<DOCUMENT>
<TYPE>N-CSRS
<SEQUENCE>1
<FILENAME>nif.txt
<DESCRIPTION>T. ROWE PRICE NEW INCOME FUND
<TEXT>
Item 1. Report to Shareholders
November 30, 2004
New Income Fund
Semiannual Report
T. Rowe Price
<PAGE>
--------------------------------------------------------------------------------
The views and opinions in this report were current as of November 30, 2004. They
are not guarantees of performance or investment results and should not be taken
as investment advice. Investment decisions reflect a variety of factors, and the
managers reserve the right to change their views about individual stocks,
sectors, and the markets at any time. As a result, the views expressed should
not be relied upon as a forecast of the fund's future investment intent. The
report is certified under the Sarbanes-Oxley Act of 2002, which requires mutual
funds and other public companies to affirm that, to the best of their knowledge,
the information in their financial reports is fairly and accurately stated in
all material respects.
--------------------------------------------------------------------------------
REPORTS ON THE WEB
Sign up for our E-mail Program, and you can begin to receive updated fund
reports and prospectuses online rather than through the mail. Log in to your
account at troweprice.com for more information.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Fellow Shareholders
The past six months were favorable for investment-grade bonds and your fund as
long-term bond prices rallied in response to falling yields. Although the
Federal Reserve raised its target for the key federal funds rate four times in
the period, your portfolio's defensive posture and focus on intermediate- and
longer-term securities benefited results. The New Income Fund posted solid
returns for six and 12 months that compared favorably with its Lipper peer group
average.
MARKET ENVIRONMENT
Short- and long-term Treasury yields moved in opposite directions in the
six-month period ended November 30, 2004. As anticipated, the Federal Reserve
repeatedly nudged short-term interest rates higher--in four quarter-point
increments since June 30--in response to a sustained economic expansion. The
federal funds target rate has doubled from a multi-decade low to 2.0%, and
short-maturity fixed-income yields have responded in kind. For example, the
yield on the three-month Treasury bill rose 116 basis points (100 basis points
equal 1.0%) to 2.22% over the past six months. (The Federal Reserve raised rates
another quarter point to 2.25% on December 14, following the end of our
reporting period.)
[GRAPHIC OMITTED]
INTEREST RATE LEVELS
--------------------------------------------------------------------------------
10-Year Treasury Note
Lehman Brothers Baa U.S. Credit Index
2-Year Treasury Note
10-Year Lehman Brothers Baa 2-Year
Treasury Note U.S. Credit Index Treasury Note
11/30/03 4.33% 5.15% 2.04%
4.25 4.95 1.82
4.13 4.84 1.82
2/04 3.97 4.68 1.64
3.84 4.61 1.57
4.51 5.27 2.32
5/04 4.65 5.50 2.53
4.58 5.51 2.68
4.48 5.35 2.68
8/04 4.12 5.01 2.39
4.12 5.00 2.61
4.02 4.92 2.55
11/30/04 4.35 5.20 3.00
Nevertheless, long-term bond yields fell in the first half of your fund's fiscal
year (although rates spiked in November) due to job market weakness, a squeeze
on consumers from sharply rising oil prices, and continued geopolitical
uncertainty. From this year's high near 5.35% (at the end of May), the yield on
the 30-year Treasury note dipped to 5.00% at the end of the reporting period.
The yield on the 10-year Treasury note, which is closer to the portfolio's
weighted average maturity, declined a similar amount, to 4.35% from 4.65%, over
the last six
<PAGE>
months. The combination of rising short-term yields and falling longer-term
yields resulted in a flattening (or pivoting) of the yield curve. (The yield
curve is a graphic depiction of interest rates for bonds of the same quality
with various maturities.) Since May, long-term securities--the "back end" of the
curve--dramatically outperformed short-term issues--the "front end." We think it
is likely that longer-term yields will increase in coming quarters but that the
yield curve will continue flattening as short rates rise more than those further
out the curve.
MAJOR INDEX RETURNS
--------------------------------------------------------------------------------
Period Ended 11/30/04 6 Months 12 Months
--------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Index 3.82% 4.44%
Lehman Brothers U.S. Treasury Index 3.14 2.52
Lehman Brothers Mortgage-Backed Securities Index 4.09 5.09
Lehman Brothers U.S. Credit Index 4.60 5.04
CS First Boston High Yield Index 9.31 12.85
Sources: Lehman Brothers and CS First Boston.
Intermediate- and long-term bonds posted strong gains for the past six months as
price gains augmented interest income. Overseas credits, particularly in
emerging markets, generated the best results as the dollar fell and world
economic growth resumed. Corporate bonds, especially lower-quality credits,
generated good results as well, helped by economic strength, improving profit
trends, and continuing balance sheet repair. Mortgage-backed securities
outperformed other comparable government securities as prepayment volatility
subsided. Treasury inflation-protected securities (TIPS) also produced strong
returns. The dollar's weakness, fears relating to energy-induced inflation, and
the rising CPI helped boost demand for TIPS, especially by institutional
investors, who have added the class to their asset allocation to enhance
diversification and hedge inflation risks. Asset-backed and government agency
securities, which have minimal default risk, lagged the Lehman Brothers U.S.
Aggregate Index, a broad measure of the domestic investment-grade bond market,
but outperformed similar-maturity Treasuries.
PERFORMANCE REVIEW
The New Income Fund generated a solid 4.10% six-month gain for the period ended
November 30, 2004. The portfolio outperformed the Lipper
<PAGE>
average for similar funds and the Lehman Brothers U.S. Aggregate Index. In the
past six months, we emphasized longer maturity debt--the long end of the
curve--while maintaining a defensive posture through purchases of floating-rate
notes on the short end and increasing diversification in nondollar-denominated
securities. We concentrated purchases especially in Canada and in newly
developed markets such as Mexico and Poland where yields are significantly
higher than in the U.S. Returns for the 12-month period were also better than
both of our benchmarks. Performance for the Advisor Class and R Class will vary
due to their differing fee structures.
PERFORMANCE COMPARISON
--------------------------------------------------------------------------------
Periods Ended 11/30/04 6 Months 12 Months
--------------------------------------------------------------------------------
New Income Fund 4.10% 4.66%
New Income Fund-Advisor Class 3.86 4.31
New Income Fund-R Class 3.74 4.08
Lehman Brothers U.S. Aggregate Index 3.82 4.44
Lipper Average of Corporate Debt Funds A Rated 3.71 4.10
As we wrote six months ago, fundamental credit research and broader market
themes play a major role in determining our individual security selections and
sector allocations. Improving credit trends and stronger economic growth
supported our commitment to corporate bonds in the utility, industrials, and
energy sectors. The fund continues to overweight lower-quality, investment-grade
(BBB rated) credits, and, in anticipation of higher short-term rates, we
increased our positions in floating-rate notes. This positioning allowed the
portfolio to generate slightly more income in the first half of the current
fiscal year than in the prior six-month period, and that income generation is
reflected in the higher 30-day standardized yield. Over the past six months the
portfolio's weighted average maturity notched higher to 7.1 years from 6.7
years, but because of our concern about rising interest rates, we maintained the
portfolio's defensive 4.4-year duration. (Duration is a measure of a bond fund's
sensitivity to interest rates; for example, a fund with a four-year duration
should rise or fall approximately 4% for each one-percentage-point fall or rise
in interest rates.) Our defensive posture also led us to underweight the
highest-quality corporate bonds, which are acutely sensitive to changes in
underlying U.S. Treasury yields.
<PAGE>
STRATEGY
The beginning of the long-awaited Fed campaign to raise short-term interest
rates set the tone for our portfolio positioning. We buttressed the fund for
higher interest rates by maintaining a shorter duration than the benchmark
Lehman Brothers U.S. Aggregate Index. We also attempted to stay defensive in our
short-term holdings. This latter positioning proved more beneficial to
performance than our overall rate outlook because longer-term interest rates
declined.
PORTFOLIO CHARACTERISTICS
--------------------------------------------------------------------------------
Periods Ended 5/31/04 11/30/04
--------------------------------------------------------------------------------
New Income Fund Share Price $8.87 $9.06
Dividends Per Share
For 6 Months 0.16 0.17
For 12 Months 0.32 0.33
30-Day Standardized Yield
to Maturity 3.74% 3.84%
--------------------------------------------------------------------------------
New Income Fund-Advisor Class
Share Price $8.87 $9.05
Dividends Per Share
For 6 Months 0.15 0.16
For 12 Months 0.30 0.31
30-Day Standardized Yield
to Maturity 3.53% 3.58%
--------------------------------------------------------------------------------
New Income Fund-R Class
Share Price $8.88 $9.06
Dividends Per Share
For 6 Months 0.14 0.15
For 12 Months 0.28 0.29
30-Day Standardized Yield
to Maturity 3.28% 3.37%
--------------------------------------------------------------------------------
Weighted Average Maturity (years) 6.7 7.1
Weighted Average Effective
Duration (years) 4.4 4.4
Yields will vary and are not guaranteed.
For the past six months, the portfolio held a sizable allocation of its
corporate holdings in floating-rate notes. This gave us credit exposure and
higher yields but minimized our overall interest rate exposure. In addition, we
owned a modest position in dividend-paying stocks in several high-quality
sectors such as integrated oils and financials that allowed the fund to generate
additional income. This also helped broaden diversification and generate capital
appreciation while mitigating a measure of interest rate risk. Investors became
more interested in higher-yielding corporate bonds as they grew less concerned
about corporate governance and balance sheet leverage. Many of our lower-quality
issues, particularly those that experienced severe distress last year, performed
well.
<PAGE>
Owning fixed-rate securities that pay higher yields than Treasuries cushioned
the impact of Fed tightening. Many residential and commercial mortgage-backed,
asset-backed, and corporate bonds also generated good gains over the six-month
period. Nondollar bonds also contributed to results, thanks to a weaker dollar,
and in most cases, they paid substantially higher yields than U.S. Treasuries.
Unlike the U.S., many overseas governments have fiscal and monetary policies
that are supportive of steady or declining interest rates.
[GRAPHIC OMITTED]
SECURITY DIVERSIFICATION
--------------------------------------------------------------------------------
Mortgage-Backed Securities 40%
Corporate Bonds and Convertibles 27
U.S. Treasuries 15
Foreign Government Obligations and Municipal Bonds 6
U.S. Agency Obligations 6
Equity and Preferred 1
Other and Reserves 5
Based on net assests as of 11/30/04.
Strengthening economic fundamentals supported our commitment to higher-yielding
sectors. Throughout the period, we added to mortgage-backed issues (40% of net
assets). Our commitment to the commercial mortgage-backed market and
asset-backed securities provided a steady source of income and cash flow
stability. However, we trimmed our already underweight position in agency
holdings because valuations are high and regulatory uncertainty increases risk
in the sector.
[GRAPHIC OMITTED]
QUALITY DIVERSIFICATION
--------------------------------------------------------------------------------
U.S. Government Agency Securities * 41%
AAA Rated 30
AA Rated 2
A Rated 9
BBB Rated 16
BB and Below 1
Not Rated 1
Based on net assets as of 11/30/04.
* U.S. government agencies include GNMA and conventional pass-throughs, CMOs,
and project loans.
Source: Standard & Poor's; if Standard & Poor's does not rate a security, then
Moody's Investors Service is used as a secondary source.
Strong investor demand for additional yield and higher headline inflation
boosted the performance of Treasury inflation-protected securities. Maintaining
a modest allocation to TIPS proved beneficial during the period. Steadily
improving credit trends and stronger
<PAGE>
economic growth led us to attractively priced corporate bonds in the natural
gas, cable and media, and energy sectors. The fund maintained its significant
overweight in BBB rated corporate bonds because supply remains low while foreign
demand is strong.
OUTLOOK
The steady, resource-absorbing pace of job gains should provide further support
to a fundamentally healthy economy. In such an environment, we expect the
Federal Reserve to continue its slow march toward higher short-term rates
through 2005. Increases in long-term rates should be muted as long as core
inflation remains contained.
Several issues, however, could potentially disrupt this benign outlook. Bulging
imbalances created by the U.S. budget and trade deficits are worrisome,
especially with the prospect of a weaker dollar. Foreign investors, especially
Asian central banks, have been active participants in the investment-grade
markets over the past several years. Their support of the U.S. bond market has
clearly contributed to a relatively stable interest rate environment. Though it
is not our base case, a dramatic shift in asset preferences away from the U.S.
dollar would clearly be a negative across the yield curve.
Current valuations also concern us. Both corporate and mortgage yield spreads
(the difference between Treasury yields and other similar-maturity bonds) leave
little room for a negative market event, such as more aggressive Fed tightening.
Although credit fundamentals remain strong and mortgage prepayment volatility is
low, we believe the possibility of significant spread compression from current
levels is remote. We will be more selective in these sectors going forward.
Our research team continues to seek opportunities wherever they present
themselves. For example, many foreign investment-grade government bonds offer
higher yields than comparable-maturity U.S. Treasuries. We believe that
tax-exempt bonds also offer tactical opportunities for us, as do longer-term
TIPS. As always, we strive to enhance returns while managing risk by investing
in securities that hold what we believe are
<PAGE>
favorable total return characteristics. We appreciate your continued confidence
in this endeavor.
Respectfully submitted,
Daniel O. Shackelford
Chairman of the fund's Investment Advisory Committee
December 15, 2004
The committee chairman has day-to-day responsibility for managing the portfolio
and works with committee members in developing and executing the fund's
investment program.
<PAGE>
--------------------------------------------------------------------------------
RISKS OF BOND INVESTING
Bonds are subject to interest rate risk, the decline in bond prices that usually
accompanies a rise in interest rates, and credit risk, the chance that any fund
holding could have its credit rating downgraded or that a bond issuer will
default (fail to make timely payments of interest or principal), potentially
reducing the fund's income level and share price. Mortgage-backed securities are
subject to prepayment risk, particularly if falling rates lead to heavy
refinancing activity, and extension risk, which is an increase in interest rates
that causes a fund's average maturity to lengthen unexpectedly due to a drop in
mortgage prepayments. This could increase the fund's sensitivity to rising
interest rates and its potential for price declines.
GLOSSARY
CS First Boston High Yield Index: An index that tracks the performance of
domestic noninvestment-grade corporate bonds.
Duration: A measure of a bond or bond fund's sensitivity to changes in interest
rates. For example, a fund with a four-year duration would fall about 4% in
response to a one-percentage-point rise in interest rates, and vice versa.
Federal funds rate: The interest rate charged on overnight loans of reserves by
one financial institution to another in the United States. The Federal Reserve
sets a target federal funds rate to affect the direction of interest rates.
Lehman Brothers Mortgage-Backed Securities Index: An unmanaged index of 15- and
30-year fixed-rate securities backed by GNMA.
Lehman Brothers U.S. Aggregate Index: An unmanaged index that tracks the
performance of investment-grade government and corporate bonds. This index is
widely accepted as the benchmark for the broad U.S. investment-grade bond
market.
Lehman Brothers U.S. Credit Index: (Formerly the U.S. Corporate Investment Grade
Index) An unmanaged index that tracks the performance of investment-grade
corporate bonds.
Lehman Brothers U.S. Treasury Index: An unmanaged index of publicly traded
obligations of the U.S. Treasury.
Lipper averages: The averages of all mutual funds in a particular category as
tracked by Lipper Inc.
Weighted average maturity: The weighted average of the stated maturity dates of
a portfolio's securities. In general, the longer the average maturity, the
greater the fund's sensitivity to interest rate changes. A shorter average
maturity usually means less interest rate sensitivity and therefore a less
volatile portfolio.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
GROWTH OF $10,000
--------------------------------------------------------------------------------
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 11/30/04
New Income Fund $19,515
Lehman Brothers U.S. Aggregate Index $20,991
Lipper Average of Corporate Debt Funds A-Rated $19,935
Lehman Brothers Lipper Average of
New Income U.S. Aggregate Corporate Debt
Fund Index Funds A-Rated
11/94 $ 10,000 $ 10,000 $ 10,000
11/95 11,757 11,764 11,887
11/96 12,362 12,478 12,523
11/97 13,219 13,421 13,447
11/98 13,927 14,689 14,592
11/99 13,872 14,683 14,299
11/00 15,019 16,014 15,343
11/01 16,743 17,801 17,003
11/02 17,501 19,108 17,977
11/03 18,647 20,098 19,119
11/04 19,515 20,991 19,935
Note: Performance in the Advisor Class and R Class will vary due to their
differing fee structures. See returns table below.
AVERAGE ANNUAL COMPOUND TOTAL RETURN
--------------------------------------------------------------------------------
This table shows how the fund and its benchmarks would have performed if their
actual (or cumulative) returns for the periods shown had been earned at a
constant rate.
Since
Inception
Periods Ended 11/30/04 1 Year 5 Years 10 Years 9/30/02
--------------------------------------------------------------------------------
New Income Fund 4.66% 7.06% 6.91% -
New Income Fund-Advisor Class 4.31 - - 4.78%
New Income Fund-R Class 4.08 - - 4.59
Lehman Brothers U.S. Aggregate Index 4.44 7.41 7.70 4.20
Lipper Average of Corporate Debt
Funds A Rated 4.10 6.66 7.12 4.62
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.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
FUND EXPENSE EXAMPLE
--------------------------------------------------------------------------------
As a mutual fund shareholder, you may incur two types of costs: (1) transaction
costs such as redemption fees or sales loads and (2) ongoing costs, including
management fees, distribution and service (12b-1) fees, and other fund expenses.
The following example is intended to help you understand your ongoing costs (in
dollars) of investing in the fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The example is based on an investment
of $1,000 invested at the beginning of the most recent six-month period and held
for the entire period.
Please note that the fund has three share classes: The original share class
("investor class") charges no distribution and service (12b-1) fee; Advisor
Class shares are offered only through unaffiliated brokers and other financial
intermediaries and charge a 0.25% 12b-1 fee; R Class shares are available to
retirement plans serviced by intermediaries and charge a 0.50% 12b-1 fee. Each
share class is presented separately in the table.
Actual Expenses
The first line of the following table ("Actual") provides information about
actual account values and expenses based on the fund's actual returns. You may
use the information in this line, together with your account balance, to
estimate the expenses that you paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number in the first line under the heading
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
Hypothetical Example for Comparison Purposes
The information on the second line of the table ("Hypothetical") is based on
hypothetical account values and expenses derived from the fund's actual expense
ratio and an assumed 5% per year rate of return before expenses (not the fund's
actual return). You may compare the ongoing costs of investing in the fund with
other funds by contrasting this 5% hypothetical example and the 5% hypothetical
examples that appear in the shareholder reports of the other funds. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period.
Note: T. Rowe Price charges an annual small-account maintenance fee of $10,
generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is
waived for any investor whose T. Rowe Price mutual fund accounts total $25,000
or more, accounts employing automatic investing, and IRAs and other retirement
plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although
a separate custodial or administrative fee may apply to such accounts). This fee
is not included in the accompanying table. If you are subject to the fee, keep
it in mind when you are estimating the ongoing expenses of investing in the fund
and when comparing the expenses of this fund with other funds.
You should also be aware that the expenses shown in the table highlight only
your ongoing costs and do not reflect any transaction costs, such as redemption
fees or sales loads. Therefore, the second line of the table is useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. To the extent a fund charges transaction costs,
however, the total cost of owning that fund is higher.
<PAGE>
T. ROWE PRICE NEW INCOME FUND
--------------------------------------------------------------------------------
Beginning Ending Expenses Paid
Account Value Account Value During Period*
6/1/04 11/30/04 6/1/04 to 11/30/04
--------------------------------------------------------------------------------
Investor Class
Actual $1,000 $1,041.00 $3.53
Hypothetical (assumes 5%
return before expenses) 1,000 1,021.61 3.50
Advisor Class
Actual 1,000 1,038.60 4.60
Hypothetical (assumes 5%
return before expenses) 1,000 1,020.56 4.56
R Class
Actual 1,000 1,037.40 5.87
Hypothetical (assumes 5%
return before expenses) 1,000 1,019.30 5.82
* Expenses are equal to the fund's annualized expense ratio for the six-month
period, multiplied by the average account value over the period, multiplied
by the number of days in the most recent fiscal half year (183) divided by
the days in the year (365) to reflect the half-year period. The annualized
expense ratio of the Investor Class was 0.69%, the Advisor Class was 0.90%,
and the R Class was 1.15%.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
QUARTER-END RETURNS
--------------------------------------------------------------------------------
Periods Ended 12/31/04 1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
New Income Fund 4.60% 7.37% 6.93%
New Income Fund-Advisor Class 4.48 7.28 6.89
New Income Fund-R Class 4.12 7.16 6.83
Lehman Brothers U.S. Aggregate Index 4.34 7.71 7.72
Lipper Average of Corporate Debt Funds A Rated 4.09 6.99 7.14
Current performance may be lower or higher than the quoted past performance,
which cannot guarantee future results. Share price, principal value, and return
will vary, and you may have a gain or loss when you sell your shares. For the
most recent month-end performance information, please visit our Web site
(troweprice.com) or contact a T. Rowe Price representative at 1-800-225-5132.
This table provides returns through the most recent calendar quarter-end rather
than through the end of the fund's fiscal period. It shows how each class would
have performed each year if its actual (or cumulative) returns for the periods
shown had been earned at a constant rate. The T. Rowe Price New Income
Fund-Advisor Class and the T. Rowe Price New Income Fund-R Class began
operations on September 30, 2002. Each shares the portfolio of the existing
retail fund (the original share class of the fund is referred to as the
"investor class"). The average annual total return figures for the Advisor and R
Class have been calculated using the performance data of the investor class up
to the inception date of the class and the actual performance results of the
class since that date. The performance results of the investor class have not
been adjusted to reflect the 12b-1 fee associated with either the Advisor Class
(0.25%) or the R Class (0.50%). Had these fees been included, the performance of
the Advisor and R Classes would have been lower.
Average annual total return figures include changes in principal value,
reinvested dividends, and capital gain distributions. Returns do not reflect
taxes that the shareholder may pay on portfolio distributions or the redemption
of portfolio shares. When assessing performance, investors should consider both
short- and long-term returns.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Unaudited
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
--------------------------------------------------------------------------------
Investor Class
6 Months Year
Ended Ended
11/30/04 5/31/04 5/31/03 5/31/02 5/31/01 5/31/00
NET ASSET VALUE
Beginning of period $ 8.87 $ 9.21 $ 8.70 $ 8.53 $ 8.07 $ 8.50
Investment activities
Net investment income
(loss) 0.16 0.32 0.37 0.47 0.53 0.52
Net realized and
unrealized gain (loss) 0.20 (0.34) 0.52 0.17 0.46 (0.43)
Total from
investment activities 0.36 (0.02) 0.89 0.64 0.99 0.09
Distributions
Net investment income (0.17) (0.32) (0.38) (0.47) (0.53) (0.52)
NET ASSET VALUE
End of period $ 9.06 $ 8.87 $ 9.21 $ 8.70 $ 8.53 $ 8.07
------------------------------------------------------
Ratios/Supplemental Data
Total return^ 4.10% (0.26)% 10.52% 7.68% 12.54% 1.13%
Ratio of total expenses to
average net assets 0.69%+ 0.71% 0.74% 0.72% 0.73% 0.73%
Ratio of net investment
income (loss) to average
net assets 3.67%+ 3.56% 4.23% 5.38% 6.30% 6.32%
Portfolio turnover rate 151.7%+ 219.0% 221.2% 222.0% 112.1% 83.6%
Net assets, end of period
(in millions) $ 2,781 $ 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.
+ Annualized
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Unaudited
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
--------------------------------------------------------------------------------
Advisor Class
6 Months Year 9/30/02
Ended Ended Through
11/30/04 5/31/04 5/31/03
NET ASSET VALUE
Beginning of period $ 8.87 $ 9.21 $ 8.84
Investment activities
Net investment income (loss) 0.21* 0.30* 0.23*
Net realized and unrealized
gain (loss) 0.13 (0.34) 0.38
Total from investment activities 0.34 (0.04) 0.61
Distributions
Net investment income (0.16) (0.30) (0.24)
NET ASSET VALUE
End of period $ 9.05 $ 8.87 $ 9.21
-------------------------------------
Ratios/Supplemental Data
Total return^ 3.86%* (0.45)%* 7.02%*
Ratio of total expenses to
average net assets 0.90%*+ 0.90%* 0.90%+*
Ratio of net investment
income (loss) to average
net assets 3.27%*+ 3.36%* 2.61%+*
Portfolio turnover rate 151.7%+ 219.0% 221.2%
Net assets, end of period
(in thousands) $ 512 $ 139 $ 107
^ 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.
* Excludes expenses in excess of a 0.90% contractual expense limitation in
effect through 9/30/06.
+ Annualized
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Unaudited
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
--------------------------------------------------------------------------------
R Class
6 Months Year 9/30/02
Ended Ended Through
11/30/04 5/31/04 5/31/03
NET ASSET VALUE
Beginning of period $ 8.88 $ 9.21 $ 8.84
Investment activities
Net investment income (loss) 0.15* 0.28* 0.22*
Net realized and unrealized gain (loss) 0.18 (0.33) 0.38
Total from investment activities 0.33 (0.05) 0.60
Distributions
Net investment income (0.15) (0.28) (0.23)
NET ASSET VALUE
End of period $ 9.06 $ 8.88 $ 9.21
Ratios/Supplemental Data
Total return^ 3.74%* (0.57)%* 6.84%*
Ratio of total expenses to
average net assets 1.15%*+ 1.15%* 1.15%+*
Ratio of net investment
income (loss) to average
net assets 3.22%*+ 3.12%* 2.32%+*
Portfolio turnover rate 151.7%+ 219.0% 221.2%
Net assets, end of period
(in thousands) $ 3,450 $ 2,885 $ 321
---------------------------------------
^ 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.
* Excludes expenses in excess of a 1.15% contractual expense limitation in
effect through 9/30/06.
+ Annualized
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Unaudited November 30, 2004
PORTFOLIO OF INVESTMENTS (1) $ Par/Shares Value
--------------------------------------------------------------------------------
(Amounts in 000s)
CORPORATE BONDS AND NOTES 24.4%
Aerospace & Defense 0.1%
Boeing, 8.75%, 8/15/21 2,425 3,206
3,206
Automobiles and Related 1.6%
DaimlerChrysler
6.50%, 11/15/13 5,945 6,341
VR, 2.343%, 9/10/07 4,300 4,308
Ford Motor Credit
5.625%, 10/1/08 12,700 12,898
VR, 3.24%, 11/16/06 2,900 2,899
GM, 8.375%, 7/15/33 8,905 9,048
GMAC, 7.25%, 3/2/11 5,900 6,122
Lear, 144A, 5.75%, 8/1/14 2,000 2,006
43,622
Banking 1.5%
Bank One, 5.25%, 1/30/13 5,300 5,386
Capital One Bank, 6.50%, 6/13/13 3,520 3,811
Citigroup, 5.00%, 9/15/14 7,800 7,814
First Union, 6.40%, 4/1/08 2,215 2,387
HBOS, 144A, 6.00%, 11/1/33 4,300 4,379
MBNA America Bank
4.625%, 8/3/09 5,100 5,159
7.125%, 11/15/12 2,200 2,475
U.S. Bank, 2.87%, 2/1/07 4,000 3,943
Wells Fargo, VR, 1.99%, 3/23/07 5,900 5,905
41,259
Beverages 0.2%
Miller Brewing, 144A, 5.50%, 8/15/13 6,200 6,360
6,360
Broadcasting 0.4%
AOL Time Warner, 7.625%, 4/15/31 4,415 5,177
Chancellor Media, 8.00%, 11/1/08 2,615 2,929
<PAGE>
Hearst-Argyle, 7.00%, 1/15/18 3,685 4,067
12,173
Building and Real Estate 0.5%
Lennar, 144A, 5.50%, 9/1/14 3,850 3,848
NVR, 5.00%, 6/15/10 4,085 4,044
Pulte Homes, 7.875%, 8/1/11 5,000 5,768
13,660
Building Products 0.3%
Centex, 4.55%, 11/1/10 4,000 3,950
Masco, 5.875%, 7/15/12 5,190 5,519
9,469
Cable Operators 0.3%
Cox Communications, 7.875%, 8/15/09 4,900 5,499
Rogers Cable, 5.50%, 3/15/14 4,120 3,852
9,351
Computer Service & Software 0.3%
IBM, 4.25%, 9/15/09 5,155 5,204
SunGard Data Systems, 3.75%, 1/15/09 2,750 2,658
7,862
Conglomerates 0.8%
General Electric Capital
6.00%, 6/15/12 5,290 5,713
6.125%, 2/22/11 5,700 6,164
Hutchison Whampoa, 144A, 5.45%, 11/24/10 3,235 3,316
Tyco International, 6.375%, 10/15/11 6,310 6,922
22,115
Container 0.2%
Sealed Air, 144A, 5.375%, 4/15/08 5,200 5,355
5,355
Department Stores 0.2%
Federated Department Stores, 6.625%, 4/1/11 3,630 4,028
May Department Stores, 144A, 3.95%, 7/15/07 1,470 1,475
5,503
<PAGE>
Diversified Chemicals 0.1%
Dow Chemical, 6.125%, 2/1/11 3,225 3,487
3,487
Drugs 0.4%
Amgen, 144A, 4.00%, 11/18/09 3,285 3,254
GlaxoSmithKline, 5.375%, 4/15/34 3,355 3,211
Wyeth, 6.50%, 2/1/34 3,125 3,235
9,700
Electric Utilities 3.3%
Alabama Power, Series B, VR, 2.571%, 8/25/09 3,980 3,980
Appalachian Power, 4.80%, 6/15/05 5,115 5,166
Black Hills, 6.50%, 5/15/13 5,160 5,289
CE Electric UK Funding, 144A, 6.995%, 12/30/07 3,835 4,070
Centerpoint Energy, 5.875%, 6/1/08 4,000 4,181
Cleveland Electric Illuminating, 5.65%, 12/15/13 4,500 4,591
Dominion Resources, 5.00%, 3/15/13 4,350 4,302
Entergy Gulf States, 5.20%, 12/3/07 4,675 4,675
Exelon Generation, 5.35%, 1/15/14 3,900 3,952
FirstEnergy, 7.375%, 11/15/31 3,000 3,333
PG&E
6.05%, 3/1/34 4,035 4,064
VR, 2.72%, 4/3/06 1,568 1,570
Pinnacle West Capital, 6.40%, 4/1/06 4,285 4,437
PPL Capital Funding, 4.33%, 3/1/09 5,075 5,056
Progress Energy, 6.75%, 3/1/06 3,348 3,482
PSEG Power, 8.625%, 4/15/31 4,450 5,657
Public Service of New Mexico, 4.40%, 9/15/08 4,735 4,758
Puget Sound Energy, VR, 2.681%, 7/14/06 5,135 5,133
Sempra Energy, 6.00%, 2/1/13 4,780 5,026
Tri-State Generation, 144A, 6.04%, 1/31/18 2,850 2,936
TXU Energy, VR, 2.838%, 1/17/06 2,325 2,324
Western Power Distribution Holdings, 144A,
6.875%, 12/15/07 2,690 2,779
90,761
<PAGE>
Electronic Components 0.1%
Motorola, 7.625%, 11/15/10 2,540 2,936
2,936
Energy 0.6%
Pioneer Natural Resource, 5.875%, 7/15/16 2,445 2,526
Plains All American Pipeline, 7.75%, 10/15/12 2,255 2,615
Transocean, 7.50%, 4/15/31 2,960 3,506
XTO Energy, 6.25%, 4/15/13 3,240 3,503
YPF Sociedad Anonima, 10.00%, 11/2/28 4,660 5,545
17,695
Entertainment and Leisure 0.1%
International Speedway, 4.20%, 4/15/09 2,300 2,281
2,281
Exploration and Production 0.8%
Canadian Natural Resources, 7.20%, 1/15/32 5,200 6,002
Diamond Offshore Drilling, 144A, 5.15%, 9/1/14 3,500 3,512
Encana Holdings Finance, 5.80%, 5/1/14 5,150 5,411
Kaneb Pipe Line Operations, 7.75%, 2/15/12 5,430 6,229
21,154
Finance and Credit 1.5%
CIT Group Holdings, 7.75%, 4/2/12 6,805 7,994
Colonial Bank, 9.375%, 6/1/11 3,980 4,721
Countrywide Home Loans, 4.125%, 9/15/09 5,450 5,386
Household Finance, 6.375%, 11/27/12 4,475 4,899
International Lease Finance, 6.375%, 3/15/09 5,020 5,421
Northern Trust, 4.60%, 2/1/13 3,075 3,025
SLM Corporation
VR, 2.30%, 1/26/09 5,600 5,607
VR, 3.66%, 4/1/09 3,840 3,857
40,910
Food Processing 0.6%
Bunge Limited Finance, 4.375%, 12/15/08 5,290 5,305
Kraft Foods, 5.625%, 11/1/11 4,700 4,924
<PAGE>
McCormick, 6.40%, 2/1/06 7,300 7,579
17,808
Food/Tobacco 0.2%
UST, 6.625%, 7/15/12 5,400 5,947
5,947
Gaming 0.2%
GTECH, 144A, 4.50%, 12/1/09 3,500 3,468
Harrah's Operating, 5.50%, 7/1/10 2,700 2,778
6,246
Gas & Gas Transmission 0.8%
Buckeye Partners
5.30%, 10/15/14 1,430 1,427
6.75%, 8/15/33 3,140 3,385
Duke Capital
4.302%, 5/18/06 3,450 3,486
6.25%, 2/15/13 4,350 4,662
Kinder Morgan, 6.50%, 9/1/12 5,000 5,424
Panhandle Eastern Pipeline, 4.80%, 8/15/08 3,600 3,638
22,022
Healthcare Services 0.3%
Highmark, 144A, 6.80%, 8/15/13 4,005 4,305
Hospira, 4.95%, 6/15/09 4,800 4,874
9,179
Insurance 2.5%
ACE INA Holdings, 5.875%, 6/15/14 3,945 3,982
AIG Sunamerica Global Financing XII, 144A, 5.30%, 5/30/07 6,070 6,310
Allstate Financial Global Funding, 144A, 5.25%, 2/1/07 5,200 5,395
Cigna, 7.40%, 5/15/07 2,000 2,148
Fund American Companies, 5.875%, 5/15/13 4,735 4,747
Genworth Financial, 5.75%, 6/15/14 4,700 4,880
Jefferson Pilot, 144A, 8.14%, 1/15/46 3,000 3,354
Mangrove Bay Trust, 144A, VR, 6.102%, 7/15/33 2,500 2,482
Nationwide Financial Services, 5.90%, 7/1/12 5,170 5,442
Nationwide Mutual Insurance, 144A, 6.60%, 4/15/34 2,735 2,647
<PAGE>
NLV Financial, 144A, 7.50%, 8/15/33 3,375 3,562
Principal Life Global Funding I, 144A, 5.25%, 1/15/13 4,900 4,959
Prudential Financial, 3.75%, 5/1/08 4,520 4,473
Security Benefit Life Insurance, 144A, 7.45%, 10/1/33 2,150 2,259
Sun Life of Canada (U.S.) Capital Trust, 144A,
8.526%, 5/29/49 7,000 7,903
XL Capital, 6.50%, 1/15/12 4,070 4,402
68,945
Investment Dealers 0.7%
Franklin Resources, 3.70%, 4/15/08 1,650 1,633
Goldman Sachs Capital I, 6.345%, 2/15/34 10,000 10,157
Morgan Stanley, 3.625%, 4/1/08 7,880 7,828
19,618
Long Distance 0.5%
AT&T Broadband, 8.375%, 3/15/13 5,395 6,541
Sprint Capital, 6.90%, 5/1/19 6,115 6,687
13,228
Manufacturing 0.2%
John Deere Capital, 7.00%, 3/15/12 5,250 5,999
5,999
Media and Communications 0.3%
News America
6.75%, 1/9/38 1,705 1,883
7.625%, 11/30/28 2,160 2,510
144A, 6.20%, 12/15/34 3,185 3,160
7,553
Metals 0.2%
Alcan, 6.125%, 12/15/33 4,250 4,360
4,360
Oil Field Services 0.2%
Halliburton, 144A, VR, 2.86%, 1/26/07 5,000 4,998
4,998
Paper and Paper Products 0.6%
Celulosa Arauco Y Constitucion, 8.625%, 8/15/10 7,500 8,834
<PAGE>
SCA Coordination Center, 144A, 4.50%, 7/15/15 3,425 3,209
Weyerhaeuser
6.75%, 3/15/12 2,425 2,713
7.375%, 3/15/32 1,085 1,252
16,008
Petroleum 0.9%
Amerada Hess, 7.875%, 10/1/29 4,800 5,505
ConocoPhillips, 5.90%, 10/15/32 4,560 4,624
Devon Financing, 7.875%, 9/30/31 4,035 4,970
Pemex Project Funding Master Trust
7.375%, 12/15/14 3,280 3,589
144A, VR, 3.18%, 6/15/10 4,700 4,812
PF Export Receivables Master Trust
Series 2003, Class A, 144A, 6.436%, 6/1/15 2,566 2,525
26,025
Railroads 0.6%
Canadian National Railway, 6.25%, 8/1/34 5,110 5,396
Norfolk Southern, 6.00%, 4/30/08 6,175 6,522
Union Pacific, 6.50%, 4/15/12 5,020 5,542
17,460
Real Estate Investment Trust Securities 0.5%
Developers Diversified Realty, 3.875%, 1/30/09 3,565 3,468
EOP Operating, 4.65%, 10/1/10 4,100 4,086
Reckson Operating Partnership, 5.15%, 1/15/11 2,500 2,470
Simon Property Group, 3.75%, 1/30/09 4,650 4,540
14,564
Retail 0.1%
CVS, 144A, 4.00%, 9/15/09 2,985 2,952
2,952
Savings and Loan 0.2%
Webster Financial, 5.125%, 4/15/14 5,310 5,302
5,302
<PAGE>
Specialty Chemicals 0.1%
Lubrizol, 5.50%, 10/1/14 3,800 3,747
3,747
Supermarkets 0.2%
Kroger, 8.05%, 2/1/10 4,855 5,603
5,603
Telecommunications 0.3%
Telus
7.50%, 6/1/07 2,530 2,752
8.00%, 6/1/11 4,250 4,946
7,698
Telephones 0.7%
Deutsche Telekom International Finance,
STEP, 8.75%, 6/15/30 4,550 5,833
France Telecom, STEP, 8.50%, 3/1/11 4,360 5,173
Telefonos de Mexico, 4.50%, 11/19/08 2,480 2,490
Verizon Global Funding, 7.75%, 12/1/30 4,155 4,977
18,473
Wireless Communications 0.2%
America Movil, 5.50%, 3/1/14 3,255 3,171
U.S. Cellular, 6.70%, 12/15/33 2,695 2,707
5,878
Total Corporate Bonds and Notes (Cost $660,656) 678,472
ASSET-BACKED SECURITIES 3.2%
Auto-Backed 0.9%
Capital Auto Receivables Asset Trust
Series 2002-2, Class CERT, 4.18%, 10/15/07 2,994 3,010
Chase Manhattan Auto Owner Trust
Series 2001-B, Class CTFS, 3.75%, 5/15/08 1,731 1,736
Series 2003-A, Class A4, 2.06%, 12/15/09 9,125 8,892
GS Auto Loan Trust, Series 2004-1, Class C,
2.68%, 5/15/11 1,750 1,737
Hyundai Auto Receivables Trust
Series 2003-A, Class A4, 3.02%, 10/15/10 4,950 4,894
Series 2003-A, Class D, 4.06%, 10/15/10 2,050 2,065
<PAGE>
Morgan Stanley Auto Loan Trust
Series 2004-HB1, Class C, VR, 2.88%, 10/15/11 3,636 3,621
SSB Auto Loan Trust, Series 2002-1, Class C,
4.13%, 2/15/09 938 940
26,895
Credit Card-Backed 1.5%
Citibank Credit Card Issuance Trust
Series 2001-C1, Class C1, VR, 2.68%, 1/15/10 6,035 6,136
Series 2004-C1, Class C1, VR, 2.75%, 7/15/13 13,000 13,022
MBNA Master Credit Card Trust II
Series 2000-D, Class C, 144A, 8.40%, 9/15/09 10,075 11,105
World Financial Network
Series 2003-A, Class A2, VR, 2.47%, 5/15/12 10,925 10,973
41,236
Recreational Vehicles 0.0%
CIT RV Trust, Series 1997-A, Class A6, 6.35%, 4/15/11 639 641
641
Stranded Asset 0.8%
Peco Energy Transition Trust
Series 2001-A, Class A1, 6.52%, 12/31/10 11,475 12,757
Reliant Energy Transition Bond
Series 2001-1, Class A4, 5.63%, 9/15/15 8,572 9,058
21,815
Total Asset-Backed Securities (Cost $89,979) 90,587
NON-U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 6.1%
Commercial Mortgage-Backed 3.8%
Banc of America Commercial Mortgage
Series 2003-1, Class A2, CMO, 4.648%, 9/11/36 11,450 11,407
Bear Stearns Commercial Mortgage
Series 2002-TOP8, Class A2, CMO, 4.83%, 8/15/38 8,210 8,234
DLJ Commercial Mortgage
Series 1999-CG2, Class A1B, CMO, 7.30%, 6/10/32 13,000 14,509
GE Capital Commercial Mortgage
Series 2001-1, Class A2, CMO, 6.531%, 3/15/11 11,300 12,418
Greenwich Capital Commercial Funding
Series 2004-GG1A, Class A2, CMO, 3.835%, 10/8/08 9,181 9,174
GS Mortgage Securities Corp. II
Series 2004-GG2, Class A2, CMO, 4.293%, 8/1/38 6,050 6,106
<PAGE>
J.P. Morgan Chase Commercial Mortgage
Series 2001-CIB2, Class A2, CMO, 6.244%, 4/15/35 6,750 7,195
Series 2001-CIBC, Class A3, CMO, 6.26%, 3/15/33 7,275 7,946
LB-UBS Commercial Mortgage Trust
Series 2004-C2, Class A2, CMO, 3.246%, 3/15/29 5,975 5,772
Series 2004-C4, Class A2, CMO, 4.567%, 5/15/29 11,750 11,934
Morgan Stanley Dean Witter Capital
Series 2002-TOP7, Class A2, CMO, 5.98%, 1/15/39 9,400 10,157
Prudential Securities Secured Financing
Series 1999-NRF1, Class A1, CMO, 6.074%, 1/15/08 2,204 2,250
107,102
Home Equity Loans-Backed 0.5%
BankBoston Home Equity Loan Trust
Series 1998-1, Class A6, 6.35%, 2/25/13 3,287 3,463
Chase Funding Mortgage Loan
Series 1998-1, Class 1M1, 6.59%, 5/25/28 1,422 1,440
Series 2002-2, Class 1M1, 5.599%, 9/25/31 1,750 1,775
Countrywide Asset-Backed Certificates
Series 2003-5, Class AF3, 3.613%, 4/25/30 7,925 7,910
14,588
Whole Loans-Backed 1.8%
Bank of America Mortgage Securities
Series 2003-L, Class 2A2, CMO, 4.32%, 1/25/34 16,566 16,421
Series 2004-1, Class 3A2, CMO, 5.008%, 10/25/34 6,301 6,350
Series 2004-A, Class 2A2, CMO, 4.152%, 2/25/34 8,945 8,827
Series 2004-D, Class 2A2, CMO, 4.225%, 5/25/34 4,575 4,525
Series 2004-H, Class 2A2, CMO, 4.821%, 9/25/34 5,899 5,967
Countrywide Home Loans
Series 2003-60, Class 2A1, CMO, 5.017%, 2/25/34 2,441 2,446
Residential Accredit Loans
Series 1997-QS12, Class A7, CMO, 7.25%, 11/25/27 319 320
Washington Mutual
Series 2004-AR1, Class A, CMO, 4.229%, 3/25/34 5,080 5,004
49,860
Total Non-U.S. Government Mortgage-Backed
Securities (Cost $173,010) 171,550
<PAGE>
U.S. GOVERNMENT & AGENCY MORTGAGE-BACKED SECURITIES 33.9%
U.S. Government Agency Obligations+/- 25.6%
Federal Home Loan Mortgage
4.50%, 11/1/18 - 6/1/19 34,487 34,309
5.00%, 1/1/09 - 4/1/34 64,714 65,499
5.50%, 4/1/29 709 722
6.00%, 5/1/17 - 12/1/33 26,524 27,541
6.50%, 5/1/17 - 5/1/24 6,209 6,580
7.00%, 2/1/24 - 6/1/32 4,146 4,402
7.50%, 5/1 - 6/1/24 297 321
10.50%, 3/1/13 - 8/1/20 28 31
11.00%, 11/1/17 - 7/1/20 17 19
ARM, 4.577%, 9/1/32 3,756 3,779
CMO
4.50%, 3/15/16 31,450 31,324
5.50%, 4/15/28 21,750 22,428
6.50%, 3/15/23 10,810 11,025
CMO, IO
4.50%, 6/15/11 - 4/15/18 29,866 2,961
CMO, Principal Only, 8/1/28 569 493
TBA
5.50%, 1/1/32 1,075 1,087
6.00%, 1/1/18 12,469 13,054
Federal National Mortgage Assn.
4.50%, 5/1/18 - 1/1/19 42,527 42,334
5.00%, 1/1/09 - 6/1/34 132,026 131,182
5.50%, 4/1/16 - 10/1/34 177,479 181,184
6.00%, 4/1/14 - 11/1/34 66,318 68,547
6.50%, 6/1/13 - 7/1/32 28,534 29,999
7.00%, 10/1/29 - 11/1/30 163 174
CMO, 3.50%, 4/25/13 7,250 7,255
<PAGE>
CMO, IO
5.50%, 11/25/28 7,420 490
6.50%, 2/1/32 2,275 456
TBA, 6.50%, 1/1/33 25,875 27,136
714,332
U.S. Government Obligations 8.3%
Government National Mortgage Assn.
5.00%, 7/15 - 9/20/33 61,591 61,303
5.50%, 1/20 - 4/15/34 53,219 54,065
6.00%, 2/15/14 - 9/20/34 42,428 44,103
6.50%, 8/15/25 - 9/20/34 4,473 4,714
7.00%, 3/15/13 - 11/20/28 9,396 10,037
7.50%, 8/15/16 - 8/15/28 1,833 1,973
8.00%, 7/15/16 - 10/15/27 5,974 6,529
8.50%, 9/15/16 - 9/20/26 1,108 1,221
9.00%, 1/15/09 - 11/15/19 253 282
9.50%, 6/15/09 - 2/15/25 59 65
10.25%, 9/15/19 - 11/15/20 200 226
11.00%, 12/15/09 - 6/15/19 1,889 2,133
11.50%, 3/15/10 - 10/15/15 258 295
CMO, 2.946%, 3/16/19 7,050 6,813
CMO, Principal Only, 3/16/28 1,104 1,004
TBA
5.00%, 1/1/33 7,175 7,120
5.50%, 1/1/32 14,120 14,314
6.00%, 1/1/33 14,750 15,220
231,417
Total U.S. Government & Agency Mortgage-Backed
Securities (Cost $940,539) 945,749
U.S. GOVERNMENT & AGENCY OBLIGATIONS (EXCLUDING
MORTGAGE-BACKED) 21.0%
U.S. Government Agency Obligations+/- 6.5%
Federal Home Loan Bank, 1.833%, 2/25/05 20,000 19,894
<PAGE>
Federal Home Loan Mortgage
2.75%, 3/15/08(ss.) 32,182 31,343
4.75%, 10/11/12(ss.) 10,000 9,871
5.125%, 7/15/12 31,258 32,526
6.875%, 1/15/05 4,750 4,777
Federal National Mortgage Assn.
4.25%, 7/15/07(ss.) 20,000 20,400
4.375%, 9/15/12(ss.) 10,650 10,543
5.75%, 2/15/08 15,045 16,023
7.125%, 1/15/30 11,300 13,807
CMO
2.91%, 11/25/33 6,325 6,303
5.00%, 3/25/15 15,800 16,021
181,508
U.S. Treasury Obligations 14.5%
U.S. Treasury Bonds
5.375%, 2/15/31(ss.) 24,475 25,744
5.50%, 8/15/28(ss.) 7,500 7,920
6.00%, 2/15/26(ss.) 9,805 10,994
6.25%, 8/15/23 - 5/15/30(ss.)++ 50,310 58,448
6.50%, 11/15/26(ss.) 29,650 35,251
7.50%, 11/15/16(ss.)++ 21,100 26,639
8.50%, 2/15/20(ss.) 3,600 5,005
U.S. Treasury Inflation-Indexed Bonds, 2.375%,
1/15/25(ss.) 26,091 27,004
U.S. Treasury Notes
1.50%, 2/28/05(ss.) 114,100 113,904
1.625%, 4/30/05(ss.) 30,000 29,906
4.00%, 6/15/09(ss.) 17,800 18,056
4.25%, 8/15 - 11/15/13(ss.) 9,800 9,767
4.75%, 5/15/14(ss.) 9,000 9,277
5.00%, 8/15/11(ss.) 11,500 12,161
U.S. Treasury Stripped Interest Payment
Zero Coupon, 5/15/20(ss.) 32,250 14,578
404,654
Total U.S. Government & Agency Obligations
(excluding Mortgage-Backed) (Cost $576,530) 586,162
<PAGE>
FOREIGN GOVERNMENT OBLIGATIONS & AGENCY OBLIGATIONS 3.8%
Federal Republic of Germany, 5.00%, 5/20/05 (EUR) 9,100 12,217
Government of Canada, 6.00%, 9/1/05 (CAD) 34,650 29,823
Government of Poland, 5.75%, 6/24/08 (PLN) 85,300 26,235
Republic of Chile, 5.50%, 1/15/13 4,710 4,868
Republic of South Africa, 6.50%, 6/2/14(ss.) 2,575 2,797
United Mexican States
8.00%, 12/19/13 (MXN) 337,500 25,940
VR, 2.29%, 1/13/09(ss.) 3,500 3,549
Total Foreign Government Obligations &
Agency Obligations (Cost $89,653) 105,429
MUNICIPAL BONDS 2.3%
California
Economic Recovery
5.00%, 7/1/23 (Tender 7/1/07) 2,280 2,421
5.00%, 7/1/23 (Tender 7/1/08) 2,450 2,646
GO
5.25%, 4/1/34 2,570 2,635
5.50%, 11/1/33 2,500 2,631
Kansas Dev. Fin. Auth., Public Employee Retirement
5.501%, 5/1/34 (FSA Insured) 3,175 3,164
Massachusetts, GO, 5.25%, 8/1/15 (MBIA Insured) 11,250 12,471
New York State Urban Dev. Corp., Corrections &
Youth Fac. 5.25%, 1/1/21 (Tender 1/1/09) 5,675 6,136
North Carolina, GO, 5.25%, 3/1/13 15,740 17,671
Oregon, Taxable Pension Fund, GO, 5.892%, 6/1/27 1,640 1,732
Puerto Rico Public Fin. Corp.
5.25%, 8/1/29 (MBIA Insured) (Tender 2/1/12) 11,050 12,160
Total Municipal Bonds (Cost $63,325) 63,667
COMMON STOCKS 1.0%
Bank and Trust 0.4%
AmSouth Bancorp(ss.) 60 1,556
Citizens Banking(ss.) 50 1,755
Hudson United Bancorp(ss.) 48 1,931
KeyCorp(ss.) 76 2,517
<PAGE>
National City(ss.) 45 1,668
U.S. Bancorp(ss.) 55 1,630
Washington Mutual(ss.) 39 1,567
12,624
Building and Real Estate 0.2%
CarrAmerica Realty, REIT(ss.) 60 1,943
Weingarten Realty Investors, REIT(ss.) 59 2,384
4,327
Financial Services 0.1%
Citigroup 47 2,092
2,092
Integrated Petroleum - International 0.3%
BP ADR(ss.) 49 2,994
ChevronTexaco(ss.) 56 3,058
Royal Dutch Petroleum ADS(ss.) 47 2,668
8,720
Total Common Stocks (Cost $23,238) 27,763
PREFERRED STOCKS 0.1%
Real Estate 0.1%
Roslyn Real Estate Asset * 0 1,995
Total Preferred Stocks (Cost $2,045) 1,995
INTEREST RATE SWAP AGREEMENTS 0.0%
Citigroup Capital Services, Pay 4.435% Fixed
Receive 3 month LIBOR (Currently 2.29%), 5/11/09 0 101
Morgan Stanley Capital Services, Pay 3.955% Fixed
Receive 3 month LIBOR (Currently 2.29%), 11/12/08 0 (54)
Morgan Stanley Capital Services, Pay 4.213% Fixed
Receive 3 month LIBOR (Currently 2.29%), 11/12/08 0 (50)
Total Interest Rate Swap Agreements (Premium Paid $0) (3)
SHORT-TERM INVESTMENTS 6.2%
Money Market Funds 6.2%
T. Rowe Price Reserve Investment Fund, 2.00% #+ 172,102 172,102
Total Short-Term Investments (Cost $172,102) 172,102
<PAGE>
SECURITIES LENDING COLLATERAL 16.3%
Money Market Trust 16.3%
State Street Bank and Trust Company of
New Hampshire N.A. Securities Lending Quality
Trust units, 1.998% # 453,183 453,183
Total Securities Lending Collateral (Cost $453,183) 453,183
FORWARD CURRENCY EXCHANGE CONTRACTS 0.0%
Unrealized Gain (Loss) on Forward Currency
Exchange Contracts(2) (949)
Total Forward Currency Exchange Contracts (949)
FUTURES CONTRACTS 0.0%
Variation margin receivable (payable)
on open future contracts(3) 22
Total Futures Contracts 22
Total Investments in Securities
118.3% of Net Assets (Cost $3,244,260) $3,295,729
----------
(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 November 30, 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 margin requirements
on futures contracts at November 30, 2004.
+ Affiliated company - See Note 4
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 $122,695 and represents 4.4% of net assets
ADR American Depository Receipts
ADS American Depository Shares
ARM Adjustable Rate Mortgage
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.
MXN Mexican peso
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
USD U.S. dollar
VR Variable Rate
<PAGE>
(2) Open Forward Currency Exchange Contracts at November 30, 2004 were as
follows:
Amounts in (000s)
Unrealized
Counterparty Settlement Receive Deliver Gain (Loss)
------------------ ---------- --------------- --------------- -----------
RPC Capital Markets 1/31/05 USD 16,231 CAD 19,165 $ 139
CS First Boston 2/7/05 USD 29,417 EUR 23,000 (1,088)
Net unrealized gain (loss) on open
forward currency exchange contracts $ (949)
------
(3) Open Futures Contracts at November 30, 2004 were as follows:
($ 000s)
Contract Unrealized
Expiration Value Gain (Loss)
---------- -------- -----------
Short, 679 U.S. Treasury
five year contracts,
$350 par of 6.25% U.S.
Treasury Bonds pledged as
initial margin 3/05 $ (73,894) $ 180
Short, 175 U.S. Treasury
ten year contracts,
$1,575 par of 7.50%
U.S. Treasury Bonds
pledged as initial margin 3/05 (19,381) 46
Long, 195 Federal Republic
of Germany five year contracts 12/04 29,140 528
Long, 105 Federal Republic
of Germany ten year contracts 12/04 16,424 32
Net payments (receipts) of variation
margin to date (764)
Variation margin receivable (payable)
on open futures contracts $ 22
-----
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Unaudited November 30, 2004
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
(In thousands except shares and per share amounts)
Assets
Investments in securities, at value
Affiliated companies (cost $172,102) $ 172,102
Non-affiliated companies (cost $3,072,158) 3,123,627
Total investments in securities 3,295,729
Other assets 66,369
Total assets 3,362,098
Liabilities
Obligation to return securities lending collateral 453,183
Other liabilities 123,845
Total liabilities 577,028
NET ASSETS $ 2,785,070
------------
Net Assets Consist of:
Undistributed net investment income (loss) $ (442)
Undistributed net realized gain (loss) (19,668)
Net unrealized gain (loss) 52,387
Paid-in-capital applicable to 307,537,455 shares of
$1.00 par value capital stock outstanding;
300,000,000 shares authorized 2,752,793
NET ASSETS $ 2,785,070
------------
NET ASSET VALUE PER SHARE
Investor Class
($2,781,107,861/307,099,999 shares outstanding) $ 9.06
------------
Advisor Class
($512,000/56,550 shares outstanding) $ 9.05
------------
R Class
($3,450,314/380,906 shares outstanding) $ 9.06
------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Unaudited
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
($ 000s)
6 Months
Ended
11/30/04
Investment Income (Loss)
Income
Interest $ 55,301
Dividend 2,291
Securities lending 192
Total income 57,784
Expenses
Investment management 6,148
Shareholder servicing
Investor Class 2,664
R Class 7
Custody and accounting 188
Prospectus and shareholder reports
Investor Class 44
Advisor Class 1
R Class 1
Registration 60
Legal and audit 14
Rule 12b-1 fees
R Class 6
Directors 5
Miscellaneous 10
Reductions/repayments of fees and expenses
Expenses (reimbursed by) repaid to manager (3)
Total expenses 9,145
Net investment income (loss) 48,639
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 11,627
Futures (1,686)
Foreign currency transactions (8,190)
Net realized gain (loss) 1,751
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Unaudited
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
($ 000s)
6 Months
Ended
11/30/04
Change in net unrealized gain (loss)
Securities 52,064
Futures 718
Written options 215
Other assets and liabilities
denominated in foreign currencies (999)
Change in net unrealized gain (loss) 51,998
Net realized and unrealized gain (loss) 53,749
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 102,388
----------
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Unaudited
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
($ 000s)
6 Months Year
Ended Ended
11/30/04 5/31/04
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 48,639 $ 79,320
Net realized gain (loss) 1,751 41,550
Change in net unrealized gain (loss) 51,998 (128,783)
Increase (decrease) in net assets from operations 102,388 (7,913)
Distributions to shareholders
Net investment income
Investor Class (50,226) (82,278)
Advisor Class (5) (4)
R Class (55) (55)
Decrease in net assets from distributions (50,286) (82,337)
Capital share transactions *
Shares sold
Investor Class 339,609 693,833
Advisor Class 385 38
R Class 1,106 3,387
Distributions reinvested
Investor Class 48,188 77,952
Advisor Class 3 4
R Class 55 55
Shares redeemed
Investor Class (170,386) (436,124)
Advisor Class (18) (6)
R Class (662) (834)
Increase (decrease) in net assets from
capital share transactions 218,280 338,305
Net Assets
Increase (decrease) during period 270,382 248,055
Beginning of period 2,514,688 2,266,633
End of period $2,785,070 $2,514,688
---------- ----------
(Including undistributed net investment income (loss)
of $(442) at 11/30/04 and $1,205 at 5/31/04)
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Unaudited
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
($ 000s)
6 Months Year
Ended Ended
11/30/04 5/31/04
*Share information
Shares sold
Investor Class 37,677 76,658
Advisor Class 42 5
R Class 124 377
Distributions reinvested
Investor Class 5,333 8,648
R Class 6 6
Shares redeemed
Investor Class (18,955) (48,398)
Advisor Class (2) (1)
R Class (74) (93)
Increase (decrease) in shares outstanding 24,151 37,202
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
Unaudited November 30, 2004
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
unaffiliated brokers and other unaffiliated 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
<PAGE>
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. In the course of making a good
faith determination of a security's fair value, the fund reviews a variety of
factors, including market and trading trends and the value of comparable
securities, such as unrestricted securities of the same issuer.
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
<PAGE>
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.
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. Inflation
adjustments to the principal amount of inflation-indexed bonds are included in
interest income. 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. Unsettled variation margin on futures contracts is
included in investments in securities, and unrealized gains and losses on
futures contracts are included in the change in net unrealized gain or loss in
the accompanying financial statements. Unrealized gains and losses on forward
currency exchange contracts are included in investments in securities, 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
<PAGE>
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.
Restricted Securities
The fund may invest in securities that are subject to legal or contractual
restrictions on resale. Although certain of these securities may be readily
sold, for example, under Rule 144A, others may be illiquid, and their sale may
involve substantial delays and additional costs, and prompt sale at an
acceptable price may be difficult.
Forward Currency Exchange Contracts
During the six months ended November 30, 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 six months ended November 30, 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. Transactions in options written and
related premiums received during the six months ended November 30, 2004, were as
follows:
<PAGE>
Number of
Contracts Premiums
Outstanding at beginning of period 240 $ 258,000
Expired (240) (258,000)
Outstanding at end of period - $ -
------------------------------
Swap Agreements
During the six months ended November 30, 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 November 30, 2004, the value of loaned securities was $468,570,000; aggregate
collateral consisted of $453,183,000 in the money market pooled trust and U.S.
government securities valued at $29,584,000.
Other
Purchases and sales of portfolio securities, other than short-term and U.S.
government securities, aggregated $368,480,000 and $406,948,000, respectively,
for the six months ended November 30, 2004. Purchases and sales of U.S.
government securities aggregated $1,792,806,000 and $1,500,120,000,
respectively, for the six months ended November 30, 2004.
<PAGE>
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 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. The amount and character of
tax-basis distributions and composition of net assets are finalized at fiscal
year-end; accordingly, tax-basis balances have not been determined as of
November 30, 2004.
The fund intends to retain realized gains to the extent of available capital
loss carryforwards. As of May 31, 2004, the fund had $22,720,000 of unused
capital loss carryforwards that expire in fiscal 2009
At November 30, 2004, the cost of investments for federal income tax purposes
was $3,244,260,000. Net unrealized gain aggregated $52,387,000 at period-end, of
which $97,860,000 related to appreciated investments and $45,473,000 related to
depreciated investments.
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 November 30,
2004, the effective annual group fee rate was 0.31%, and investment management
fee payable totaled $1,053,000.
The Advisor Class and R Class are also subject to a contractual expense
limitation through the limitation dates indicated in the table below. During the
limitation
<PAGE>
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 November 30, 2004, management fees waived remain
subject to repayment in the following amounts: $10,000 through September 30,
2006 and $1,000 through September 30, 2008.
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. For the six months ended November
30, 2004, expenses incurred pursuant to these service agreements were $72,000
for Price Associates, $348,000 for T. Rowe Price Services, Inc., and $611,000
for T. Rowe Price Retirement Plan Services, Inc. At period-end, a total of
$205,000 of these expenses was payable.
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 six months ended November
30, 2004, the fund was charged $2,000 for shareholder servicing costs related to
the college savings plans, of which $1,000 was for services provided by Price
and $0 was payable at period-end. At November 30, 2004, no shares of the
Investor Class were held by college savings plans.
<PAGE>
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 six months ended November 30,
2004, the fund was allocated $911,000 of Spectrum Funds' expenses and $484,000
of Retirement Funds' expenses. Of these amounts, $900,000 related to services
provided by Price and $223,000 was payable at period-end. At November 30, 2004,
approximately 35.3% of the outstanding shares of the Investor Class were held by
the Spectrum Funds and 12.5% 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 and
affiliates of the fund. 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 six
months ended November 30, 2004, dividend income from the Reserve Funds totaled
$1,660,000, and the value of shares of the Reserve Funds held at November 30,
2004 and May 31, 2004 was $172,102,000 and $238,642,000, respectively.
As of November 30, 2004, T. Rowe Price Group, Inc. and/or its wholly owned
subsidiaries owned 12,226 shares of the Advisor Class, aggregating less than 1%
of the fund's net assets.
<PAGE>
T. Rowe Price New Income Fund
--------------------------------------------------------------------------------
INFORMATION ON PROXY VOTING POLICIES, PROCEDURES, AND RECORDS
--------------------------------------------------------------------------------
A description of the policies and procedures used by T. Rowe Price funds and
portfolios to determine how to vote proxies relating to portfolio securities is
available in each fund's Statement of Additional Information, which you may
request by calling 1-800-225-5132 or by accessing the SEC's Web site,
www.sec.gov. The description of our proxy voting policies and procedures is also
available on our Web site, www.troweprice.com. To access it, click on the words
"Company Info" at the top of our homepage for individual investors. Then, in the
window that appears, click on the "Proxy Voting Policy" navigation button in the
top left corner.
Each fund's most recent annual proxy voting record is available on our Web site
and through the SEC's Web site. To access it through our Web site, follow the
directions above, then click on the words "Proxy Voting Record" at the bottom
of the Proxy Voting Policy page.
HOW TO OBTAIN QUARTERLY PORTFOLIO HOLDINGS
--------------------------------------------------------------------------------
The fund files a complete schedule of portfolio holdings with the Securities and
Exchange Commission for the first and third quarters of each fiscal year on Form
N-Q. The fund's Form N-Q is available electronically on the SEC's Web site
(www.sec.gov); hard copies may be reviewed and copied at the SEC's Public
Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information
on the Public Reference Room, call 1-800-SEC-0330.
Item 2. Code of Ethics.
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 is filed as an
exhibit to the registrant's annual Form N-CSR. No substantive amendments were
approved or waivers were granted to this code of ethics during the registrant's
most recent fiscal half-year.
Item 3. Audit Committee Financial Expert.
Disclosure required in registrant's annual Form N-CSR.
Item 4. Principal Accountant Fees and Services.
Disclosure required in registrant's annual Form N-CSR.
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. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. 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 change in the registrant's internal control over financial
reporting that occurred during the registrant's second fiscal quarter covered by
this report that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 12. Exhibits.
(a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is filed
with the registrant's annual Form N-CSR.
(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 January 14, 2005
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 January 14, 2005
By /s/ Joseph A. Carrier
-----------------------------------
Joseph A. Carrier
Principal Financial Officer
Date January 14, 2005
</TEXT>
</DOCUMENT>