<PAGE>
- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
SemiAnnual Report
New Income Fund
- --------------------------------------------------------------------------------
November 30, 1996
- --------------------------------------------------------------------------------
Report Highlights
================================================================================
* Bond markets rebounded from their first-half weakness to provide strong
returns for the six months ended November 30, 1996, and positive returns
for the past 12 months.
* Corporate bonds generated the best results for the first half, followed by
mortgage-backed securities, but the latter outperformed for the 12-month
period.
* Your fund's 6- and 12-month returns of 7.42% and 5.14%, respectively,
exceeded its benchmarks for the shorter period but not for the longer.
* Mortgage-backed securities remained the fund's major holding, followed by
Treasuries.
* We expect the economic environment of 1997 to remain favorable for fixed
income investments, with income largely determining performance.
- --------------------------------------------------------------------------------
Fellow Shareholders
================================================================================
The fixed income market turned around during the six months ended November 30 as
interest rates retreated and bond prices rose. The pace of consumer spending and
employment growth, which had invigorated the economy in the first half, slowed
sharply in the third quarter. This assuaged fears that the Federal Reserve would
tighten monetary policy and paved the way for strong six-month bond performance;
12-month results still reflected the unfavorable markets of early 1996.
Short-term rates were relatively steady during most of the period before dipping
toward the end. Intermediate- and long-term rates fell approximately 65 and 50
basis points, respectively, measured by 5- and 30- year Treasury securities.
(One hundred basis points equal one percentage point.) Gratifying as this rally
was, it did not fully recoup the price losses experienced in the first five
months of 1996.
<PAGE>
Corporate bonds outperformed both Treasuries and mortgage-backed securities
during the past six months, as mortgages lost some luster when falling interest
rates sparked prepayment concerns. For the 12-month period, however,
mortgage-backed securities were the clear winner among high-quality bonds,
surpassing returns on comparable Treasuries by 200 basis points and corporate
returns by about 100.
- --------------------------------------------------------------------------------
PERFORMANCE AND STRATEGY REVIEW
================================================================================
For the six-month period ending November 30, 1996, your fund's income of $0.29
per share was augmented by a $0.34 increase in share price to generate an
excellent total return of 7.42%. This was slightly ahead of the 7.31% posted by
both the Lehman Aggregate Bond Index and Lipper Average of Corporate Bond Funds
A-Rated. Results for the 12-month period were less favorable, reflecting the
weaker bond markets of last spring. The fund's $0.59 of income per share was
partly offset by a $0.15 net drop in share price, resulting in a 5.14% return
that was roughly in line with its peer group average but trailed the Lehman
index.
- --------------------------------------------------------------------------------
Performance Comparison
================================================================================
Periods Ended 11/30/96 6 Months 12 Months
- --------------------------------------------------------------------------------
New Income Fund 7.42% 5.14%
Lehman Aggregate Bond Index 7.31 6.07
Lipper Average of Corporate
Bond Funds A-Rated 7.31 5.19
================================================================================
We did not make any major portfolio changes during the past six months. Our
single largest commitment remained mortgage-backed securities, which we
increased from 38% of net assets at the end of last May to 44% as of November
30. This significantly overweighted position served the fund well on the whole
over the past year and should continue to do so in coming months, unless
mortgage prepayments accelerate, which we do not expect. (Rising prepayment
levels are viewed negatively by investors because prepayments result in capital
losses on mortgage-backed securities that were purchased at prices above their
par values.) Treasury notes and bonds were trimmed a bit but remained our
second-largest holding at 30% of net assets. The fund's high overall credit
quality (AA+) was not affected by any asset shifts.
<PAGE>
[Pie chart showing Security Diversification as of 11-30-96]
As evidence mounted that economic growth was moderating, we lengthened the
fund's average maturity and duration modestly to 9.9 years and 5.5 years,
respectively, to increase appreciation potential. (Duration measures a bond's
price sensitivity to interest rate changes. A 5.5-year duration means the fund's
price could be expected to rise or fall approximately 5.5% for each one
percentage point fall or rise in interest rates.)
- --------------------------------------------------------------------------------
OUTLOOK
================================================================================
While there will doubtless be variations from quarter to quarter, we look for
1997 to be a repeat of 1996 on balance, with low unemployment, inflation just
edging up, and moderate overall growth. Through most of 1996, the bond market's
response to the economic climate assisted the Fed in keeping the economy on a
moderate growth track, which is appropriate for this phase of the business
cycle. Until either growth or inflation deviates from its current path, we
believe long-term Treasury yields will continue to fluctuate between 6% and 7%
- -- at the lower end of the range when the economy slows and at the upper end
when it strengthens.
Against this benign backdrop, we would expect income to be the determining
factor in your fund's total return over the coming months. With its focus on
high-quality bonds and attractive income, the fund should perform well in this
environment.
Respectfully submitted,
[signature]
Charles P. Smith
President
and Chairman of the Investment Advisory Committee
December 17, 1996
- --------------------------------------------------------------------------------
<PAGE>
Portfolio Highlights
================================================================================
Key statistics
================================================================================
5/31/96 11/30/96
Price Per Share $ 8.70 $ 9.04
Dividends Per Share
For 6 months ........................ 0.30 0.29
For 12 months ....................... 0.60 0.59
Dividend Yield *
For 6 months ............................ 6.66% 6.79%
For 12 months ........................... 6.85 6.84
Weighted Average Maturity (years)........ 9.5 9.9
Weighted Average Effective Duration (years) 5.3 5.5
Weighted Average Quality ** AA+ AA+
- --------------------------------------------------------------------------------
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the average daily net asset values per share for the same
period.
** Based on T. Rowe Price research.
- --------------------------------------------------------------------------------
Portfolio Highlights
================================================================================
SECTOR Diversification
================================================================================
Percent of Percent of
Net Assets Net Assets
5/31/96 11/30/96
Mortgage-Backed Securities ........................ 38% 44
U.S. Treasury Securities .......................... 32 30
Banking . ......................................... 7 11
Commercial Paper .................................. 2 5
Electric Utilities ................................ 4 4
U.S. Government Agency Obligations ................ -- 3
Finance and Credit ................................ 1 2
Investment Dealers ................................ 2 2
All Other ......................................... 13 5
Other Assets Less Liabilities ..................... 1 -6
Total ............................................. 100% 100%
- --------------------------------------------------------------------------------
<PAGE>
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 a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.
[SEC Graph shown here. Periods 11\86 thru 11\96. New Income Fund $21,434 and
Lehman Aggregate Bond Index $22,843]
- --------------------------------------------------------------------------------
Average Annual Compound Total Return
================================================================================
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
================================================================================
Periods Ended 11/30/96 1 Year 3 Years 5 Years 10 Years
- ------------- -------- ------ ------- ------- --------
New Income Fund 5.14% 6.39% 7.38% 7.92%
================================================================================
Investment return and principal value represent past performance and
will vary. Shares may be worth more or less at redemption than at original
purchase.
- --------------------------------------------------------------------------------
<PAGE>
Financial Highlights
================================================================================
Unaudited
For a share outstanding throughout each period
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
6 Months Year 3 Months++ Year
Ended Ended Ended Ended
11/30/96 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 2/29/92
-------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE
Beginning of period .......... $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 $ 8.94 $ 8.60
Investment activities
Net investment income .......... 0.29 0.60 0.58 0.14 0.54 0.57 0.67
Net realized and
unrealized gain (loss) ......... 0.34 (0.27) 0.34 (0.40) (0.05) 0.30 0.36
Total from
investment activities .......... 0.63 0.33 0.92 (0.26) 0.49 0.87 1.03
Distributions
Net investment income .......... (0.29) (0.60) (0.58) (0.14) (0.54) (0.57) (0.67)
Net realized gain .............. -- -- (0.02) (0.07) (0.07) -- (0.02)
Total distributions ............ (0.29) (0.60) (0.60) (0.21) (0.61) (0.57) (0.69)
NET ASSET VALUE
End of period .................. $ 9.04 $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 $ 8.94
Ratios/Supplemental Data
Total return ................... 7.42% 3.70% 11.13% (2.84)% 5.36% 10.12% 12.40%
Ratio of expenses to
average net assets ............. 0.76%+ 0.75% 0.78% 0.80%+ 0.82% 0.84% 0.87%
Ratio of net investment
income to average
net assets ..................... 6.70%+ 6.66% 6.95% 6.43%+ 5.77% 6.36% 7.64%
Portfolio turnover rate ........ 72.1%+ 35.5% 54.1% 91.5%+ 58.3% 85.8% 49.7%
Net assets, end of period
(in millions) .................. $ 1,710 $ 1,634 $ 1,566 $ 1,375 $ 1,458 $ 1,527 $ 1,307
- --------------------------------------------------------------------------------
+ Annualized.
++ The fund's fiscal year-end was changed to May 31.
================================================================================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Statement of Net Assets
================================================================================
Unaudited November 30, 1996
Par/Shares Value
---------- -----
CORPORATE BONDS AND NOTES 22.7%
Banking 10.1%
ABN Amro Bank N.V., Sub. Deb., 7.30%, 12/1/26 .............. $10,000 $ 9,870
Banca Commerciale Italiana, Sr. Sub. Notes, 8.25%, 7/15/07 . 8,070 8,844
BCH Cayman Islands, Gtd. Notes,
7.50%, 6/15/05 ..................................... 6,000 6,184
Banesto Delaware, Sub. Notes, 8.25%, 7/28/02 ............... 2,700 2,911
Bank of Boston, Sub. Notes, 6.625%, 12/1/05 ................ 10,000 9,893
Bank of Boston Capital Trust, Gtd. Notes, (144a),
8.25%, 12/15/26 .................................... 10,000 10,350
Chase Capital I, Gtd. Notes, 7.67%, 12/1/26 ................ 7,000 6,982
Den Danske Bank, Sub. Notes, (144a), 7.25%, 6/15/05 ........ 4,500 4,639
Deposit Guaranty, Sr. Notes, 7.25%, 5/1/06 ................. 10,400 10,672
FBS Capital I, (144a), 8.09%, 11/15/26 ..................... 10,000 10,404
Fifth Third Bank, Sub. Notes, 6.75%, 7/15/05 ............... 4,000 4,021
First Chicago, (144a), 8.413%, 12/31/00 .................... 10,000 10,243
First National Bank of Boston, Sub. Notes, 8.375%, 12/15/02 8,000 8,771
J.P. Morgan Capital Trust, Gtd. Notes, 7.54%, 1/15/27 ...... 8,300 8,321
Mercantile Bankshares, Sr. Notes, (144a), 6.13%, 7/15/98+ .. 5,000 4,979
Nationsbank N.A., Sr. Notes, 6.75%, 8/15/00 ................ 10,000 10,207
PNC Bank N.A., Sub. Notes, 7.875%, 4/15/05 ................. 12,000 12,854
Santander Financial Issuances
Gtd. Sub. Notes
6.80%, 7/15/05 ..................................... 2,000 2,000
7.875%, 4/15/05 .................................... 4,000 4,290
Scotland International, Sub. Notes, (144a), 8.80%, 1/27/04 . 10,000 11,261
Union Planters
MTN, 6.76%, 10/30/01 ................................... 10,000 10,169
Sub. Notes, 6.75%, 11/1/05 ............................. 5,000 4,968
172,833
<PAGE>
Par/Shares Value
---------- -----
Electric Utilities 4.3%
Alabama Power, 1st Mtg. Bonds, 7.75%, 2/1/23 ............... $ 3,650 $ 3,716
Big Rivers, Cooperative Utility Trust Cert., 10.70%, 9/15/17 2,500 2,717
Commonwealth Edison
1st Mtg. Bonds, 9.375%, 2/15/00 ........................ 5,000 5,407
Deb., 6.40%, 10/15/05 .................................. 11,600 11,045
MTN, 9.17%, 10/15/02 ................................... 2,500 2,760
Connecticut Light & Power
1st Ref. Mtg. Notes
5.75%, 7/1/00 ...................................... 7,000 6,763
7.25%, 7/1/99 ...................................... 4,500 4,543
Consumers Power, 1st Mtg. Bonds, 6.375%, 9/15/03 ........... 5,000 4,821
Georgia Power
1st Mtg. Bonds
7.625%, 3/1/23 ..................................... 5,750 5,793
7.95%, 2/1/23 ...................................... 3,300 3,403
Monongahela Power, 1st Mtg. Bonds, 8.625%, 11/1/21 ......... 4,720 5,018
Montana Power, 1st Mtg. Bonds, 8.25%, 2/1/07 ............... 5,000 5,469
Northern Indiana Public Service, MTN, 6.90%, 6/1/00 ........ 5,000 5,069
Pacificorp, MTN, 7.12%, 8/15/02 ............................ 3,900 4,031
Texas Utilities Electric, 1st Mtg. Bonds, 7.875%, 3/1/23 ... 3,450 3,560
74,115
Finance and Credit 1.9%
Advanta, MTN, 6.384%, 8/7/98 ............................... 6,000 6,015
Conseco Financing Trust, Gtd. Bonds, (144a), 8.70%, 11/15/26 10,000 10,293
Fairfax Financial Holdings, Notes, 8.25%, 10/1/15 .......... 8,000 8,544
Worldwide Financial Properties, PTC, (144a), 6.95%, 9/1/13 . 7,000 7,072
31,924
Industrials 1.3%
Clorox, Notes, 8.80%, 7/15/01 .............................. 5,000 5,504
Ford Holdings, Gtd. Notes, 9.25%, 3/1/00 ................... 5,000 5,452
Lockheed, Notes, 7.875%, 3/15/23 ........................... 5,000 5,217
United Technologies, Deb., 8.875%, 11/15/19 ................ 4,340 5,222
21,395
Investment Dealers 2.3%
Bear Stearns, Sr. Notes, 7.625%, 4/15/00 ................... 5,000 5,207
<PAGE>
Par/Shares Value
---------- -----
Lehman Brothers
Sr. Sub. Notes
5.75%, 11/15/98 .................................... $ 5,000 $4,964
7.625%, 8/1/98 ..................................... 8,000 8,179
PaineWebber Group, Notes, 8.875%, 3/15/05 .................. 5,000 5,549
Salomon
MTN
6.31%, 10/29/98 .................................... 5,000 5,012
6.625%, 11/30/00 ................................... 6,000 6,006
Sr. Notes, 7.25%, 5/1/01 ............................... 5,000 5,121
40,038
Manufacturing 0.3%
Burlington Industries, Notes, 7.25%, 9/15/05 ............... 5,500 5,536
5,536
Savings and Loan 1.0%
CENFED Financial, Sr. Deb., (144a), 11.17%, 12/15/01 ....... 5,000 5,525
Great Western Financial, Notes, 6.375%, 7/1/00 ............. 6,000 6,030
Washington Mutual, Sr. Notes, 7.25%, 8/15/05 ............... 5,000 5,170
16,725
Telephone 1.1%
BellSouth Telecom, Deb., 7.875%, 8/1/32 .................... 6,400 6,851
GTE, Deb., 9.375%, 12/1/00 ................................. 10,000 11,138
17,989
Transportation 0.4%
Qantas Airways, Sr. Notes, (144a), 6.625%, 6/30/98 ......... 7,000 7,033
7,033
Total Corporate Bonds and Notes (Cost $376,555) 387,588
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 43.6%
<PAGE>
Par/Shares Value
---------- -----
U.S. Government Agency Asset-Backed 0.3%
Federal National Mortgage Assn., REMIC, 8.10%, 4/25/25 ..... $ 4,500 $4,735
4,735
U.S. Government Agency Obligations 2.3%
Federal Home Loan Mortgage
6.50%, 11/1/04 - 6/1/24 ............................ 11,394 11,078
7.00%, 2/1/24 ...................................... 4,551 4,544
7.50%, 3/1/24 - 6/1/24 ............................. 9,508 9,637
8.00%, 6/1/08 ...................................... 121 125
9.00%, 3/1/21 - 5/1/22 ............................. 7,179 7,615
9.75%, 12/1/17 ..................................... 2,523 2,726
10.50%, 2/1/01 - 8/1/20 ............................ 1,155 1,275
11.00%, 5/1/11 - 7/1/20 ............................ 576 645
11.50%, 6/1/01 ..................................... 11 12
Federal National Mortgage Assn .............................
8.75%, 3/1/10 ...................................... 15 16
10.50%, 7/1/09 - 4/1/22 ............................ 2,525 2,795
40,468
U.S. Government Guaranteed Obligations 41.0%
Government National Mortgage Assn.
I
6.00%, 12/15/23 - 4/15/24 .............................. $ 3,501 $ 3,356
6.50%, 9/15/23 - 5/15/26 ............................... 63,475 61,928
7.00%, 4/15/22 - 8/15/26 ............................... 119,552 119,095
7.50%, 8/15/16 - 5/15/26 ............................... 110,052 112,167
8.00%, 7/15/16 - 9/15/26 ............................... 83,608 87,041
8.50%, 9/15/16 - 6/15/26 ............................... 63,617 66,814
9.00%, 1/15/09 - 4/15/25 ............................... 22,196 23,737
9.50%, 6/15/09 - 3/15/25 ............................... 69,459 75,689
11.00%, 12/15/09 - 1/15/21 ............................. 20,524 23,205
11.50%, 3/15/10 - 10/15/15 ............................. 2,601 2,996
II
7.00%, 12/20/23 ........................................ 1,468 1,454
8.50%, 9/20/26 ......................................... 183 191
9.00%, 6/20/16 - 5/20/22 ............................... 8,351 8,798
GPM, I, 10.25%, 2/15/16 - 11/15/20 ......................... 3,745 4,170
TBA, I
6.50%, 1/15/24 ......................................... 37,000 35,993
7.00%, 7/15/20 ......................................... 65,000 64,663
7.50%, 7/15/20 ......................................... 10,000 10,151
701,448
Total U.S. Government Mortgage-Backed Securities (Cost $732,613) 746,651
<PAGE>
Par/Shares Value
---------- -----
U.S. Government Obligations 29.6%
U.S. Treasury Obligations 29.6%
U.S. Treasury Bonds
6.00%, 2/15/26 ..................................... $ 3,250 $ 3,065
6.75%, 8/15/26 ..................................... 72,550 75,678
7.875%, 2/15/21 .................................... 35,000 40,840
8.00%, 11/15/21 .................................... 18,860 22,337
8.125%, 5/15/21 .................................... 32,140 38,498
U.S. Treasury Notes
6.125%, 9/30/00 .................................... 3,000 3,035
6.50%, 5/15/05 ..................................... 53,275 54,890
6.625%, 6/30/01 .................................... 11,800 12,176
6.875%, 5/15/06 .................................... 16,025 16,936
7.00%, 7/15/06 ..................................... 3,160 3,369
7.125%, 9/30/99 .................................... 3,450 3,578
7.25%, 5/15/04 - 8/15/04 ........................... 90,435 97,297
7.50%, 11/15/01 - 2/15/05 .......................... 21,400 23,257
7.75%, 11/30/99 .................................... 76,250 80,468
7.875%, 11/15/04 ................................... 27,215 30,379
Total U.S. Government Obligations (Cost $471,493) 505,803
ASSET-BACKED SECURITIES 1.2%
Auto-Backed 0.7%
Daimler-Benz Auto Grantor Trust, 3.90%, 10/15/98 ........... 770 763
Ford Credit Grantor Trust, 4.30%, 7/15/98 .................. 727 722
GMAC Grantor Trust, 4.15%, 3/16/98 ......................... 292 291
Olympic Automobile Receivable, 4.95%, 10/15/99 ............. 703 701
Premier Auto Trust, 4.22%, 3/2/99 .......................... 2,140 2,116
Western Financial Grantor Trust, 6.20%, 2/1/02 ............. 6,547 6,570
Zions Auto Trust, 4.65%, 6/15/99 ........................... 365 365
11,528
Home Equity Loans-Backed 0.0%
Home Equity Loan, REMIC, 5.65%, 11/15/14 ................... 604 592
592
<PAGE>
Par/Shares Value
---------- -----
Receivables-Backed 0.5%
Continental Airlines, PTC, 6.94%, 10/15/13 ................. $3,500 $3,545
Green Tree Financial, PTC, 6.25%, 1/15/28 .................. 5,000 5,030
8,575
Total Asset-Backed Securities (Cost $20,649) 20,695
EQUITY AND CONVERTIBLE SECURITIES 0.6%
Banking 0.6%
Chase Preferred Capital, Pfd. Stock, Series A .............. 400 10,250
Total Equity and Convertible Securities (Cost $9,960) 10,250
U.S. $ DENOMINATED FOREIGN
SECURITIES(1) 0.6%
Province of Ontario, Deb., 15.75%, 3/15/12 ................. 9,000 9,803
Total U.S. $ Denominated Foreign Securities (Cost $8,982) 9,803
COMMERCIAL PAPER 5.2%
Coca-Cola, 4(2), 5.23%, 12/17/96 ........................... $30,000 $29,923
Halifax Building Society, 5.28%, 12/19/96 .................. 19,278 19,222
Investments in Commercial Paper through a joint account,
5.70 - 5.90%, 12/2/96 ...................................... 40,010 40,010
Total Commercial Paper (Cost $89,161) 89,155
U.S. GOVERNMENT AGENCY OBLIGATIONS 2.9%
Federal Home Loan Mortgage, Discount Notes, 5.21%, 12/18/96 50,000 49,863
Total U.S. Government Agency Obligations (Cost $49,877) 49,863
Total Investments in Securities
106.4% of Net Assets (Cost $1,759,290) $ 1,819,808
Other Assets Less Liabilities (109,609)
<PAGE>
NET ASSETS $ 1,710,199 Net Assets Consist of:
Accumulated net investment income - net of distributions $ 2,679
Accumulated net realized gain/loss - net of distributions (8,103)
Net unrealized gain (loss) 60,518
Paid-in-capital applicable to 189,134,592 shares of $1.00 par
value capital stock outstanding; 300,000,000 shares authorized 1,655,105
NET ASSETS $ 1,710,199
NET ASSET VALUE PER SHARE $ 9.04
- --------------------------------------------------------------------------------
+ Private Placement
(1) Marketable securities (payable in U.S. dollars) issued or guaranteed
by a foreign government or community.
GPM Graduated Payment Mortgage
MTN Medium Term Note
PTC Pass-through Certificate
REMIC Real Estate Mortgage Investment Conduit
TBA To be announced security was purchased on a forward commitment basis;
the aggregate liability for securities purchased under such agreements
totaled $110,339,000 at 11/30/96. 4(2) Commercial Paper sold within
terms of a private placement memorandum, exempt from registration
under section 4.2 of the Securities Act of 1933, as amended, andmay be
sold only to dealers in that program or other "accredited investors".
144a Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to qualified
institutional buyers-- total of such securities at year-end amounts to
4.8% of net assets.
================================================================================
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
<PAGE>
Statement of Operations
================================================================================
Unaudited
In thousands
6 Months
Ended
11/30/96
--------
Investment Income
Interest income ............................................. $ 61,647
Expenses
Investment management ..................................... 3,961
Shareholder servicing ..................................... 1,955
Custody and accounting .................................... 215
Prospectus and shareholder reports ........................ 47
Registration .............................................. 38
Legal and audit ........................................... 15
Directors ................................................. 9
Miscellaneous ............................................. 11
Total expenses ................................................ 6,251
Net investment income ......................................... 55,396
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities ........................ 3,393
Change in net unrealized gain or
loss on securities ........................................... 60,155
Net realized and unrealized gain (loss) .................. 63,548
-------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ............. $ 118,944
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
<PAGE>
Statement of Changes in Net Assets
================================================================================
Unaudited
6 Months Year
Ended Ended
11/30/96 5/31/96
-------- -------
Increase (Decrease) in Net Assets
Operations
Net investment income ...........................$ 55,396 $ 107,924
Net realized gain (loss) ........................ 3,393 1,379
Change in net unrealized gain or loss ........... 60,155 (53,172)
Increase (decrease) in net assets from operations 118,944 56,131
Distributions to shareholders
Net investment income ........................... (55,396) (107,911)
Capital share transactions *
Shares sold ..................................... 147,782 394,756
Distributions reinvested ........................ 36,682 78,213
Shares redeemed ................................. (172,175) (352,730)
Increase (decrease) in net assets from capital
share transactions .............................. 12,289 120,239
Net Assets
Increase (decrease) during period ................... 75,837 68,459
Beginning of period ................................. 1,634,362 1,565,903
End of period .......................................$ 1,710,199 $ 1,634,362
*Share information
Shares sold ..................................... 16,837 43,673
Distributions reinvested ........................ 4,165 8,680
Shares redeemed ................................. (19,632) (39,188)
Increase (decrease) in shares outstanding ....... 1,370 13,165
- --------------------------------------------------------------------------------
<PAGE>
Notes to Financial Statements
================================================================================
Unaudited November 30, 1996
- --------------------------------------------------------------------------------
NOTE 1 - Significant accounting policies
================================================================================
T. Rowe Price New Income Fund, Inc., (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company and commenced operations on October 12, 1973.
Valuation Debt securities are generally traded in the over-the-counter market.
Investments in securities originally issued with maturities of one year or more
are stated at fair value as 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
money market yields.
Equity securities listed or regularly traded on a securities exchange are valued
at the last quoted sales price at the time the valuations are made. A security
which 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 and securities regularly traded in the
over-the-counter market are valued at the mean of the latest bid and asked
prices.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Premiums and Discounts Premiums and discounts on debt securities, other than
mortgage-backed securities, are amortized for both financial reporting and tax
purposes. Premiums and discounts on mortgage-backed securities are recognized
upon principal repayment as gain or loss for financial reporting purposes and as
ordinary income for tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Dividend income and distributions to
shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income tax
regulations and may differ from those determined in accordance with generally
accepted accounting principles.
<PAGE>
- --------------------------------------------------------------------------------
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.
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Securities Lending To earn additional income, the fund lends its securities to
approved brokers. At November 30, 1996, the market value of securities on loan
was $287,483,000, which was fully collateralized with cash. Although the 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 them.
Other Purchases and sales of portfolio securities, other than short-term and
U.S. government securities, aggregated $159,643,000 and $165,941,000,
respectively, for the six months ended November 30, 1996. Purchases and sales of
U.S. government securities aggregated $479,697,000 and $421,098,000,
respectively, for the six months ended November 30, 1996.
- --------------------------------------------------------------------------------
NOTE 3 - FEDERAL INCOME TAXES
================================================================================
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
income. The fund has unused realized capital loss carryforwards for federal
income tax purposes of $2,377,000, of which $1,115,000 expires in 2003, and
$1,262,000 in 2004. The fund intends to retain gains realized in future periods
that may be offset by available capital loss carryforwards.
At November 30, 1996, the aggregate cost of investments for federal income tax
and financial reporting purposes was $1,759,290,000, and net unrealized gain
aggregated $60,518,000, of which $63,090,000 related to appreciated investments
and $2,572,000 to depreciated investments.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4 - RELATED PARTY TRANSACTIONS
================================================================================
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management fee,
of which $663,000 was payable at November 30, 1996. The fee is computed daily
and paid monthly, and consists of an individual fund fee equal to 0.15% of
average daily net assets and a group fee. The group fee is based on the combined
assets of certain mutual funds sponsored by the manager or Rowe Price-Fleming
International, Inc. (the group). The group fee rate ranges from 0.48% for the
first $1 billion of assets to 0.305% for assets in excess of $50 billion. At
November 30, 1996, and for the six months then ended, the effective annual group
fee rate was 0.33%. The fund pays a pro-rata share of the group fee based on the
ratio of its net assets to those of the group.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc. (TRPS) is the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc., provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. Additionally, the fund is one of several T.Rowe
Price mutual funds (the underlying funds) in which the T. Rowe Price Spectrum
Income Fund (Spectrum) invests. In accordance with an agreement among Spectrum,
the underlying funds, the manager, and TRPS, expenses from the operation of
Spectrum are borne by the underlying funds based on each underlying fund's
proportionate share of assets owned by Spectrum. The fund incurred expenses
pursuant to these related party agreements totaling approximately $1,790,000 for
the six months ended November 30, 1996, of which $349,000 was payable at
period-end.
================================================================================
Investment Services And Information
- --------------------------------------------------------------------------------
Knowledgeable Service Representatives
================================================================================
By Phone Shareholder service representatives are available from 8 a.m. to 10
p.m. ET Monday through Friday and from 8:30 a.m. to 5 p.m. ET on weekends. Call
1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
In Person Visit one of our investor center
locations to meet with a representative who will be able to assist you with your
accounts. While there, you can drop off applications or obtain prospectuses and
other literature.
- --------------------------------------------------------------------------------
<PAGE>
Automated 24-Hour Services
================================================================================
Tele*Access(Registration mark) Call 1-800-638-2587 to obtain information such as
account balance, date and amount of your last transaction, latest dividend
payment, fund prices, and yields. Additionally, you have the ability to request
prospectuses, statements, and account and tax forms; to reorder checks; and to
initiate purchase, redemption, and exchange orders for identically registered
accounts.
T. Rowe Price OnLine Through a personal computer via dial-up modem,
you can replicate all the services available on Tele*Access plus conduct
transactions in your Discount Brokerage and Variable Annuity accounts.
- --------------------------------------------------------------------------------
Account Services
================================================================================
Checking Write checks for $500 or more on any money market and most
bond fund accounts (except the High Yield and Emerging Markets Bond Funds).
Automatic Investing Build your account over time by investing directly from your
bank account or paycheck with Automatic Asset Builder. Additionally, Automatic
Exchange enables you to set up systematic investments from one fund account into
another, such as from a money fund into a stock fund. A low, $50 minimum makes
it easy to get started.
Automatic Withdrawal If you need money from your fund account on a regular
basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options Reinvest all or some of your
distributions, or take them in cash. We give you maximum flexibility and
convenience.
- --------------------------------------------------------------------------------
Discount Brokerage *
================================================================================
Investments Available You can trade stocks, bonds, options, precious metals, and
other securities at a savings over regular commission rates.
To Open an Account
Call a shareholder service representative for more information.
- --------------------------------------------------------------------------------
<PAGE>
Investment Information
================================================================================
Combined Statement A comprehensive overview of your T. Rowe Price accounts is
provided. The summary page gives you earnings by tax category, provides total
portfolio value, and lists your investments by type--stock, bond, and money
market. Detail pages itemize account transactions by fund.
Shareholder Reports Portfolio managers review the performance of the funds in
plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report This is a quarterly newsletter with relevant articles
on market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Performance Update This quarterly report reviews recent market developments and
provides comprehensive performance information for every T. Rowe Price fund.
Insights This library of information includes reports on mutual fund tax issues,
investment strategies, and financial markets.
Detailed Investment Guides Our widely acclaimed Asset Mix Worksheet, College
Planning Kit, Retirees Financial Guide, and Retirement Planning Kit (also
available on disk for PC use) can help you determine and reach your investment
goals.
* A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
================================================================================
<PAGE>
Mutual Funds
- --------------------------------------------------------------------------------
Stock Funds
- -------------------------
Domestic
- -------------------------
Balanced
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era New Horizons *
OTC
Science & Technology
Small-Cap Value *
Spectrum Growth
Value
International/Global
- -------------------------
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
================================================================================
<PAGE>
Bond Funds
- -----------------------------
Domestic Taxable
- -----------------------------
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-free
- -----------------------------
California Tax-Free Bond
Florida Insured Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
International/Global
- -----------------------------
Global Government Bond
Emerging Markets Bond
International Bond
================================================================================
<PAGE>
Money Market
- -----------------------------
Taxable
- -----------------------------
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
- -----------------------------
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
Blended Asset
- -----------------------------
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
T. Rowe Price No-Load Variable Annuity
- ----------------------------------------
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
*Closed to new investors.
================================================================================
- --------------------------------------------------------------------------------
Discount Brokerage
================================================================================
A Division of T. Rowe Price Investment Services, Inc., Member NASD/SIPC
- --------------------------------------------------------------------------------
This low-cost service gives you the opportunity to easily consolidate all your
investments with one company. Through T. Rowe Price Discount Brokerage, you can
buy and sell individual securities-stocks, bonds, options, and others-at
considerable commission savings. We also provide a wide range of services,
including:
Automated Telephone and Computer Services You can enter trades, access quotes,
and review account information 24 hours a day, seven days a week. Any trades
executed through these programs save you an additional 10% on commissions.*
Investor Information A variety of informative reports, such as our Brokerage
Insights series, S&P Market Month newsletter, and optional S&P Stock Reports,
can help you better evaluate economic trends and investment opportunities.
Dividend Reinvestment Service Virtually all stocks held in customer accounts are
eligible for this service, free of charge. *Discount applies to our current
commission schedule; subject to our $35 minimum commission.
================================================================================
For yield, price, last transaction,
current balance or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(R):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
<PAGE>
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price New Income Fund(R).
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor
RPRTNIF 11/30/96
