-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nk1XmDK8QZoPVn3q48H+dq04PonlhV0Y8w6bIWtfdmGx5SzQuckyUWUmSY1gShRL FEQ0yuqZhor08UmpoDcM+Q== 0000080249-04-000014.txt : 20040728 0000080249-04-000014.hdr.sgml : 20040728 20040727131107 ACCESSION NUMBER: 0000080249-04-000014 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040531 FILED AS OF DATE: 20040727 EFFECTIVENESS DATE: 20040727 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE T ROWE NEW INCOME FUND INC CENTRAL INDEX KEY: 0000080249 IRS NUMBER: 520980581 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-02396 FILM NUMBER: 04932921 BUSINESS ADDRESS: STREET 1: 100 EAST PRATT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4105472000 N-CSR 1 nif.txt T. ROWE PRICE NEW INCOME FUND Item 1. Report to Shareholders T. Rowe Price New Income 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 New Income 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] NEW INCOME FUND - -------------------------------------------------------------------------------- As of 5/31/04 Lehman Brothers U.S. Aggregate Index $20,234 Lipper Average of Corporate Debt Funds A Rated $19,015 New Income Fund $18,772 Lehman Lipper Brothers Average U.S. of Corporate New Aggregate Debt Funds Income Index A Rated Fund 5/94 $ 10,000 $ 10,000 $ 10,000 5/95 11,148 11,123 11,112 5/96 11,636 11,526 11,523 5/97 12,604 12,443 12,410 5/98 13,980 13,909 13,754 5/99 14,589 14,234 13,895 5/00 14,896 14,221 14,052 5/01 16,850 16,015 15,815 5/02 18,215 17,093 17,029 5/03 20,324 19,152 18,821 5/04 20,234 19,015 18,772 Note: Performance for the Advisor Class and R Class will vary due to their differing fee structures. See returns table below. Average Annual Compound Total Return - -------------------------------------------------------------------------------- Since Inception Periods Ended 5/31/04 1 Year 5 Years 10 Years 9/30/02 - -------------------------------------------------------------------------------- New Income Fund -0.26% 6.20% 6.50% - New Income Fund-Advisor Class -0.45 - - 3.87% New Income Fund-R Class -0.57 - - 3.69 Lehman Brothers U.S. Aggregate Index -0.44 6.76 7.30 3.15 Lipper Average of Corporate Debt Funds A Rated -0.64 5.85 6.61 3.67 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 Annual Report Dear Shareholder, The New Income Fund, New Income Fund-Advisor Class, and New Income Fund-R Class posted modest losses during the 12 months ended May 31, 2004. As shown in the table on the preceding page, we outperformed the Lipper Average of Corporate Debt Funds A Rated, and our results were in line with the unmanaged Lehman Brothers U.S. Aggregate Index during the period. High-quality domestic bonds were generally flat over the year, as price declines stemming from rising interest rates offset income. [Graphic Omitted] Interest Rate levels - -------------------------------------------------------------------------------- Lehman Brothers 10-Year Baa U.S. Treasury Credit Index Note 5/03 4.77% 3.37% 4.82 3.51 5.56 4.41 8/03 5.55 4.46 4.92 3.94 5.18 4.29 11/03 5.15 4.33 4.95 4.25 4.84 4.13 2/04 4.68 3.97 4.61 3.84 5.27 4.51 5/04 5.50 4.65 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 Interest Rate Levels chart reflects the pattern of bond yields over the fund's fiscal year. Intermediate- and long-term yields ended the 12-month period significantly higher, which hampered most fixed-income securities during the entire period. (Bond prices and yields move in opposite directions.) Major Index Returns - -------------------------------------------------------------------------------- Period Ended 5/31/04 12 Months - -------------------------------------------------------------------------------- Lehman Brothers U.S. 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 Lehman Brothers Baa U.S. Credit Index 0.71 Source: Lehman Brothers indexes. The Major Index Returns table shows how various investment-quality bond categories performed over the fund's fiscal year. The broad investment-grade bond market, as measured by the Lehman Brothers U.S. Aggregate Bond Index, registered a small loss for the past 12 months. Mortgage-backed and lower-rated investment-grade corporate bonds posted modest gains, and Treasuries and high-rated corporate securities fell over the 12-month period. The Portfolio Characteristics table shows various portfolio details as of May 31, 2004, compared with one year earlier. The portfolio's weighted average maturity and duration expanded modestly during the year, to 6.7 and 4.4 years, respectively, while the quality of the portfolio's holdings remained stable at AA+. Throughout the year, we remained skeptical about the sustainability of low absolute interest rates, and the portfolio has maintained a defensive posture by keeping its maturity and duration modestly below the benchmark Lehman Brothers U.S. Aggregate Index. Portfolio Characteristics - -------------------------------------------------------------------------------- Periods Ended 5/31/03 5/31/04 - -------------------------------------------------------------------------------- New Income Fund Share Price $ 9.21 $ 8.87 30-Day Standardized Yield to Maturity 3.13% 3.74% - -------------------------------------------------------------------------------- New Income Fund-Advisor Class Share Price $ 9.21 $ 8.87 30-Day Standardized Yield to Maturity 2.99% 3.53% - -------------------------------------------------------------------------------- New Income Fund-R Class Share Price $ 9.21 $ 8.88 30-Day Standardized Yield to Maturity 2.73% 3.28% - -------------------------------------------------------------------------------- Weighted Average Maturity (years) 6.3 6.7 Weighted Average Effective Duration (years) 4.2 4.4 Weighted Average Quality * AA+ AA+ * Based on T. Rowe Price research. Yields will vary and are not guaranteed. As shown in the Quality Diversification chart, more than half of the portfolio was invested in AAA rated bonds and more than 80% was invested in bonds rated A or higher at the end of the reporting [Graphic Omitted] Quality Diversification - -------------------------------------------------------------------------------- AAA Rated 53% AA Rated 18% A Rated 11% BBB Rated 17% BB and Below 1% Based on T. Rowe Price research. period. Bonds rated BBB, the lowest tier of the investment-grade universe, and BB and below accounted for 18% of the fund, which was modestly above the 14% allocation we held in those tiers a year ago. Although we made several quality adjustments during the period, the fund's AA+ weighted average quality remained unchanged from a year ago. We thank you for your continued support. Respectfully, James S. Riepe Chairman June 14, 2004 T. Rowe Price New Income Fund - ------------------------------------------------------------------------------ Certified Annual Report Financial Highlights For a share outstanding throughout each period - ------------------------------------------------------------------------------ Investor Class Year Ended 5/31/04 5/31/03 5/31/02 5/31/01 5/31/00 NET ASSET VALUE Beginning of period $ 9.21 $ 8.70 $ 8.53 $ 8.07 $ 8.50 Investment activities Net investment income (loss) 0.32 0.37 0.47 0.53 0.52 Net realized and unrealized gain (loss) (0.34) 0.52 0.17 0.46 (0.43) Total from investment activities (0.02) 0.89 0.64 0.99 0.09 Distributions Net investment income (0.32) (0.38) (0.47) (0.53) (0.52) NET ASSET VALUE End of period $ 8.87 $ 9.21 $ 8.70 $ 8.53 $ 8.07 ------------------------------------------------ Ratios/Supplemental Data Total return^ (0.26)% 10.52% 7.68% 12.54% 1.13% Ratio of total expenses to average net assets 0.71% 0.74% 0.72% 0.73% 0.73% Ratio of net investment income (loss) to average net assets 3.56% 4.23% 5.38% 6.30% 6.32% Portfolio turnover rate 219.0% 221.2% 222% 112.1% 83.6% Net assets, end of period (in millions) $ 2,512 $ 2,266 $ 1,863 $ 1,684 $ 1,633 ^ 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 Annual Report Financial Highlights For a share outstanding throughout each period - -------------------------------------------------------------------------- Advisor Class Year 9/30/02 Ended Through 5/31/04 5/31/03 NET ASSET VALUE Beginning of period $ 9.21 $ 8.84 Investment activities Net investment income (loss) 0.30* 0.23* Net realized and unrealized gain (loss) (0.34) 0.38 Total from investment activities (0.04) 0.61 Distributions Net investment income (0.30) (0.24) NET ASSET VALUE End of period $ 8.87 $ 9.21 ----------------------- Ratios/Supplemental Data Total return^ (0.45)%* 7.02%* Ratio of total expenses to average net assets 0.90%* 0.90%+* Ratio of net investment income (loss) to average net assets 3.36%* 2.61%+* Portfolio turnover rate 219.0% 221.2%+ Net assets, end of period (in thousands) $ 139 $ 107 * Excludes expenses in excess of a 0.90% contractual expense limitation in effect through 9/30/06. ^ 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 Annual Report Financial Highlights For a share outstanding throughout each period - ---------------------------------------------------------------------------- R Class Year 9/30/02 Ended Through 5/31/04 5/31/03 NET ASSET VALUE Beginning of period $ 9.21 $ 8.84 Investment activities Net investment income (loss) 0.28* 0.22* Net realized and unrealized gain (loss) (0.33) 0.38 Total from investment activities (0.05) 0.60 Distributions Net investment income (0.28) (0.23) NET ASSET VALUE End of period $ 8.88 $ 9.21 ------------------------ Ratios/Supplemental Data Total return^ (0.57)%* 6.84%* Ratio of total expenses to average net assets 1.15%* 1.15%+* Ratio of net investment income (loss) to average net assets 3.12%* 2.32%+* Portfolio turnover rate 219.0% 221.2%+ Net assets, end of period (in thousands) $ 2,885 $ 321 * Excludes expenses in excess of a 1.15% contractual expense limitation in effect through 9/30/06. ^ 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 Annual Report May 31, 2004 Portfolio of Investments (1) $ Par/Shares Value - -------------------------------------------------------------------------------- (Amounts in 000s) CORPORATE BONDS AND NOTES 24.9% Aerospace & Defense 0.1% Boeing, 8.75%, 8/15/21 2,425 3,018 3,018 Automobiles and Related 1.5% DaimlerChrysler, 6.50%, 11/15/13 5,945 6,011 Ford Motor Credit 5.80%, 1/12/09 5,900 5,913 6.50%, 1/25/07 10,850 11,378 General Motors Acceptance, 7.25%, 3/2/11 5,900 6,183 GM, 8.375%, 7/15/33 5,885 6,114 Hertz, 4.70%, 10/2/06 2,170 2,179 37,778 Banking 1.3% Bank One, 5.25%, 1/30/13 5,300 5,180 Capital One Bank, 4.25%, 12/1/08 4,500 4,413 Citigroup, 5.625%, 8/27/12 5,300 5,416 First Union, 6.40%, 4/1/08 2,215 2,393 HBOS, 144A, 6.00%, 11/1/33 4,300 4,027 J.P. Morgan Chase, 5.75%, 1/2/13 4,900 4,966 Wells Fargo, 1.17%, 3/23/07 5,900 5,908 32,303 Beverages 0.2% Miller Brewing, 144A, 5.50%, 8/15/13 6,200 6,191 6,191 Broadcasting 0.6% AOL Time Warner, 7.625%, 4/15/31 4,415 4,755 Chancellor Media, 8.00%, 11/1/08 2,615 2,966 Hearst-Argyle, 7.00%, 1/15/18 3,685 3,970 Univision Communications, 2.875%, 10/15/06 2,540 2,514 14,205 Building and Real Estate 0.2% Pulte Homes, 7.875%, 8/1/11 4,000 4,500 4,500 Cable Operators 0.2% Clear Channel Communications, 4.625%, 1/15/08 2,530 2,568 Rogers Cable, 5.50%, 3/15/14 4,120 3,620 6,188 Computer Service & Software 0.3% IBM, 4.25%, 9/15/09 5,155 5,141 Sungard Data Systems, 3.75%, 1/15/09 2,750 2,662 7,803 Conglomerates 0.9% General Electric Capital 6.00%, 6/15/12 9,800 10,309 6.125%, 2/22/11 5,700 6,098 Hutchison Whampoa, 144A, 5.45%, 11/24/10 3,235 3,158 Tyco International, 6.375%, 10/15/11 3,760 3,950 23,515 Container 0.2% Sealed Air, 144A, 5.375%, 4/15/08 5,200 5,345 5,345 Diversified Chemicals 0.1% Dow Chemical, 6.125%, 2/1/11 3,225 3,394 3,394 Drugs 0.1% Glaxosmithkline Capital, 5.375%, 4/15/34 3,355 3,041 3,041 Electric Utilities 2.8% Appalachian Power, 4.80%, 6/15/05 5,115 5,224 Black Hills, 6.50%, 5/15/13 5,160 5,163 CE Electric UK Funding, 144A, 6.995%, 12/30/07 3,835 4,058 Centerpoint Energy, 5.875%, 6/1/08 1,000 1,019 ComEd Financing III, 6.35%, 3/15/33 2,100 2,008 Entergy Gulf States, 5.20%, 12/3/07 4,675 4,710 Exelon Generation, 144A, 5.35%, 1/15/14 3,900 3,771 Jersey Central Power & Light, 144A, 5.625%, 5/1/16 3,050 2,978 Noram Energy, 6.50%, 2/1/08 2,247 2,373 Ohio Edison, 4.00%, 5/1/08 2,300 2,247 Pacific Gas and Electric, 1.81%, 4/3/06 5,400 5,414 Pinnacle West Capital, 6.40%, 4/1/06 4,285 4,514 Potomac Electric Power, 3.75%, 2/15/06 2,750 2,778 PPL Capital Funding, 144A, 4.33%, 3/1/09 5,075 4,942 PSEG Power 3.75%, 4/1/09 3,610 3,449 6.875%, 4/15/06 1,930 2,059 Public Service of New Mexico, 4.40%, 9/15/08 4,320 4,296 Sempra Energy, 6.00%, 2/1/13 4,780 4,942 Tri-State Generation, 144A, 6.04%, 1/31/18 2,850 2,845 Western Power Distribution Holdings 144A, 6.875%, 12/15/07 2,690 2,784 71,574 Electronic Components 0.1% Motorola, 6.75%, 2/1/06 2,665 2,807 2,807 Energy 1.0% Petroleos de Venezuela (PDVSA) Finance, 6.80%, 11/15/08 4,705 4,734 Pioneer Natural Resources, 7.50%, 4/15/12 3,500 3,954 Plains All American Pipeline, 7.75%, 10/15/12 3,200 3,516 Transocean, 7.50%, 4/15/31 2,960 3,347 XTO Energy, 4.90%, 2/1/14 3,545 3,324 YPF Sociedad Anonima, 10.00%, 11/2/28 4,660 5,033 23,908 Entertainment and Leisure 0.1% International Speedway, 144A, 4.20%, 4/15/09 2,300 2,256 2,256 Exploration and Production 0.7% Canadian Natural Resources, 7.20%, 1/15/32 5,200 5,811 Encana Holdings, 5.80%, 5/1/14 5,150 5,247 Kaneb Pipeline Operations 5.875%, 6/1/13 2,900 2,830 7.75%, 2/15/12 2,900 3,171 17,059 Finance and Credit 1.6% CIT Group, 7.75%, 4/2/12 6,805 7,749 Colonial Bank, 9.375%, 6/1/11 3,980 4,639 Countrywide Home Loans, 5.50%, 2/1/07 3,860 4,047 Household Finance 5.75%, 1/30/07 2,925 3,092 6.375%, 11/27/12 1,550 1,651 International Lease Finance, 6.375%, 3/15/09 5,520 5,930 Northern Trust, 4.60%, 2/1/13 3,075 2,918 SLM Corporation 1.37%, 1/26/09 5,600 5,599 3.05%, 4/1/09 3,840 3,757 39,382 Food Processing 0.5% Kraft Foods, 5.625%, 11/1/11 4,700 4,743 McCormick, 6.40%, 2/1/06 7,300 7,725 12,468 Food/Tobacco 0.2% UST, 6.625%, 7/15/12 5,400 5,845 5,845 Gas & Gas Transmission 0.8% Buckeye Partners, 6.75%, 8/15/33 3,140 3,243 Duke Capital 4.302%, 5/18/06 3,450 3,466 7.50%, 10/1/09 4,250 4,730 Kinder Morgan, 6.50%, 9/1/12 5,000 5,296 Panhandle Eastearn Pipeline, 4.80%, 8/15/08 3,600 3,613 20,348 Healthcare Services 0.1% Highmark, 144A, 6.80%, 8/15/13 2,265 2,378 2,378 Insurance 2.5% AIG Sunamerica Global Financing XII, 144A, 5.30%, 5/30/07 6,070 6,339 Allstate Financial Global Funding, 144A, 5.25%, 2/1/07 5,200 5,437 Cigna, 7.40%, 5/15/07 2,000 2,185 Fund American Companies, 5.875%, 5/15/13 4,735 4,691 Jefferson Pilot, 144A, 8.14%, 1/15/46 3,000 3,217 Mangrove Bay Trust, 144A, 6.102%, 7/15/33 2,500 2,456 Marsh & McLennan, 3.625%, 2/15/08 2,250 2,214 Nationwide Financial Services, 5.90%, 7/1/12 5,170 5,354 Nationwide Mutual Insurance, 144A, 6.60%, 4/15/34 2,735 2,596 NLV Financial, 144A, 7.50%, 8/15/33 3,375 3,384 Principal Life Global Funding, 144A, 5.25%, 1/15/13 4,900 4,872 Prudential, 3.75%, 5/1/08 4,520 4,475 Security Benefit Life Insurance, 144A, 7.45%, 10/1/33 2,150 2,212 Sun Life of Canada (U.S.) Capital Trust 144A, 8.526%, 5/29/49 7,000 7,744 XL Capital Finance, 6.50%, 1/15/12 4,070 4,372 61,548 Investment Dealers 0.8% Franklin Resources, 3.70%, 4/15/08 1,650 1,621 Goldman Sachs Capital, 6.345%, 2/15/34 10,000 9,415 Morgan Stanley, 3.625%, 4/1/08 7,880 7,747 18,783 Long Distance 0.7% AT&T Broadband, 8.375%, 3/15/13 7,295 8,572 Sprint Capital 6.875%, 11/15/28 3,625 3,512 7.625%, 1/30/11 5,575 6,191 18,275 Manufacturing 0.2% John Deere Capital, 7.00%, 3/15/12 5,250 5,866 5,866 Media and Communications 0.6% Cox Enterprises, 144A, 4.375%, 5/1/08 5,500 5,483 Liberty Media, 2.61%, 9/17/06 4,695 4,780 News America 6.75%, 1/9/38 1,705 1,890 7.625%, 11/30/28 2,160 2,428 14,581 Metals 0.2% Alcan, 6.125%, 12/15/33 4,250 4,098 4,098 Metals and Mining 0.3% Falconbridge, 7.35%, 6/5/12 5,100 5,617 WMC Finance, 5.125%, 5/15/13 2,975 2,891 8,508 Miscellaneous Consumer Products 0.4% Bunge Limited Finance, 4.375%, 12/15/08 5,290 5,228 Masco, 5.875%, 7/15/12 5,190 5,395 10,623 Oil Field Services 0.2% Halliburton, 144A, 1.92%, 1/26/07 5,000 4,999 4,999 Paper and Paper Products 0.9% Celulosa Arauco Y Constitucion, 8.625%, 8/15/10 7,500 8,737 Domtar, 5.375%, 12/1/13 4,500 4,283 SCA Coordination Center, 144A, 4.50%, 7/15/15 3,425 3,121 Weyerhaeuser, 6.75%, 3/15/12 4,850 5,236 21,377 Petroleum 0.8% Amerada Hess, 7.875%, 10/1/29 3,300 3,539 ConocoPhillips, 5.90%, 10/15/32 4,560 4,369 Devon Financing, 7.875%, 9/30/31 4,035 4,628 Occidental Petroleum, 4.25%, 3/15/10 2,125 2,079 Pemex Project Funding Master Trust, 7.375%, 12/15/14 3,280 3,378 PF Export Receivables Master Trust, 144A, 6.436%, 6/1/15 2,715 2,668 20,661 Printing and Publishing 0.1% R.R. Donnelley & Sons, 144A, 3.75%, 4/1/09 2,825 2,727 2,727 Railroads 0.6% Canadian National Railway, 4.40%, 3/15/13 3,980 3,717 Norfolk Southern, 6.00%, 4/30/08 6,175 6,581 Union Pacific, 6.50%, 4/15/12 5,020 5,400 15,698 Real Estate 0.5% Developers Diversified Realty, 3.875%, 1/30/09 3,565 3,443 IStar Financial, 144A, 4.875%, 1/15/09 1,940 1,838 Reckson Operating Partnership, 5.15%, 1/15/11 2,500 2,430 Simon Property Group, 144A, 3.75%, 1/30/09 4,650 4,448 12,159 Savings and Loan 0.2% Webster Financial, 5.125%, 4/15/14 4,900 4,710 4,710 Services 0.2% Waste Management, 6.375%, 11/15/12 4,000 4,234 4,234 Specialty Chemicals 0.2% Chevron Phillips Chemical, 5.375%, 6/15/07 3,935 4,106 4,106 Specialty Retailers 0.3% AutoZone, 4.75%, 11/15/10 3,535 3,448 Office Depot, 6.25%, 8/15/13 4,145 4,298 7,746 Supermarkets 0.2% Fred Meyer, 7.45%, 3/1/08 4,635 5,157 5,157 Telecommunications 0.3% British Telecommunications, 8.375%, 12/15/10 2,700 3,163 Telus, 8.00%, 6/1/11 4,250 4,873 8,036 Telephones 1.0% Citizens Communications, 9.00%, 8/15/31 2,600 2,439 Deutsche Telekom Finance, STEP 8.50%, 6/15/10 2,960 3,499 8.75%, 6/15/30 3,400 4,125 France Telecom, STEP, 8.75%, 3/1/11 2,100 2,436 Telecom Italia Capital, 144A, 5.25%, 11/15/13 5,155 4,979 Telefonos De Mexico, S. A., 4.50%, 11/19/08 2,480 2,412 Verizon Global Funding, 7.75%, 12/1/30 4,155 4,667 24,557 Wireless Communications 0.1% U.S. Cellular, 6.70%, 12/15/33 2,695 2,555 2,555 Total Corporate Bonds and Notes (Cost $623,445) 626,310 ASSET-BACKED SECURITIES 3.8% Auto-Backed 1.2% Capital Auto Receivables Asset Trust Series 2002-2, Class CERT, 4.18%, 10/15/07 4,956 5,027 Chase Manhattan Auto Owner Trust Series 2001-B, Class B, 3.75%, 5/15/08 2,575 2,602 Series 2003-A, Class A4, 2.06%, 12/15/09 9,125 8,877 GS Auto Loan Trust, Series 2004-1, Class C, 2.68%, 12/15/06 1,750 1,742 Hyundai Auto Receivables Trust Series 2003 A, Class D, 4.06%, 10/15/10 2,050 2,057 Series 2003-A, Class A4, 3.02%, 10/15/10 4,950 4,888 Morgan Stanley Auto Loan Trust, 2.88%, 10/15/11 3,960 3,955 SSB Auto Loan Trust, Series 2002-1, Class C, 4.13%, 2/15/09 1,788 1,805 30,953 Credit Card-Backed 1.6% Citibank Credit Card Issuance Trust Series 2001-C1, Class C1, 2.22%, 1/15/10 6,035 6,148 Series 2000-C1, Class C1, 7.45%, 9/15/07 11,075 11,726 MBNA Master Credit Card Trust II Series 2000-D, Class C, 144A, 8.40%, 9/15/09 10,075 11,305 World Financial Network Series 2003-A, Class A2, 1.47%, 5/15/12 10,925 10,942 40,121 Recreational Vehicles 0.1% CIT RV Trust, Series 1997-A, Class A6, 6.35%, 4/15/11 2,358 2,387 2,387 Stranded Asset 0.9% Peco Energy Transition Trust Series 2001-A, Class A1, 6.52%, 12/31/10 11,475 12,589 Reliant Energy Transition Bond Series 2001-1, Class A4, 5.63%, 9/15/15 8,572 8,941 21,530 Total Asset-Backed Securities (Cost $94,196) 94,991 EQUITY AND CONVERTIBLE SECURITIES 1.7% Bank and Trust 0.9% AmSouth Bancorporation, Common Stock (ss.) 60 1,529 Bank One, Common Stock 32 1,531 BB&T, Common Stock (ss.) 37 1,394 Citizens Banking, Common Stock (ss.) 50 1,499 Hudson United Bancorp, Common Stock (ss.) 48 1,740 KeyCorp, Common Stock (ss.) 76 2,375 National City, Common Stock (ss.) 45 1,597 PNC Financial Services Group, Common Stock (ss.) 43 2,363 Regions Financial, Common Stock (ss.) 40 1,521 U.S. Bancorp, Common Stock (ss.) 55 1,545 Union Planters, Common Stock (ss.) 45 1,355 Wachovia, Common Stock (ss.) 35 1,662 Washington Mutual, Common Stock (ss.) 39 1,682 21,793 Building and Real Estate 0.3% CarrAmerica Realty, REIT (ss.) 60 1,759 Reckson Associates Realty, Conv. Pfd. Stock, REIT (ss.) 90 2,300 Vornado Realty Trust, REIT (ss.) 33 1,803 Weingarten Realty, REIT (ss.) 59 1,812 7,674 Electric Utilities 0.0% PPL Energy Supply, Conv. Bonds, 2.625%, 5/15/23 1,572 1,588 1,588 Financial Services 0.1% Citigroup, Common Stock (ss.) 47 2,171 2,171 Integrated Petroleum - International 0.3% BP ADR (ss.) 49 2,587 ChevronTexaco, Common Stock (ss.) 28 2,531 Royal Dutch Petroleum ADS (ss.) 47 2,334 7,452 Media and Communications 0.0% Liberty Media, Conv. Bonds, 4.00%, 11/15/29 985 690 690 Real Estate 0.1% Roslyn Real Estate Asset, Pfd. Stock 0 2,048 2,048 Total Equity and Convertible Securities (Cost $41,319) 43,416 NON-U.S. GOVERNMENT MORTGAGE- BACKED SECURITIES 8.5% Commercial Mortgage-Backed 5.3% Banc of America Commercial Mortgage Series 2003-1, Class A2, CMO, 4.648%, 9/11/36 11,450 11,022 Bear Stearns Commercial Mortgage Series 2002-TOP8, Class A2, CMO, 4.83%, 8/15/38 8,210 8,034 DLJ Commercial Mortgage Series 1999-CG2, Class A1B, CMO, 7.30%, 6/10/32 13,000 14,582 General Electric Capital Series 2001-1, Class A2, CMO, 6.531%, 5/15/33 11,300 12,251 Greenwich Capital Commercial Funding Series 2004-GG1, Class A2, CMO, 3.835%, 10/8/08 9,181 9,199 J.P. Morgan Chase Commercial Mortgage Series 1999-C7, Class A2, CMO, 6.507%, 10/15/35 9,500 10,242 Series 1999-PLS1, Class A2, CMO 144A, 7.313%, 2/15/32 19,203 21,171 Series 2001-CIB2, Class A2, CMO, 6.244%, 4/15/35 6,750 7,244 Series 2001-CIBC, Class A3, CMO, 6.26%, 3/15/33 7,275 7,731 LB-UBS Commercial Mortgage Trust Series 2004-C2, Class A2, CMO, 3.246%,3/15/29 5,975 5,698 Series 2004-C4, Class A2, CMO, 4.567%,4/17/09 11,750 11,846 Morgan Stanley Dean Witter Capital Series 2002, Class A2, CMO, 5.98%, 1/15/39 9,400 9,899 Prudential Securities Secured Financing Series 1999-NRF1, Class A1, CMO, 6.074%, 1/15/08 4,217 4,385 133,304 Home Equity Loans-Backed 1.4% BankBoston Home Equity Loan Trust Series 1998-1, Class A6, 6.35%, 2/25/13 3,967 4,063 Chase Funding Mortgage Loan Series 1998-1, Class 1M1, 6.59%, 5/25/28 1,718 1,762 Series 2002-1, Class 1A3, 5.039%, 12/25/23 5,768 5,802 Series 2002-2, Class 1M1, 5.599%, 9/25/31 1,750 1,792 Series 2002-3, Class 1A6, 4.707%, 8/25/13 5,365 5,356 Series 2003-1, Class 1A6, 4.458%, 3/25/14 5,960 5,917 Series 2003-3, Class 1M1, 4.537%, 9/25/32 4,400 4,193 Countrywide Asset-Backed Certificates Series 2003-5, Class AF3, 3.613%, 4/25/30 7,925 7,926 36,811 Whole Loans-Backed 1.8% Bank of America Mortgage Securities Series 2003-L, Class 2A2, CMO, 4.356%,1/25/34 18,600 18,564 Series 2004-A, Class 2A2, CMO, 4.178%, 2/25/34 10,141 10,026 Series 2004-D, Class 2A 2, CMO, 4.23%, 5/25/34 4,869 4,834 Countrywide Home Loans Series 2003-60, Class 2A1, CMO, 5.064%, 2/25/34 3,112 3,126 Residential Accredit Loans Series 1997-QS12, Class A7, CMO, 7.25%, 11/25/27 696 701 Summit Mortgage Trust Series 2002-1, Class A2, CMO, 144A, 6.197%, 6/28/16 1,723 1,721 Washington Mutual Series 2004-AR1, Class A, CMO, 4.229%, 3/25/34 5,831 5,775 44,747 Total Non-U.S. Government Mortgage-Backed Securities (Cost $219,713) 214,862 U.S. GOVERNMENT & AGENCY MORTGAGE- BACKED SECURITIES 30.0% U.S. Government Agency Obligations (+/-) 23.7% Federal Home Loan Mortgage 4.50%, 11/1/18 - 5/1/19 25,406 24,865 5.00%, 1/1/09 - 4/1/34 71,361 71,148 5.50%, 4/1/29 737 736 6.00%, 12/1/33 - 2/1/34 19,120 19,475 6.50%, 5/1/17 - 5/1/24 7,287 7,678 7.00%, 2/1/24 - 6/1/32 5,458 5,742 7.50%, 5/1 - 6/1/24 381 410 10.50%, 3/1/13 - 8/1/20 35 38 11.00%, 11/1/17 - 7/1/20 19 21 ARM, 4.62%, 9/1/32 4,952 4,946 CMO 4.50%, 3/15/16 31,450 31,083 5.50%, 4/15/28 21,750 21,742 6.50%, 3/15/23 10,810 11,162 CMO, Principal Only, 8/1/28 733 596 CMO, IO, 4.50%, 6/15/11 - 4/15/18 32,383 3,561 Federal National Mortgage Assn. 4.50%, 5/1/18 - 1/1/19 46,044 45,147 5.00%, 1/1/09 - 5/1/34 66,083 63,657 5.50%, 6/1/16 - 5/1/34 156,696 156,645 6.00%, 4/1/14 - 2/1/34 3,958 4,054 6.50%, 6/1/13 - 7/1/32 10,808 11,263 7.00%, 10/1/29 - 11/1/30 216 228 CMO 5.00%, 3/25/15 15,800 16,235 5.50%, 5/25/28 9,085 9,182 CMO, IO 5.50%, 11/25/28 8,030 923 6.50%, 2/1/32 2,967 728 TBA 2.91%, 11/25/33 6,325 6,046 3.50%, 4/25/13 7,250 7,281 5.50%, 1/1/19 36,067 36,789 6.00%, 1/1/34 33,079 33,606 594,987 U.S. Government Obligations 6.3% Government National Mortgage Assn. 5.00%, 9/20/33 19,937 19,231 5.50%, 1/20 - 4/20/34 56,382 56,000 6.00%, 2/15/14 - 2/20/34 26,261 27,134 6.50%, 8/15/25 - 12/20/33 5,701 5,931 7.00%, 3/15/13 - 11/20/28 11,677 12,432 7.50%, 8/15/16 - 8/15/28 2,304 2,473 8.00%, 7/15/16 - 10/15/27 7,387 8,064 8.50%, 9/15/16 - 9/20/26 1,391 1,537 9.00%, 1/15/09 - 11/15/19 322 360 9.50%, 6/15/09 - 2/15/25 71 78 10.25%, 9/15/19 - 11/15/20 203 229 11.00%, 12/15/09 - 6/15/19 2,126 2,403 11.50%, 3/15/10 - 10/15/15 277 318 CMO, Principal Only, 3/16/28 1,406 1,186 TBA, 6.00%, 1/1/34 21,120 21,496 158,872 Total U.S. Government & Agency Mortgage- Backed Securities (Cost $760,936) 753,859 U.S. GOVERNMENT & AGENCY OBLIGATIONS (EXCLUDING MORTGAGE-BACKED) 17.7% U.S. Government Agency Obligations (+/-) 4.0% Federal Home Loan Mortgage 4.75%, 10/11/12 (ss.) 10,000 9,627 6.875%, 1/15/05 (ss.) 4,750 4,902 Federal National Mortgage Assn. 2.50%, 6/15/06 (ss.) 32,827 32,654 4.25%, 7/15/07 (ss.) 20,000 20,449 5.125%, 1/2/14 (ss.) 3,960 3,844 5.75%, 2/15/08 (ss.) 15,045 16,058 7.125%, 1/15/30 (ss.) 11,300 13,090 100,624 U.S. Treasury Obligations 13.7% U.S. Treasury Bills, 1.051%, 8/12/04 21,500 21,457 U.S. Treasury Bonds 5.375%, 2/15/31 (ss.) 1,325 1,330 6.00%, 2/15/26 (ss.) 9,805 10,508 6.25%, 8/15/23 - 5/15/30 (ss.) 34,010 37,587 6.50%, 11/15/26 (ss.) 29,650 33,722 7.50%, 11/15/16 (ss.) 21,100 25,920 U.S. Treasury Inflation-Indexed Notes, 1.875%, 7/15/13 (ss.) 42,075 41,858 U.S. Treasury Notes 1.50%, 3/31/06 (ss.) 8,545 8,404 2.125%, 8/31/04 (ss.) 30,660 30,732 3.25%, 8/15/07 (ss.) 24,000 24,075 3.375%, 12/15/08 (ss.) 4,365 4,306 3.875%, 2/15/13 (ss.) 7,100 6,765 5.00%, 8/15/11 (ss.) 11,500 11,978 5.88%, 11/15/04 (ss.)^++ 72,320 73,800 U.S. Treasury Stripped Interest Payment Zero Coupon, 5/15/20 (ss.) 32,250 13,177 345,619 Total U.S. Government & Agency Obligations (excluding Mortgage-Backed) (Cost $445,166) 446,243 FOREIGN GOVERNMENT OBLIGATIONS & AGENCY OBLIGATIONS 5.4% Canadian Government and Municipalities 2.3% Government of Canada 5.50%, 6/1/09 (CAD) 24,820 19,249 6.00%, 9/1/05 (CAD) 50,150 38,190 57,439 Foreign Government and Municipalities (Excluding Canadian) 3.1% Asian Developement Bank, 6.25%, 6/15/11 (AUD) 16,075 11,610 Federal Republic of Germany, 5.00%, 5/20/05 (EUR) 9,100 11,403 Government of Poland, 5.75%, 6/24/08 (PLN) 133,300 32,977 Republic of Chile, 5.50%, 1/15/13 4,710 4,719 Republic of Poland, Zero Coupon, 4/12/06 (PLN) 20,000 4,605 Republic of South Africa, 6.50%, 6/2/14 2,575 2,570 United Mexican States 1.84%, 1/13/09 (ss.) 3,500 3,547 6.375%, 1/16/13 (ss.) 5,800 5,809 77,240 Total Foreign Government Obligations & Agency Obligations (Cost $128,418) 134,679 MUNICIPAL BONDS 1.8% California 5.00%, 7/1/23 4,730 5,074 GO 5.25%, 4/1/34 2,570 2,546 5.50%, 11/1/33 2,500 2,548 Kansas Dev. Fin. Auth., Public Employee Retirement 5.501%, 5/1/34 (FSA Insured) 3,175 2,990 Massachusetts, GO, 5.50%, 1/1/13 (MBIA Insured) 11,890 13,267 North Carolina, GO, 5.25%, 3/1/13 15,740 17,435 Oregon, GO, 5.892%, 6/1/27 1,640 1,650 Total Municipal Bonds (Cost $46,502) 45,510 OPTIONS WRITTEN 0.0% U. S. Treasury Bonds Futures, 240 contracts, Call 6/25/04 @ $104.00 * (240) (473) Total Options Written (Cost $(258)) (473) INTEREST RATE SWAP AGREEMENTS 0.0% Citigroup Capital Services, Pay 4.4% Fixed Receive 3 month LIBOR (Currently 1.19%), 5/11/09 0 58 Morgan Stanley Capital Services, Pay 3.96% Fixed Receive 3 month LIBOR (Currently 1.17%), 11/12/08 0 98 Morgan Stanley Capital Services, Pay 4.21% Fixed Receive 3 month LIBOR (Currently 1.18%), 5/10/09 0 1 Total Interest Rate Swaps (Premium Paid $0) 157 SHORT-TERM INVESTMENTS 9.5% Money Market Funds 9.5% T. Rowe Price Reserve Investment Fund, 1.09% # 238,642 238,642 Total Money Market Funds (Cost $238,642) 238,642 SECURITIES LENDING COLLATERAL 16.2% Money Market Pooled Account 16.2% State Street Bank and Trust Company of New Hampshire N.A. Securities Lending Quality Trust units, 1.06% # 406,318 406,318 Total Securities Lending Collateral (Cost $406,318) 406,318 Total Investments in Securities 119.5% of Net Assets (Cost $3,004,397) $3,004,514 Forward Currency Exchange Contracts - ----------------------------------------------------------------------------- Amounts in (000s) Unrealized Counterparty Settlement Receive Deliver Gain (Loss) - ----------------------------------------------------------------------------- CS First Boston 6/30/04 USD 11,619 AUD 16,500 $ (121) Royal Bank of Canada 7/30/04 USD 36,852 CAD 50,125 233 CS First Boston 8/2/04 USD 29,512 EUR 24,100 117 Net unrealized gain (loss) on open forward currency exchange contracts $ 229 Futures Contracts ($ 000s) Contract Unrealized Expiration Value Gain (Loss) ------------ --------- ----------- Long, 141 U.S. Treasury 30 Year Note contracts, $326 par of U.S. Treasury Notes pledged as initial margin 9/04 $ 14,836 $ 68 Net payments (receipts) of variation margin to date (152) Variation margin receivable (payable) on open futures contracts $ (84) ------------- (1) Denominated in U.S. dollars unless otherwise noted # Seven-day yield * Non-income producing (ss.) All or a portion of this security is on loan at May 31, 2004 - See Note 2 (+/-) The issuer is a publicly-traded company that operates under a congressional charter; its securities are neither issued nor guaranteed by the U.S. government. ^ All or a portion of this security is pledged to cover written call options at May 31, 2004. ++ All or a portion of this security is pledged to cover margin requirements on futures contracts at May 31, 2004. 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 value of such securities at period-end amounts to $147,450 and represents 17.1% of net assets ADR American Depository Receipts ADS American Depository Shares ARM Adjustable Rate Mortgage AUD Australian dollar CAD Canadian dollar CMO Collateralized Mortgage Obligation EUR Euro FSA Financial Security Assurance Inc. GO General Obligation IO Interest Only security for which the fund receives interest on notional principal (par) MBIA MBIA Insurance Corp. PLN Polish zloty REIT Real Estate Investment Trust STEP Stepped coupon bond for which the coupon rate of interest will adjust on specified future date(s) TBA To Be Announced security was purchased on a forward commitment basis The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- Certified Annual Report May 31, 2004 Statement of Assets and Liabilities - -------------------------------------------------------------------------------- (In thousands except shares and per share amounts) Assets Investments in securities, at value (cost $3,004,397) $ 3,004,514 Other assets 94,170 Total assets 3,098,684 Liabilities Payable for investment securities purchased 169,580 Obligation to return securities lending collateral 406,318 Other liabilities 8,098 Total liabilities 583,996 NET ASSETS $ 2,514,688 ------------- Net Assets Consist of: Undistributed net investment income (loss) $ 1,205 Undistributed net realized gain (loss) (21,419) Net unrealized gain (loss) 389 Paid-in-capital applicable to 283,385,372 shares of $1.00 par value capital stock outstanding; 300,000,000 shares authorized 2,534,513 NET ASSETS $ 2,514,688 ------------- NET ASSET VALUE PER SHARE Investor Class ($2,511,663,592/283,044,626 shares outstanding) $ 8.87 ------------- Advisor Class ($139,180/15,686 shares outstanding) $ 8.87 ------------- R Class ($2,885,337/325,060 shares outstanding) $ 8.88 ------------- The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- Certified Annual Report Statement of Operations - -------------------------------------------------------------------------------- ($ 000s) Year Ended 5/31/04 Investment Income (Loss) Income Interest $ 90,156 Dividend 5,299 Securities lending 503 Total income 95,958 Expenses Investment management 10,947 Shareholder servicing Investor Class 4,968 R Class 9 Custody and accounting 381 Registration 179 Prospectus and shareholder reports Investor Class 124 Advisor Class 1 R Class 2 Legal and audit 30 Directors 10 Rule 12b-1 fees R Class 6 Miscellaneous 16 Reductions/repayments pursuant to expense limitation Expenses (reimbursed by) repaid to manager (7) Total expenses 16,666 Expenses paid indirectly (28) Net expenses 16,638 Net investment income (loss) 79,320 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- Certified Annual Report Statement of Operations - -------------------------------------------------------------------------------- ($ 000s) Year Ended 5/31/04 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 43,929 Futures 2,124 Written options 531 Foreign currency transactions (5,034) Net realized gain (loss) 41,550 Change in net unrealized gain (loss) Securities (130,819) Futures (188) Written options (215) Other assets and liabilities denominated in foreign currencies 2,439 Change in net unrealized gain (loss) (128,783) Net realized and unrealized gain (loss) (87,233) INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ (7,913) ----------- The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income 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) $ 79,320 $ 84,987 Net realized gain (loss) 41,550 (2,576) Change in net unrealized gain (loss) (128,783) 122,779 Increase (decrease) in net assets from operations (7,913) 205,190 Distributions to shareholders Net investment income Investor Class (82,278) (87,016) Advisor Class (4) (3) R Class (55) (4) Decrease in net assets from distributions (82,337) (87,023) Capital share transactions * Shares sold Investor Class 693,833 561,473 Advisor Class 38 100 R Class 3,387 321 Distributions reinvested Investor Class 77,952 81,806 Advisor Class 4 3 R Class 55 4 Shares redeemed Investor Class (436,124) (358,633) Advisor Class (6) - R Class (834) (14) Increase (decrease) in net assets from capital share transactions 338,305 285,060 Net Assets Increase (decrease) during period 248,055 403,227 Beginning of period 2,266,633 1,863,406 End of period $ 2,514,688 $ 2,266,633 ----------- ----------- (Including undistributed net investment income (loss) of $1,205 at 5/31/04 and $899 at 5/31/03) T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- Certified Annual Report Statement of Changes in Net Assets - -------------------------------------------------------------------------------- ($ 000s) Year Ended 5/31/04 5/31/03 *Share information Shares sold Investor Class 76,658 63,287 Advisor Class 5 12 R Class 377 36 Distributions reinvested Investor Class 8,648 9,221 R Class 6 1 Shares redeemed Investor Class (48,398) (40,608) Advisor Class (1) - R Class (93) (2) Increase (decrease) in shares outstanding 37,202 31,947 The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- Certified Annual Report 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: the New Income Fund original share class, referred to in this report as the Investor 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 sold only through brokers and other financial intermediaries, and R Class shares are available to 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, shareholder servicing, and/or 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 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. 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, for certain markets, the official closing price at the time the valuations are made, except for OTC Bulletin Board securities, which are valued at the mean of the latest bid and asked prices. 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 asked prices for domestic securities and the last quoted sale price for international securities. Investments in mutual funds are valued at the mutual fund's closing net asset value per share on the day of valuation. Options on futures contracts are valued at the last sale price. Financial futures contracts are valued at closing settlement prices. Swap agreements are valued at prices furnished by dealers who make markets in such securities. 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 Directors. Most foreign markets close before the close of trading on the NYSE. If the fund determines that developments between the close of a foreign market and the close of the NYSE will, in its judgment, materially affect the value of some or all of its portfolio securities, which in turn will affect the fund's share price, the fund will adjust the previous closing prices to reflect the fair value of the securities as of the close of the NYSE, as determined in good faith by the T. Rowe Price Valuation Committee, established by the fund's Board of Directors. A fund may also fair value securities in other situations, such as when a particular foreign market is closed but the fund is open. In deciding whether to make fair value adjustments, the fund reviews a variety of factors, including developments in foreign markets, the performance of U.S. securities markets, and the performance of instruments trading in U. S. markets that represent foreign securities and baskets of foreign securities. The fund uses outside pricing services to provide it with closing market prices and information used for adjusting those prices. The fund cannot predict how often it will use closing prices and how often it will adjust those prices. As a means of evaluating its fair value process, the fund routinely compares closing market prices, the next day's opening prices in the same markets, and adjusted prices. 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 asked 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 security gains and losses. Class Accounting The Advisor Class and R Class each pay distribution, shareholder servicing, and/or certain 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 daily 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 all 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 outstanding shares. 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, which are reflected as expenses paid indirectly. 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 and forward currency exchange 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. Net periodic receipts or payments required by swap agreements are accrued daily and recorded as realized gain or loss on securities in the accompanying financial statements. Fluctuations in the fair value of swap agreements are recorded in the change in net unrealized gain or loss on securities in the accompanying financial statements and are reclassified to realized gain or loss on securities upon termination prior to maturity. Distributions to shareholders are recorded on the ex-dividend date. 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. 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. Forward Currency Exchange Contracts During the year ended May 31, 2004, 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, 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. Options 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 on a certain date. Risks arise from possible illiquidity of the options market and from movements in underlying futures prices. Options are reflected in the accompanying Portfolio of Investments at market value. Transactions in options written and related premiums received during the year ended May 31, 2004, were as follows: - -------------------------------------------------------------------------------- Number of Contracts Premiums Outstanding at beginning of period - $ - Written 1,770 1,310,000 Expired (810) (361,000) Closed (720) (691,000) Outstanding at end of period 240 $ 258,000 ----------------------------- Swap Agreements During the year ended May 31, 2004, the fund was a party to interest rate swap agreements under which it is obligated to exchange cash flows based on the difference between specified interest rates applied to a notional principal amount for a specified period of time. Risks arise from the possible inability of counterparties to meet the terms of their agreements and from movements in interest rates. Securities Lending The fund lends its securities to approved brokers to earn additional income. It receives as collateral cash and U.S. 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, 2004, the value of loaned securities was $417,004,000; aggregate collateral consisted of $406,318,000 in the money market pooled trust and U.S. government securities valued at $46,520,000. Other Purchases and sales of portfolio securities, other than short-term and U.S. government securities, aggregated $903,685,000 and $788,850,000, respectively, for the year ended May 31, 2004. Purchases and sales of U.S. government securities aggregated $4,220,752,000 and $4,075,204,000, 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 $82,337,000 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 $ 67,550,000 Unrealized depreciation (76,271,000) Net unrealized appreciation (depreciation) (8,721,000) Undistributed ordinary income 11,616,000 Capital loss carryforwards (22,720,000) Paid-in capital 2,534,513,000 Net assets $ 2,514,688,000 --------------- Federal income tax regulations require the fund to defer recognition of capital losses realized on certain covered option, futures and forward currency exchange contract transactions; accordingly, $9,027,000 of realized losses reflected in the accompanying financial statements have not been recognized for tax purposes as of May 31, 2004. The fund intends to retain realized gains to the extent of available capital loss carryforwards for federal income tax purposes. During the fiscal year ended May 31, 2004, the fund utilized $16,609,000 of capital loss carryforwards. As of May 31, 2004, the fund had $22,720,000 of capital loss carryforwards that expire in fiscal 2009. For the year ended May 31, 2004, 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. 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 $ 3,323,000 Undistributed net realized gain (8,322,000) Paid-in capital 4,999,000 At May 31, 2004, the cost of investments for federal income tax purposes was $3,013,507,000. 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 $996,000. The Advisor Class and R Class are also subject to contractual expense limitations through the limitation dates indicated in the table below. During the limitation period, the manager is required to waive its management fee and reimburse a class for any expenses, excluding interest, taxes, brokerage commissions, and extraordinary expenses, that would otherwise cause the class's ratio of total expenses to average net assets (expense ratio) to exceed its expense limitation. Through the repayment date, each class is required to repay the manager for expenses previously reimbursed and management fees waived to the extent the class's net assets have grown or expenses have declined sufficiently to allow repayment without causing the class's expense ratio to exceed its expense limitation. - -------------------------------------------------------------------------------- Advisor Class R Class Expense Limitation 0.90% 1.15% Limitation Date 9/30/06 9/30/06 Repayment Date 9/30/08 9/30/08 Pursuant to this agreement, at May 31, 2004, expenses previously reimbursed by the manager in the amount of $8,000 remain subject to repayment through September 30, 2006. 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 Investor Class and R Class. Expenses incurred pursuant to these service agreements totaled $2,182,000 for the year ended May 31, 2004, of which $187,000 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. For the year ended May 31, 2004, the fund was charged $9,000 for shareholder servicing costs related to the college savings plans, of which $6,000 was for services provided by Price. At May 31, 2004, no shares of the Investor Class were held by college savings plans. 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 expenses in the accompanying financial statements. For the year ended May 31, 2004, the fund was allocated $1,931,000 of Spectrum Funds' expenses and $337,000 of Retirement Funds' expenses. Of these amounts, $1,746,000 related to services provided by Price and $184,000 was payable at period-end. At May 31, 2004, approximately 37.2% of the outstanding shares of the Investor Class were held by the Spectrum Funds and 7.1% were held by the Retirement 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 $3,843,000. T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- Certified Annual Report Report of Independent Registered Public Accounting Firm 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, 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 custodians and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Baltimore, Maryland June 22, 2004 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- Certified Annual Report Tax Information (Unaudited) for the Tax Year Ended 5/31/04 - -------------------------------------------------------------------------------- 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 $4,999,000 from short-term capital gains. For taxable non-corporate shareholders, $824,000 of the fund's income represents qualified dividend income subject to the 15% rate category. For corporate shareholders, $748,000 of the fund's income qualifies for the dividends-received deduction. Information on Proxy Voting - -------------------------------------------------------------------------------- A description of the policies and procedures that the T. Rowe Price New Income 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 New Income Fund - -------------------------------------------------------------------------------- Certified Annual Report 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 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 Executive (1945) Officer, The Rouse Company, real estate developers; 1980 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 Resources (1938) Corp. (5/00 to present), and Pacific Rim Mining Corp. 2001 (2/02 to present); Chairman and President, Nye Corp. Karen N. Horn Managing Director and President, Global Private Client (1943) Services, Marsh Inc. (1999-2003); Managing Director and 2003 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, Inc., (1934) consulting environmental and civil engineers 1983 John G. Schreiber Owner/President, Centaur Capital Partners, Inc., a real (1946) estate investment company; Partner, Blackstone Real 1992 Estate Advisors, L.P.; Director, AMLI Residential Properties Trust and The Rouse Company, real estate developers * Each independent director oversees 111 T. Rowe Price portfolios and serves until retirement, resignation, or election of a successor. Inside Directors Name Principal Occupation(s) During Past 5 Years and (Year of Birth) Directorships of Other Public Companies Year Elected * [Number of T. Rowe Price Portfolios Overseen] Mary J. Miller, CFA Vice President, T. Rowe Price and T. Rowe Price (1955) Group, Inc. 2004 [37] James S. Riepe Director and Vice President, T. Rowe Price; Vice (1943) Chairman of the Board, Director, and Vice President, 1983 T. Rowe Price Group, Inc.; Chairman of the Board and [111] 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, New Income Fund * Each inside director serves until retirement, resignation, or election of a successor. Officers Name (Year of Birth) Principal Occupation(s) Title and Fund(s) Served Connice A. Bavely, CFA (1951) Vice President, T. Rowe Price and Vice President, New Income Fund T. Rowe Price Group, Inc. Stephen V. Booth, CPA (1961) Vice President, T. Rowe Price, T. Rowe Vice President, New Income Fund Price Group, Inc., and T. Rowe Price Trust Company Brian J. Brennan, CFA (1964) Vice President, T. Rowe Price, T. Rowe Vice President, New Income Fund Price Group, Inc., and T. Rowe Price Trust Company Jennifer A. Callaghan (1969) Assistant Vice President, T. Rowe Price Assistant Vice President, New Income Fund Joseph A. Carrier (1960) Vice President, T. Rowe Price, T. Rowe Treasurer, New Income Fund Price Group, Inc., T. Rowe Price Investment Services, 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) Principal Occupation(s) Title and Fund(s) Served Patrick S. Cassidy, CFA (1964) Vice President, T. Rowe Price and Vice President, New Income Fund T. Rowe Price Group, Inc. Roger L. Fiery III, CPA (1959) Vice President, T. Rowe Price, T. Rowe Vice President, New Income Fund Price Group, Inc., T. Rowe Price International, Inc., and T. Rowe Price Trust Company Gregory S. Golczewski (1966) Vice President, T. Rowe Price and Vice President, New Income Fund T. Rowe Price Trust Company Michael J. Grogan, CFA (1971) Assistant Vice President, T. Rowe Price Assistant Vice President, New Income Fund Henry H. Hopkins (1942) Director and Vice President, T. Rowe Vice President, New Income 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. Alan D. Levenson, PhD (1958) Vice President, T. Rowe Price and Vice President, New Income Fund T. Rowe Price Group, Inc. Patricia B. Lippert (1953) Assistant Vice President, T. Rowe Secretary, New Income Fund Price and T. Rowe Price Investment Services, Inc. Edmund M. Notzon III, PhD, CFA (1945) Vice President, T. Rowe Price, T. Rowe Vice President, New Income Fund Price Group, Inc., T. Rowe Price Investment Services, Inc., and T. Rowe Price Trust Company Vernon A. Reid, Jr. (1954) Vice President, T. Rowe Price and Vice President, New Income Fund T. Rowe Price Group, Inc. Daniel O. Shackelford, CFA (1958) Vice President, T. Rowe Price, T. Rowe President, New Income Fund Price Group, Inc., and T. Rowe Price Trust Company David A. Tiberii, CFA (1965) Vice President, T. Rowe Price and Vice President, New Income Fund 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 $16,881 $11,541 Audit-Related Fees 1,536 -- Tax Fees 4,665 3,107 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 New Income Fund, Inc. 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 EX-99.CERT 2 ex-99cert.txt 302 CERTIFICATIONS Item 11(a)(2). CERTIFICATIONS I, James S. Riepe, certify that: 1. I have reviewed this report on Form N-CSR of T. Rowe Price New Income Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 16, 2004 /s/ James S. Riepe James S. Riepe Principal Executive Officer CERTIFICATIONS I, Joseph A. Carrier, certify that: 1. I have reviewed this report on Form N-CSR of T. Rowe Price New Income Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 16, 2004 /s/ Joseph A. Carrier Joseph A. Carrier Principal Financial Officer EX-99.CODE ETH 3 ex-99_codeeth.txt CODE OF ETHICS Code of Ethics for Principal Executive and Senior Financial Officers of The Price Funds under the Sarbanes-Oxley Act of 2002 I. General Statement. This Code of Ethics (the "Price Funds S-O Code") has been designed to bring the Price Funds into compliance with the applicable requirements of the Sarbanes-Oxley Act of 2002 (the "Act") rules promulgated by The Securities and Exchange Commission thereunder ("Regulations"). The Price Funds S-O Code applies solely to the Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer or Controller of, or persons performing similar functions for, a Price Fund (whether such persons are employed by a Price Fund or third party) ("Covered Officers"). The "Price Funds" shall include each mutual fund that is managed, sponsored and distributed by affiliates of T. Rowe Price Group, Inc. ("Group"). The investment managers to the Price Funds will be referred to as the "Price Fund Advisers." A list of Covered Officers is attached as Exhibit A. The Price Fund Advisers have, along with their parent, T. Rowe Price Group, Inc. ("Group") also maintained a comprehensive Code of Ethics and Conduct (the "Group Code") since 1972, which applies to all officers, directors and employees of the Price Funds, Group and its affiliates. As mandated by the Act, Group has adopted a Code (the "Group S-O Code"), similar to the Price Funds S-O Code, which applies solely to its principal executive and senior financial officers. The Group S-O Code and the Price Funds S-O Code will be referred to collectively as the "S-O Codes". The Price Funds S-O Code has been adopted by the Price Funds in accordance with the Act and Regulations thereunder and will be administered in conformity with the disclosure requirements of Item 2 of Form N-CSR. The S-O Codes are attachments to the Group Code. In many respects the S-O Codes are supplementary to the Group Code, but the Group Code is administered separately from the S-O Codes, as the S-O Codes are from each other. II. Purpose of the Price Funds S-O Code. The purpose of the Price Funds S-O Code, as mandated by the Act and the Regulations, is to establish standards that are reasonably designed to deter wrongdoing and to promote: Ethical Conduct. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. Disclosure. Full, fair, accurate, timely and understandable disclosure in reports and documents that the Price Funds file with, or submit to, the SEC and in other public communications made by the Price Funds. Compliance. Compliance with applicable governmental laws, rules and regulations. Reporting of Violations. The prompt internal reporting of violations of the Price Funds S-O Code to an appropriate person or persons identified in the Price Funds S-O Code. Accountability. Accountability for adherence to the Price Funds S-O Code. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest. Overview. Each Covered Officer owes a duty to the Price Funds to adhere to a high standard of honesty and business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the Price Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with a Price Fund. Certain conflicts of interest covered by the Price Funds S-O Code arise out of the relationships between Covered Officers and the Price Funds and may already be subject to provisions regulating conflicts of interest in the Investment Company Act of 1940 ("Investment Company Act"), the Investment Advisers Act of 1940 ("Investment Advisers Act") and the Group Code. For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with a Price Fund because of their status as "affiliated persons" of a Price Fund. The compliance programs and procedures of the Price Funds and Price Fund Advisers are designed to prevent, or identify and correct, violations of these provisions. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between a Price Fund and its Price Fund Adviser (and its affiliates) of which the Covered Officers may also be officers or employees. As a result, the Price Funds S-O Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Price Funds or for the Price Fund Advisers, or for both), be involved in establishing policies and implementing decisions which will have different effects on these entities. The participation of the Covered Officers in such activities is inherent in the contractual relationship between each Price Fund and its respective Price Fund Adviser. Such participation is also consistent with the performance by the Covered Officers of their duties as officers of the Price Funds and, if consistent with the provisions of the Investment Company Act and the Investment Advisers Act, it will be deemed to have been handled ethically. Other conflicts of interest are covered by the Price Funds S-O Code, even if these conflicts of interest are not addressed by or subject to provisions in the Investment Company Act and the Investment Advisers Act. Whenever a Covered Officer is confronted with a conflict of interest situation where he or she is uncertain as to the appropriate action to be taken, he or she should discuss the matter with the Chairperson of Group's Ethics Committee or another member of the Committee. Handling of Specific Types of Conflicts. Each Covered Officer (and close family members) must not: Entertainment. Accept entertainment from any company with which any Price Fund or any Price Fund Adviser has current or prospective business dealings, including portfolio companies, unless such entertainment is in full compliance with the policy on entertainment as set forth in the Group Code. Gifts. Accept any gifts, except as permitted by the Group Code. Improper Personal Influence. Use his or her personal influence or personal relationships improperly to influence investment decisions, brokerage allocations or financial reporting by the Price Funds to the detriment of any one or more of the Price Funds. Taking Action at the Expense of a Price Fund. Cause a Price Fund to take action, or fail to take action, for the personal benefit of the Covered Officer rather than for the benefit of one or more of the Price Funds. Misuse of Price Funds' Transaction Information. Use knowledge of portfolio transactions made or contemplated for a Price Fund or any other clients of the Price Fund Advisers to trade personally or cause others to trade in order to take advantage of or avoid the market impact of such portfolio transactions. Outside Business Activities. Engage in any outside business activity that detracts from a Covered Officer's ability to devote appropriate time and attention to his or her responsibilities to a Price Fund. Service Providers. Excluding Group and its affiliates, have any ownership interest in, or any consulting or employment relationship with, any of the Price Funds' service providers, except that an ownership interest in public companies is permitted Receipt of Payments. Have a direct or indirect financial interest in commissions, transaction charges, spreads or other payments paid by a Price Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest (such as compensation or equity ownership) arising from the Covered Officer's employment by Group or any of its affiliates. Service as a Director or Trustee. Serve as a director, trustee or officer of any public or private company or a non-profit organization that issues securities eligible for purchase by any of the Price Funds, unless approval is obtained as required by the Group Code. IV. Covered Officers' Specific Obligations and Accountabilities. A. Disclosure Requirements and Controls. Each Covered Officer must familiarize himself or herself with the disclosure requirements (Form N-1A registration statement, proxy (Schedule 14A), shareholder reports, Forms N-SAR, N-CSR, etc.) applicable to the Price Funds and the disclosure controls and procedures of the Price Fund and the Price Fund Advisers. B. Compliance with Applicable Law. It is the responsibility of each Covered Officer to promote compliance with all laws, rules and regulations applicable to the Price Funds and the Price Fund Advisers. Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Price Funds and the Price Fund Advisers and take other appropriate steps with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Price Funds file with, or submit to, the SEC, and in other public communications made by the Price Funds. C. Fair Disclosure. Each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about a Price Fund to others, whether within or outside the Price organization, including to the Price Fund's directors and auditors, and to governmental regulators and self-regulatory organizations. D. Initial and Annual Affirmations. Each Covered Officer must: 1. Upon adoption of the Price Funds S-O Code (or thereafter, as applicable, upon becoming a Covered Officer), affirm in writing that he or she has received, read, and understands the Price Funds S-O Code. 2. Annually affirm that he or she has complied with the requirements of the Price Funds S-O Code. E. Reporting of Material Violations of the Price Funds S-O Code. If a Covered Officer becomes aware of any material violation of the Price Funds S-O Code or laws and governmental rules and regulations applicable to the operations of the Price Funds, he or she must promptly report the violation ("Report") to the Chief Legal Counsel of the Price Funds ("CLC"). Failure to report a material violation will be considered itself a violation of the Price Funds S-O Code. The CLC is identified in the attached Exhibit B. It is the Price Funds policy that no retaliation or other adverse action will be taken against any Covered Officer or other employee of a Price Fund, a Price Fund Adviser or their affiliates based upon any lawful actions of the Covered Officer or employee with respect to a Report made in good faith. F. Annual Disclosures. Each Covered Officer must report, at least annually, all affiliations or other relationships as called for in the "Annual Questionnaire for Executive Officers and/or Employee Directors/Trustees of Group and the Price Funds." V. Administration of the Price Funds S-O Code. The Ethics Committee is responsible for administering the Price Funds S-O Code and applying its provisions to specific situations in which questions are presented. A. Waivers and Interpretations. The Chairperson of the Ethics Committee has the authority to interpret the Price Funds S-O Code in any particular situation and to grant waivers where justified, subject to the approval of the Joint Audit Committee of the Price Funds. All material interpretations concerning Covered Officers will be reported to the Joint Audit Committee of the Price Funds at its next meeting. Waivers, including implicit waivers, to Covered Officers will be publicly disclosed as required in the Instructions to N-CSR. Pursuant to the definition in the Regulations, an implicit waiver means a Price Fund's failure to take action within a reasonable period of time regarding a material departure from a provision of the Price Funds S-O Code that has been made known to an "executive officer" (as defined in Rule 3b-7 under the Securities Exchange Act of 1934) of a Price Fund. An executive officer of a Price Fund includes its president and any vice-president in charge of a principal business unit, division or function. B. Violations/Investigations. The following procedures will be followed in investigating and enforcing the Price Funds S-O Code: 1. The CLC will take or cause to be taken appropriate action to investigate any potential or actual violation reported to him or her. 2. The CLC, after consultation if deemed appropriate with Outside Counsel to the Price Funds, will make a recommendation to the appropriate Price Funds Board regarding the action to be taken with regard to each material violation. Such action could include any of the following: a letter of censure or suspension, a fine, a suspension of trading privileges or termination of officership or employment. In addition, the violator may be required to surrender any profit realized (or loss avoided) from any activity that is in violation of the Price Funds S-O Code. VI. Amendments to the Price Funds S-O Code. Except as to the contents of Exhibit A and Exhibit B, the Price Funds S-O Code may not be materially amended except in written form, which is specifically approved or ratified by a majority vote of each Price Fund Board, including a majority of the independent directors on each Board. VII. Confidentiality. All reports and records prepared or maintained pursuant to the Price Funds S-O Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law, the Price Funds S-O Code or as necessary in connection with regulations under the Price Funds S-O Code, such matters shall not be disclosed to anyone other than the directors of the appropriate Price Fund Board, Outside Counsel to the Price Funds, members of the Ethics Committee and the CLC and authorized persons on his or her staff. Approved: October 2003 Exhibit A Persons Covered by the Price Funds S-O Code of Ethics James S. Riepe, Chairman and Chief Executive Officer Joseph A. Carrier, Treasurer and Chief Financial Officer Exhibit B Chief Legal Counsel to the Price Funds Henry H. Hopkins EX-99.906 4 ex-99_906cert.txt 906 CERTIFICATIONS Item 11(b). CERTIFICATION UNDER SECTION 906 OF SARBANES-OXLEY ACT OF 2002 Name of Issuer: T. Rowe Price New Income Fund In connection with the Report on Form N-CSR for the above named issuer, the undersigned hereby certifies, to the best of his knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: July 16, 2004 /s/ James S. Riepe James S. Riepe Principal Executive Officer Date: July 16, 2004 /s/ Joseph A. Carrier Joseph A. Carrier Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----