 0.2% Waste Management, 6.375%, 11/15/12 4,000 4,555 4,555 Specialty Chemicals 0.4% Chevron Phillips Chemical, 5.375%, 6/15/07 3,935 4,237 Monsanto, 4.00%, 5/15/08 4,140 4,295 8,532 Specialty Retailers 0.2% Lowes, 6.50%, 3/15/29 4,000 4,662 4,662 Telephones 1.1% British Telecommunications, VR, 1.00%, 12/15/10 $ 4,300 $ 5,401 France Telecom, VR, 9.25%, 3/1/11 2,100 2,619 Royal KPN, 8.00%, 10/1/10 5,000 6,172 Verizon Florida, 6.125%, 1/15/13 3,080 3,534 Verizon Global Funding 7.375%, 9/1/12 1,500 1,834 7.75%, 12/1/30 2,615 3,349 Verizon Virginia, 4.625%, 3/15/13 3,090 3,169 26,078 Wireless Communications 0.3% AT&T Wireless Group, 7.875%, 3/1/11 5,100 6,067 6,067 Total Corporate Bonds and Notes (Cost $517,634) 565,642 ASSET-BACKED SECURITIES 3.0% Auto-Backed 0.8% Capital Auto Receivables Asset Trust, Series 2002-2, Class CERT 4.18%, 10/15/07 9,998 10,252 Chase Manhattan Auto Owner Trust, Series 2001-B, Class CTFS 3.75%, 5/15/08 4,898 4,993 SSB Auto Loan Trust, Series 2002-1, Class C, 4.13%, 2/15/09 3,766 3,784 19,029 Credit Card-Backed 1.1% Citibank Credit Card Issuance Trust, Series 2000-C1, Class C1 7.45%, 9/15/07 11,075 12,140 MBNA Master Credit Card Trust II, Series 2000-D, Class C 144A, 8.40%, 9/15/09 10,075 11,625 23,765 Motorcycles 0.4% Harley Davidson Motorcycle Trust Series 2002-1, Class B, 4.36%, 1/15/10 5,097 5,270 Series 2003-1, Class B, 2.39%, 11/15/10 3,579 3,614 8,884 Recreational Vehicles 0.3% CIT RV Trust, Series 1997-A, Class A6, 6.35%, 4/15/11 6,792 7,037 7,037 Stranded Asset 0.4% Reliant Energy Transition Bond, Series 2001-1, Class A4 5.63%, 9/15/15 $ 8,572 $ 9,647 9,647 Total Asset-Backed Securities (Cost $65,060) 68,362 EQUITY AND CONVERTIBLE SECURITIES 0.9% Building and Real Estate 0.5% Equity Office Properties Trust, Series B, REIT Pfd. Conv. Stock, 5.25% 54 2,662 Equity Residential Properties Trust, Series G, REIT Pfd. Conv. Stock, 7.25% 150 3,893 Reckson Associates Realty, Series A, REIT Pfd. Conv. Stock, 7.625% 170 4,128 10,683 Computer Service & Software 0.1% Juniper Networks, Conv. Notes, 4.75%, 3/15/07 2,400 2,232 2,232 Electric Utilities 0.1% PPL Energy, Conv. Notes, 2.625%, 5/15/08 1,572 1,627 1,627 Telecom Equipment 0.1% Corning, Conv. Notes, 11/8/05 2,806 2,073 2,073 Telecommunications 0.1% CIENA, Conv. Notes, 3.75%, 2/1/08 3,050 2,521 2,521 Telephones 0.0% Liberty Media/Sprint PCS, Conv. Notes, 4.00%, 11/15/29 985 663 663 Total Equity and Convertible Securities (Cost $18,305) 19,799 NON-U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 8.6% Commercial Mortgage-Backed 4.5% Banc of America Commercial Mortgage, Series 2003-1, Class A2 CMO, 4.648%, 9/11/36 11,450 12,035 Bear Stearns, Series 2002-TOP8, Class A2, CMO 4.83%, 8/15/38 8,210 8,763 DLJ Commercial Mortgage, Series 1999-CG2, Class A1B, CMO 7.30%, 6/10/32 $ 13,000 $ 15,764 JP Morgan Chase Commercial Mortgage Securities Series 2001-CIB2, Class A2, CMO 6.244%, 4/15/35 9,900 11,316 JP Morgan Commercial Mortgage Financial Corp. Series 1999-C7, Class A2, CMO 6.507%, 10/15/35 9,500 11,013 Series 1999-PLS1, Class A2, CMO 7.109%, 2/15/32 8,813 10,478 Morgan Stanley Dean Witter Capital Trust Series 2002, Class A2, CMO, 5.98%, 1/15/39 9,400 10,816 Prudential Securities Secured Financing Series 1999, Class A1, CMO, 6.074%, 1/15/08 8,695 9,439 Salomon Brothers Mortgage Securities VII Series 2001-C1, Class A2, CMO, 6.226%, 12/18/35 10,875 12,380 102,004 Home Equity Loans-Backed 2.3% BankBoston Home Equity Loan Trust, Series 1998-1, Class A6 6.35%, 2/25/13 5,348 5,617 Chase Funding Mortgage Loan Series 2003-1, Class 1A6, 4.458%, 3/25/14 5,960 6,203 Series 2003-3, Class 1M1, 4.537%, 9/25/32 4,400 4,400 Series 1998-1, Class 1M1, 6.59%, 5/25/28 2,748 2,874 Series 2002-1, Class 1A3, 5.039%, 12/25/23 10,675 11,020 Series 2002-2, Class 1M1, 5.599%, 9/25/31 1,750 1,828 Series 2002-3, Class 1A6, 4.707%, 8/25/13 5,365 5,733 Mellon Residential Funding Series 2001-HEIL, Class A3, 5.945%, 2/25/11 13,540 13,668 51,343 Whole Loans-Backed 1.8% GE Capital Mortgage Services Series 1998-13, Class A24, 6.75%, 8/25/28 11,560 11,625 Norwest Asset Securities Series 1998-23, Class B1, CMO, 6.75%, 10/25/28 11,350 11,421 Residential Accredit Loans Series 1997-QS12, Class A7, CMO, 7.25%, 11/25/27 3,225 3,314 Series 1998-QS9, Class A11, CMO, 6.75%, 7/25/28 7,500 7,626 Residential Funding Mortgage Securities Series 1999-S3, Class A1, CMO, 6.50%, 1/25/29 $ 385 $ 385 Summit Mortgage Trust Series 2002, Class A2, CMO, 144A 6.34003%, 6/28/16 7,450 7,657 42,028 Total Non-U.S. Government Mortgage-Backed Securities (Cost $187,374) 195,375 U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 25.7% U.S. Government Agency Obligations 15.0% Federal Home Loan Mortgage 5.00%, 1/1/09 8,670 8,946 5.50%, 4/1/29 1,329 1,388 6.50%, 11/1/04 - 6/1/24 14,059 14,705 7.00%, 2/1/24 - 6/1/32 16,838 17,664 7.50%, 5/1 - 6/1/24 870 932 8.00%, 6/1/08 2 2 10.50%, 7/1/11 - 8/1/20 89 98 11.00%, 11/1/17 - 7/1/20 31 35 ARM, 4.687%, 9/1/32 8,174 8,468 CMO 6.50%, 3/15/23 10,810 11,588 7.00%, 11/15/22 723 732 Principal Only, 8/1/28 1,973 1,868 Federal National Mortgage Assn. 5.00%, 1/1/09 2,619 2,702 5.50%, 2/1/18 13,928 14,459 6.00%, 4/1/14 - 2/1/33 4,004 4,173 6.50%, 6/1/13 - 7/1/32 25,301 26,422 7.00%, 10/1/29 - 11/1/30 532 561 CMO 5.50%, 7/25 - 11/25/28 27,720 20,100 Interest Only 5.50%, 12/1/32 + 14,617 2,110 6.50%, 2/1/32 + 7,749 770 TBA 5.00%, 1/1/18 - 1/1/33 74,461 76,806 5.50%, 1/1/18 - 1/1/33 $ 86,845 $ 90,020 6.00%, 1/1/33 33,413 34,677 339,226 U.S. Government Guaranteed Obligations 10.7% Government National Mortgage Assn. 4.50%, 5/15/18 29,460 30,454 6.00%, 2/15/14 - 4/20/33 75,259 78,778 6.50%, 8/15/25 - 9/20/32 12,522 13,116 7.00%, 3/15/13 - 11/20/28 21,768 23,095 7.50%, 8/15/16 - 8/15/28 3,960 4,233 8.00%, 7/15/16 - 10/15/27 11,900 12,986 8.50%, 9/15/16 - 9/20/26 2,366 2,616 9.00%, 1/15/09 - 11/15/19 506 564 9.50%, 6/15/09 - 3/15/25 113 124 10.25%, 8/15/18 - 11/15/20 330 371 11.00%, 12/15/09 - 1/15/21 3,105 3,480 11.50%, 3/15/10 - 10/15/15 365 412 TBA 4.50%, 1/1/18 19,940 20,613 6.00%, 1/1/33 47,077 49,023 CMO, Principal Only, 3/16/28 2,778 2,642 242,507 Total U.S. Government Mortgage-Backed Securities (Cost $576,123) 581,733 U.S. GOVERNMENT OBLIGATIONS/ AGENCIES 23.2% U.S. Government Agency Obligations 4.7% Federal Home Loan Mortgage 4.75%, 10/11/12 (misc. symbol) 10,000 10,347 5.125%, 7/15/12 (misc. symbol) 16,385 18,308 5.75%, 1/15/12 (misc. symbol) 3,689 4,295 6.75%, 3/15/31 2,649 3,430 6.875%, 1/15/05 (misc. symbol) 4,750 5,172 Federal National Mortgage Assn. 4.25%, 7/15/07 (misc. symbol) 20,000 21,607 5.75%, 2/15/08 (misc. symbol) 15,045 17,260 6.375%, 8/15/07 (AUD) 16,250 11,206 7.125%, 1/15/30 (misc. symbol) 11,300 15,154 106,779 U.S. Treasury Obligations 18.5% U.S. Treasury Bonds 5.375%, 2/15/31 (misc. symbol) $ 8,655 $ 10,055 6.00%, 2/15/26 (misc. symbol) 3,355 4,109 6.25%, 8/15/23 - 5/15/30 (misc. symbol) ** 45,155 57,050 6.50%, 11/15/26 (misc. symbol) 29,650 38,536 7.50%, 11/15/16 (misc. symbol) 21,100 29,138 U.S. Treasury Inflation-Indexed Notes, 3.00%, 7/15/12 (misc. symbol) 23,789 26,405 U.S. Treasury Notes 3.50%, 11/15/06 (misc. symbol) 77,290 81,782 3.875%, 2/15/13 (misc. symbol) ** 13,160 13,746 4.25%, 11/15/03 (misc. symbol) 11,920 12,089 5.00%, 8/15/11 (misc. symbol) 32,175 36,534 5.875%, 11/15/04 (misc. symbol) 86,420 92,227 6.50%, 8/15/05 (misc. symbol) 1,520 1,690 U.S. Treasury Stripped Interest Payment Zero Coupon, 5/15/20 (misc. symbol) 32,250 14,785 418,146 Total U.S. Government Obligations/ Agencies (Cost $491,115) 524,925 FOREIGN GOVERNMENT OBLIGATIONS/ AGENCIES 9.7% Canadian Government and Municipalities 5.3% Government of Canada 3.50%, 6/1/04 (CAD) 27,125 19,854 5.25%, 6/1/12 (CAD) 15,240 11,814 5.50%, 6/1/09 (CAD) 24,820 19,551 6.00%, 9/1/05 (CAD) 81,150 62,716 Quebec Province, 5.00%, 7/17/09 6,640 7,348 121,283 Foreign Government and Municipalities (Excluding Canadian) 4.4% Bundesobligation, 4.00%, 2/16/07 (EUR) 19,000 23,410 Bundesrepublic, 5.00%, 1/4/12 (EUR) 11,300 14,625 European Investment Bank, 6.00%, 7/15/05 (AUD) 33,000 22,185 Federal Republic of Germany, 5.00%, 5/20/05 (EUR) 18,600 23,063 Republic of Chile, 5.50%, 1/15/13 4,710 5,029 Republic of Italy, 2.50%, 3/31/06 4,000 4,080 United Mexican States, 6.375%, 1/16/13 (misc. symbol) $ 5,800 $ 6,252 98,644 Total Foreign Government Obligations/Agencies (Cost $189,001) 219,927 MONEY MARKET FUNDS 18.2% T. Rowe Price Reserve Investment Fund, 1.28% # ! 412,118 412,118 Total Money Market Funds (Cost $412,118) 412,118 SECURITIES LENDING COLLATERAL 15.5% Money Market Trust 15.5% State Street Bank and Trust Company of New Hampshire, N.A. Securities Lending Quality Trust units 351,922,748 351,923 Total Securities Lending Collateral (Cost $351,923) 351,923 Total Investments in Securities 129.7% of Net Assets (Cost $2,808,653) $ 2,939,804 Forward Currency Exchange Contracts (In thousands) Unrealized Counterparty Settlement Receive Deliver Gain (Loss) -------------------------------------------------------------------------------- Credit Suisse First Boston 6/6/03 USD 32,239 EUR 28,765 $ (1,590) Credit Suisse First Boston 6/10/03 USD 5,566 AUD 8,750 (133) Credit Suisse First Boston 6/27/03 USD 17,452 AUD 26,600 155 Credit Suisse First Boston 6/30/03 USD 12,958 CAD 17,978 (138) Morgan Stanley 6/9/03 USD 15,567 CAD 21,725 (275) Morgan Stanley 6/30/03 USD 25,132 CAD 35,000 (363) Morgan Stanley 6/30/03 USD 16,384 EUR 14,000 (70) Net unrealized gain (loss) on open forward currency exchange contracts (2,414) Value -------------------------------------------------------------------------------- In thousands Futures Contracts Contract Unrealized Expiration Value Gain (Loss) -------------------------------------------------------------------------------- In thousands Long, 100 thirty year U.S. Treasury Note contracts, $152,174 par of U.S. Treasury Notes pledged as initial margin 6/03 $ 12,050 $ 203 Long, 80 ten year Euro Bond contracts, $121,739 par of U.S. Treasury Notes pledged as initial margin 6/03 9,441 95 Short, 855 ten year U.S. Treasury Note contracts, $1,075,000 of U.S. Treasury Bonds pledged as initial margin 9/03 (101,264) (27) Short, 50 five year U.S. Treasury Note contracts, $76,087 of U.S. Treasury Notes pledged as initial margin 9/03 (5,784) (15) Net payments (receipts)of variation margin to date (221) Variation margin receivable (payable) on open futures contracts 35 Other Assets Less Liabilities (670,792) NET ASSETS $ 2,266,633 --------------- # Seven-day yield + Interest Only security for which the fund receives interest on notional principal (par) (misc. symbol) All or a portion of this security is on loan at May 31, 2003 - See Note 2 ! Affiliated company, as defined by the Investment Company Act of 1940, as a result of the fund's ownership of at least 5% of the company's outstanding voting securities. ** All or a portion of this security is pledged to cover margin requirements on futures contracts at May 31, 2002 144A Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration only to qualified institutional buyers - total of such securities at period-end amounts to $86,685,000 and represents 3.8% of net assets ARM Adjustable Rate Mortgage AUD Australian dollar CAD Canadian dollar CMO Collateralized Mortgage Obligation EUR Euro REIT Real Estate Investment Trust TBA To Be Announced security was purchased on a forward commitment basis USD United States dollar VR Variable Rate The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials May 31, 2003 Statement of Assets and Liabilities -------------------------------------------------------------------------------- In thousands Assets Investments in securities, at value Affiliated companies (cost $412,118) $ 412,118 Other companies (cost $ 2,396,535) 2,527,686 Total investments in securities 2,939,804 Other assets 86,903 Total assets 3,026,707 Liabilities Payable for investment securities purchased 404,863 Obligation to return securities lending collateral 351,923 Other liabilities 3,288 Total liabilities 760,074 NET ASSETS $2,266,633 ---------- Net Assets Consist of: Undistributed net investment income (loss) $ 899 Undistributed net realized gain (loss) (54,647) Net unrealized gain (loss) 129,172 Paid-in-capital applicable to 246,182,959 shares of $1.00 par value capital stock outstanding; 300,000,000 shares authorized 2,191,209 NET ASSETS $2,266,633 ---------- NET ASSET VALUE PER SHARE New Income shares ($2,266,204,952/246,136,470 shares outstanding) $ 9.21 ---------- New Income-Advisor Class shares ($106,973/11,620 shares outstanding) $ 9.21 ---------- New Income-R Class shares ($321,059/34,869 shares outstanding) $ 9.21 ---------- The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials Statement of Operations -------------------------------------------------------------------------------- In thousands Year Ended 5/31/03 Investment Income (Loss) Income Interest $ 92,933 Income distributions from mutual funds 4,858 Dividend 1,438 Securities lending 568 Total income 99,797 Expenses Investment management 9,469 Shareholder servicing New Income shares 4,809 Custody and accounting 369 Registration 63 Prospectus and shareholder reports New Income shares 61 Legal and audit 19 Directors 15 Distribution-R Class shares 1 Miscellaneous 11 Reimbursed by manager (1) Total expenses 14,816 Expenses paid indirectly (6) Net expenses 14,810 Net investment income (loss) 84,987 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 10,275 Futures (4,856) Written options 513 Foreign currency transactions (8,508) Net realized gain (loss) (2,576) T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials Statement of Operations -------------------------------------------------------------------------------- In thousands Year Ended 5/31/03 Change in net unrealized gain (loss) Securities 124,953 Futures 280 Written options (204) Other assets and liabilities denominated in foreign currencies (2,250) Change in net unrealized gain (loss) 122,779 Net realized and unrealized gain (loss) 120,203 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 205,190 ---------- The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials Statement of Changes in Net Assets -------------------------------------------------------------------------------- In thousands Year Ended 5/31/03 5/31/02 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 84,987 $ 95,823 Net realized gain (loss) (2,576) 34,057 Change in net unrealized gain (loss) 122,779 (675) Increase (decrease) in net assets from operations 205,190 129,205 Distributions to shareholders Net investment income New Income shares (87,016) (96,406) New Income-Advisor Class shares (3) -- New Income-R Class shares (4) -- Decrease in net assets from distributions (87,023) (96,406) Capital share transactions * Shares sold New Income shares 561,473 346,902 New Income-Advisor Class shares 100 -- New Income-R Class shares 321 -- Distributions reinvested New Income shares 81,806 90,767 New Income-Advisor Class shares 3 -- New Income-R Class shares 4 -- Shares redeemed New Income shares (358,633) (291,357) New Income-R Class shares (14) -- Increase (decrease) in net assets from capital share transactions 285,060 146,312 Net Assets Increase (decrease) during period 403,227 179,111 Beginning of period 1,863,406 1,684,295 End of period $ 2,266,633 $ 1,863,406 ------------------------------------- *Share information Shares sold New Income shares 63,287 39,834 New Income-Advisor Class shares 12 -- New Income-R Class shares 36 -- Distributions reinvested New Income shares 9,221 10,415 New Income-R Class shares 1 -- Shares redeemed New Income shares (40,608) (33,537) New Income-R Class shares (2) -- Increase (decrease) in shares outstanding 31,947 16,712 The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials May 31, 2003 Notes to Financial Statements -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price New Income Fund, Inc. (the fund) is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end management investment company. The fund seeks the highest level of income consistent with the preservation of capital over time by investing primarily in marketable debt securities. The fund has three classes of shares: New Income Fund (New Income class), offered since August 31, 1973, New Income Fund- Advisor Class (Advisor Class), offered since September 30, 2002, and New Income Fund-R Class (R Class), offered since September 30, 2002. Advisor Class shares are offered only through brokers and other financial intermediaries, and R Class shares are only available to small retirement plans serviced by intermediaries. The Advisor Class and R Class each operate under separate Board-approved Rule 12b-1 plans, pursuant to which each class compensates financial intermediaries for distribution and certain administrative services. Each class has exclusive voting rights on matters related solely to that class, separate voting rights on matters that relate to all classes, and, in all other respects, the same rights and obligations as the other classes. 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 Investments are valued 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 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. Equity securities listed or regularly traded on a securities exchange or in the over-the-counter market are valued at the last quoted sale price, or official closing price for certain markets, at the time the valuations are made. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Listed securities not traded on a particular day are valued at the mean of the latest bid and ask prices for domestic securities and the last quoted sale price for international securities. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Purchased and written options are valued at the mean of the closing bid and ask prices. Purchased and written options on futures contracts are valued at the last sale price. 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 or under the supervision of the officers of the fund, as authorized by the Board of Directors. Most foreign markets close before the NYSE. Developments that could affect the values of securities that occur between the close of a foreign market and the close of the NYSE normally will not be reflected in security valuations. However, if such developments are so significant that they will, in the judgment of the officers of the fund, clearly and materially affect the value of securities, the previous closing prices may be adjusted to reflect the fair value of the securities as of the close of the NYSE, as determined in good faith by or under the supervision of the officers of the fund, as authorized by the Board of Directors. Currency Translation Assets, including investments, and liabilities denominated in foreign currencies are translated into U.S. dollar values each day at the prevailing exchange rate, using the mean of the bid and ask prices of such currencies against U.S. dollars as quoted by a major bank. Purchases and sales of securities, income, and expenses are translated into U.S. dollars at the prevailing exchange rate on the date of the transaction. The effect of changes in foreign currency exchange rates on realized and unrealized security gains and losses is reflected as a component of such gains and losses. Premiums and Discounts Premiums and discounts on debt securities are amortized for financial reporting purposes. Class Accounting The Advisor Class and R Class each pay distribution and administrative expenses in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% and 0.50%, respectively, of the class's average net assets. Shareholder servicing, prospectus, and shareholder report expenses incurred by each class are charged directly to the class to which they relate. Expenses common to both classes and investment income are allocated to the classes' based upon the relative daily net assets of each class's settled shares; realized and unrealized gains and losses are allocated based upon the relative daily net assets of each class's shares outstanding. Income distributions are declared by each class on a daily basis and paid monthly. Capital gain distributions, if any, are declared and paid by the fund, typically on an annual basis. Expenses Paid Indirectly Credits earned on temporarily uninvested cash balances at the custodian are used to reduce the fund's custody charges. Custody expense in the accompanying statement of operations is presented before reduction for credits, which totaled $6,000 for the year ended May 31, 2003. 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. Dividend income and distributions to shareholders are recorded by the fund on the ex-dividend date. Payments ("variation margin") made or received by the fund 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 and forward currency exchange contracts are included in Other assets and Other liabilities, respectively, and in Change in net unrealized gain or loss in the accompanying financial statements. 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. Forward Currency Exchange Contracts During the year ended May 31, 2003, the fund was a party to forward currency exchange contracts under which it is obligated to exchange currencies at specified future dates and exchange rates. Risks arise from the possible inability of counterparties to meet the terms of their agreements and from movements in currency values. Futures Contracts During the year ended May 31, 2003, 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. Options Call and put options give the holder the right to purchase or sell, respectively, a security at a specified price until a certain date. Risks arise from possible illiquidity of the options market and from movements in security values. Transactions in options written and related premiums received during the year ended May 31, 2003, were as follows: -------------------------------------------------------------------------------- Number of Contracts Premiums Outstanding at beginning of period 800 $ 369,000 Written 400 345,000 Closed (1,200) (714,000) Outstanding at end of period -- $ -- ------------------------------- Call and put options on futures contracts give the holder the right to purchase or sell, respectively, a particular futures contract at a specified price until a certain date. Risks arise from possible illiquidity of the options market and from movements in underlying futures prices. Securities Lending The fund lends its securities to approved brokers to earn additional income. It receives as collateral cash and government securities valued at 102% to 105% of the value of the securities on loan. Cash collateral is invested in a money market pooled trust managed by the fund's lending agent in accordance with investment guidelines approved by fund management. Collateral is maintained over the life of the loan in an amount not less than the value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund the next business day. Although risk is mitigated by the collateral, the fund could experience a delay in recovering its securities and a possible loss of income or value if the borrower fails to return the securities. Securities lending revenue recognized by the fund consists of earnings on invested collateral and borrowing fees, net of any rebates to the borrower and compensation to the lending agent. At May 31, 2003, the value of loaned securities was $363,906,000; aggregate collateral consisted of $351,923,000 in the money market pooled trust and government securities valued at $21,862,000. 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, 2003, the value of affiliated companies totaled $412,118,000, representing 18.2% of the value of the fund's investments in securities. For the year then ended, $4,858,000 (4.8%) of interest income reflected in the accompanying financial statements resulted from transactions with affiliated companies. Other Purchases and sales of portfolio securities, other than short-term and U.S. government securities, aggregated $929,649,000 and $837,156,000, respectively, for the year ended May 31, 2003. Purchases and sales of U.S. government securities aggregated $3,574,647,000 and $3,428,356,000, respectively, for the year ended May 31, 2003. 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 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. Temporary differences are not adjusted. Distributions during the year ended May 31, 2003 totaled $87,023,000 and were characterized as ordinary income for tax purposes. At May 31, 2003, the tax-basis components of net assets were as follows: -------------------------------------------------------------------------------- Unrealized appreciation $169,409,000 Unrealized depreciation (55,555,000) Net unrealized appreciation (depreciation) 113,854,000 Undistributed ordinary income 899,000 Capital loss carryforwards (39,329,000) Paid-in capital 2,191,209,000 Net assets $2,266,633,000 -------------- Federal income tax regulations require the fund to defer recognition of capital losses realized on certain covered option and futures and forward currency exchange contract transactions; accordingly, $17,570,000 of realized losses reflected in the accompanying financial statements have not been recognized for tax purposes as of May, 31, 2003. The fund intends to retain realized gains to the extent of available capital loss carryforwards for federal income tax purposes. In 2003, the fund utilized $6,905,000 of capital loss carryforwards. As of May 31, 2003, the fund had $1,791,000 of capital loss carryforwards that expire in 2008, and $37,538,000 that expire in 2009. For the year ended May 31, 2003, the fund recorded the following permanent reclassifications to reflect tax character. Reclassifications to paid-in capital relate primarily to a tax practice that treats a portion of the proceeds from each redemption of capital shares as a distribution of taxable net investment income and/or realized capital gain. Results of operations and net assets were not affected by these reclassifications. -------------------------------------------------------------------------------- Undistributed net investment income $ (60,000) Undistributed net realized gain (3,115,000) Paid-in capital 3,175,000 At May 31, 2003, the cost of investments for federal income tax purposes was $2,823,971,000. 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 net assets to those of the group. At May 31, 2003, the effective annual group fee rate was 0.32%, and investment management fee payable totaled $882,000. Through September 30, 2004, the manager is required to bear any expenses, excluding interest, taxes, brokerage commissions, and extraordinary expenses, for the Advisor Class and R Class that would cause the class's ratio of total expenses to average net assets (expense ratio) to exceed 0.90% and 1.15%, respectively. Thereafter, through September 30, 2006, each class is required to reimburse the manager for these expenses, provided that its average net assets have grown or expenses have declined sufficiently to allow reimbursement without causing its expense ratio to exceed 0.90% for the Advisor Class and 1.15% for the R Class. 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 prices 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 New Income class and R Class. Expenses incurred pursuant to these service agreements totaled $2,532,000 for the year ended May 31, 2003, of which $301,000 was payable at period-end. Additionally, the fund is one of several mutual funds in which certain college savings plans managed by Price Associates may invest. As approved by the fund's Board of Directors, shareholder servicing costs associated with each college savings plan are borne by the fund in proportion to the average daily value of its shares owned by the college savings plan. At May 31, 2003, approximately 0.1% of the outstanding shares of the New Income class were held by college savings plans and, through that date, no shareholder servicing costs related to the college savings plans had been charged to the class. 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) and T. Rowe Price Retirement Funds (Retirement Funds) may invest. Neither the Spectrum Funds nor the Retirement Funds invest in the underlying Price funds for the purpose of exercising management or control. Pursuant to separate, special servicing agreements, expenses associated with the operation of the Spectrum and Retirement 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 and Retirement Funds, respectively. Expenses allocated under these agreements are reflected as shareholder servicing expense in the accompanying financial statements. For the year ended May 31, 2003, the New Income class was allocated $1,701,000 of Spectrum Funds' expenses and $58,000 of Retirement Funds' expenses under these agreements. Of these amounts, $938,000 related to services provided by Price and $101,000 was payable at period-end. At May 31, 2003, approximately 35.6% of the outstanding shares of the New Income class were held by the Spectrum Funds and 0.9% were held by the Retirement Funds. The fund may invest in the T. Rowe Price Reserve Investment Fund and 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 only to mutual funds, trusts, and other accounts managed by Price Associates and/or 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, 2003, totaled $4,858,000. T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials Report of Independent Auditors -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of T. Rowe Price New Income Fund, Inc. 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 New Income Fund, Inc. (the "Fund") at May 31, 2003, 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 auditing standards generally accepted in the United States of America, 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, 2003 by correspondence with custodians and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Baltimore, Maryland June 18, 2003 T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials Tax Information (Unaudited) for the Tax Year Ended 5/31/03 -------------------------------------------------------------------------------- We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements. The fund's distributions to shareholders included $1,036,000 from short-term capital gains. For taxable non-corporate shareholders, $25,000 of the fund's distributed income and short-term capital gains represents qualified dividend income subject to the 15% rate category. For corporate shareholders, $200,000 of the fund's distributed income and short-term capital gains qualified for the dividends-received deduction. T. Rowe Price New Income Fund -------------------------------------------------------------------------------- Certified Shareholder Report and Financials About the Fund's Directors and Officers -------------------------------------------------------------------------------- Your fund is governed by a Board of Directors 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 directors are independent of T. Rowe Price Associates, Inc. (T. Rowe Price); "inside" directors are officers of T. Rowe Price. The Board of Directors elects the fund's officers, who are listed in the final table. The business address of each director and officer is 100 East Pratt Street, Baltimore, MD 21202. The Statement of Additional Information includes additional information about the fund directors and is available without charge by calling a T. Rowe Price representative at 1-800-225-5132. Independent Directors Name (Date of Birth) Year Elected* Principal Occupation(s) During Past 5 Years and Directorships of Other Public Companies Anthony W. Deering (1/28/45) 1980 Director, Chairman of the Board, President, and Chief Executive Officer, The Rouse Company, real estate developers; Director, Mercantile Bank (4/03 to present) Donald W. Dick, Jr. (1/27/43) 2001 Principal, EuroCapital Advisors, LLC, an acquisition and management advisory firm David K. Fagin (4/9/38) 2001 Director, Golden Star Resources Ltd., Canyon Resources Corp. (5/00 to present), and Pacific Rim Mining Corp. (2/02 to present); Chairman and President, Nye Corp. F. Pierce Linaweaver (8/22/34) 1983 President, F. Pierce Linaweaver & Associates, Inc., consulting environmental and civil engineers Hanne M. Merriman (11/16/41) 2001 Retail Business Consultant; Director, Ann Taylor Stores Corp., Ameren Corp., Finlay Enterprises, Inc., The Rouse Company, and US Airways Group, Inc. John G. Schreiber (10/21/46) 1992 Owner/President, Centaur Capital Partners, Inc., a real estate investment company; Senior Advisor and Partner, Blackstone Real Estate Advisors, L.P.; Director, AMLI Residential Properties Trust, Host Marriott Corp., and The Rouse Company Hubert D. Vos (8/2/33) 2001 Owner/President, Stonington Capital Corp., a private investment company Paul M. Wythes (6/23/33) 2001 Founding Partner, Sutter Hill Ventures, a venture capital limited partnership, providing equity capital to young high-technology companies throughout the United States; Director, Teltone Corp. *Each independent director oversees 105 T. Rowe Price portfolios and serves until retirement, resignation, or election of a successor. Inside Directors Name (Date of Birth) Year Elected* [Number of T. Rowe Price Portfolios Overseen] Principal Occupation(s) During Past 5 Years and Directorships of Other Public Companies William T. Reynolds (5/26/48) 1997 [37] Director and Vice President, T. Rowe Price and T. Rowe Price Group, Inc.; Director, T. Rowe Price Global Asset Management Limited; President, New Income Fund James S. Riepe (6/25/43) 1983 [105] Director and Vice President, T. Rowe Price; Vice Chairman of the Board, Director, and Vice President, T. Rowe Price Group, Inc.; 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.; Chairman of the Board, New Income Fund M. David Testa (4/22/44) 1997 [105] Chief Investment Officer, Director, and Vice President, T. Rowe Price; Vice Chairman of the Board, Chief Investment Officer, Director, and Vice President, T. Rowe Price Group, Inc.; Director, T. Rowe Price Global Asset Management Limited and T. Rowe Price Global Investment Services Limited; Chairman of the Board and Director, T. Rowe Price International, Inc.; Director and Vice President, T. Rowe Price Trust Company * Each inside director serves until retirement, resignation, or election of a successor. Officers Name (Date of Birth) Title and Fund(s) Served Principal Occupation(s) Connice A. Bavely (3/5/51) Vice President, New Income Fund Vice President, T. Rowe Price and T. Rowe Price Group, Inc. Stephen V. Booth (6/21/61) Vice President, New Income Fund Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price Trust Company Brian J. Brennan (7/14/64) Vice President, New Income Fund Vice President, T. Rowe Price and T. Rowe Price Group, Inc. Jennifer A. Callaghan (5/6/69) Assistant Vice President, New Income Fund Assistant Vice President, T. Rowe Price * Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. Officers (continued) Name (Date of Birth) Title and Fund(s) Served Principal Occupation(s) Joseph A. Carrier (12/30/60) Treasurer, New Income Fund Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price Investment Services, Inc. Patrick S. Cassidy (8/27/64) Vice President, New Income Fund Vice President, T. Rowe Price and T. Rowe Price Group, Inc. Roger L. Fiery III (2/10/59) Vice President, New Income Fund Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price International, Inc., and T. Rowe Price Trust Company Gregory S. Golczewski (1/15/66) Vice President, New Income Fund Vice President, T. Rowe Price and T. Rowe Price Trust Company Michael J. Grogan (5/2/71) Assistant Vice President, New Income Fund Employee, T. Rowe Price Henry H. Hopkins (12/23/42) Vice President, New Income Fund Director and Vice President, T. Rowe Price Group, Inc., T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price Trust Company; Vice President, T. Rowe Price, T. Rowe Price International, Inc., and T. Rowe Price Retirement Plan Services, Inc. Alan D. Levenson (7/17/58) Vice President, New Income Fund Vice President, T. Rowe Price and T. Rowe Price Group, Inc. Patricia B. Lippert (1/12/53) Secretary, New Income Fund Assistant Vice President, T. Rowe Price and T. Rowe Price Investment Services, Inc. Edmund M. Notzon III (10/1/45) Vice President, New Income Fund Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price Investment Services, Inc., and T. Rowe Price Trust Company Vernon A. Reid, Jr. (5/14/54) Vice President, New Income Fund Vice President, T. Rowe Price and T. Rowe Price Group, Inc. Robert M. Rubino (8/2/53) Vice President, New Income Fund Vice President, T. Rowe Price and T. Rowe Price Group, Inc. Daniel O. Shackelford (3/11/58) Vice President, New Income Fund Vice President, T. Rowe Price, T. Rowe Price Group, 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. Item 2. Code of Ethics. Not required at this time. Item 3. Audit Committee Financial Expert. Not required at this time. Item 4. Principal Accountant Fees and Services. Not required at this time. Item 5. Audit Committee of Listed Registrants. Not required at this time. Item 6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. [Reserved] Item 9. 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) At the date of filing this Form N-CSR, the registrant's Principal Executive Officer and Principal Financial Officer are aware of no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 10. Exhibits. (a) Not required at this time. (b) 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 under the Investment Company Act of 1940, are attached. A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 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 New Income Fund, Inc. By /s/ James S. Riepe James S. Riepe Principal Executive Officer Date July 14, 2003 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 14, 2003 By /s/ Joseph A. Carrier Joseph A. Carrier Principal Financial Officer Date July 09, 2003