<PAGE>
T. Rowe Price
TAX-FREE INCOME FUND
August 31, 1994
Sector Diversification
<TABLE>
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
Hospital Revenue 15%
Nuclear Revenue 13
Dedicated Tax Revenue 9
General Obligation - State 7
Pre-Refunded Bonds 7
Lease Revenue 7
General Obligation - Local 6
Water & Sewer Revenue 6
Housing Finance Revenue 5
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
Electric Revenue 5%
Air & Sea Transportation Revenue 5
Escrowed to Maturity 4
Educational Revenue 4
Ground Transportation Revenue 3
Industrial & Pollution
Control Revenue 2
Solid Waste Revenue 1
Miscellaneous Revenue 1
</TABLE>
Statement of Net Assets / August 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -------
<S> <C> <C>
ALABAMA -- 1.5%
Alabama, GO, Zero Coupon, 9/1/03........................................... $ 10,000 $ 6,100
Zero Coupon, 3/1/04................................................ 10,000 5,882
Zero Coupon, 9/1/04................................................ 5,500 3,120
Alabama Water Pollution Control Auth., (AMBAC Insured), 5.00%, 8/15/15..... 4,000 3,437
Mobile, Capital Improvement Warrants, GO, (MBIA Insured),
Zero Coupon, 8/15/16............................................... 4,330 1,039
Zero Coupon, 8/15/17............................................... 4,435 990
- ---------------------------------------------------------------------------------------------------------------------------
ARIZONA -- 1.0%
Phoenix, GO, VRDN (Currently 3.15%)........................................ 1,200 1,200
Salt River Agricultural Improvement and Power Dist., Electric System,
5.75%, 1/1/19...................................................... 13,000 12,222
- ---------------------------------------------------------------------------------------------------------------------------
ARKANSAS -- 0.9%
Arkansas Dev. Fin. Auth., Sisters of Mercy, VRDN
(Currently 3.15%).................................................. 5,000 5,000
Little Rock Health Fac. Board, Baptist Medical Center, 6.85%, 11/1/08...... 2,495 2,658
</TABLE>
S TFI 83194
<PAGE>
T. Rowe Price Tax-Free Income Fund
Statement of Net Assets
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -------
<S> <C> <C>
ARKANSAS (cont'd)
North Little Rock, Electric System Refunding, (MBIA Insured), 6.50%, 7/1/15 $ 4,000 $ 4,250
- ---------------------------------------------------------------------------------------------------------------------------
CALIFORNIA -- 9.4%
Anaheim PFA, San Juan Unit 4, (FGIC Insured), 5.75%, 10/1/22............... 5,000 4,702
California Public Works Board, Univ. of California, 5.50%, 6/1/14.......... 2,000 1,785
5.50%, 6/1/21...................................................... 8,000 6,972
Central Coast Water Auth., State Water Project Regional Fac.,
(AMBAC Insured), 6.60%, 10/1/22.................................... 2,000 2,056
Concord Redev. Agency, GO, (AMBAC Insured), 5.25%, 7/1/19.................. 4,055 3,519
Glendale Redev. Agency, Central Glendale Redev. Project, (AMBAC Insured),
5.60%, 12/1/16..................................................... 4,030 3,749
Los Angeles County, Marina del Rey, COP, 6.25%, 7/1/03..................... 4,000 4,018
6.50%, 7/1/08...................................................... 3,250 3,275
Los Angeles County Transportation Commission, Sales Tax, 7.40%, 7/1/15..... 5,530 6,058
(MBIA Insured), 6.25%, 7/1/13...................................... 8,965 9,082
Los Angeles Dept. of Water and Power, 7.375%, 2/1/29....................... 6,500 7,185
Los Angeles Harbor Dept., 7.60%, 10/1/18 (Escrowed to Maturity)............ 3,200 3,608
Los Angeles, Wastewater System, 7.15%, 6/1/20 (Pre-refunded 6/1/00+)....... 10,500 11,840
Modesto Irrigation Dist., Geysers Geothermal Power, COP, 7.25%, 10/1/15.... 5,000 5,319
Port of Oakland, (BIGI Insured), 7.30%, 11/1/09............................ 1,650 1,784
7.25%, 11/1/16..................................................... 12,275 13,260
Sacramento County, Main Detention Center, COP (MBIA Insured),
5.75%, 6/1/15..................................................... 3,000 2,860
Sacramento Fin. Auth., (AMBAC Insured), 5.375%, 11/1/14.................... 4,000 3,644
5.40%, 11/1/20..................................................... 7,000 6,221
San Bernardino, Sisters of Charity HealthCare System, 7.00%, 7/1/21........ 3,000 3,165
San Diego Co., GO, TRAN, 4.50%, 9/29/95.................................... 5,000 4,995
San Jose Redev. Agency, Merged Area Redev., (MBIA Insured), 6.00%, 8/1/15.. 4,500 4,447
San Mateo County Transit Dist., (MBIA Insured), 5.25%, 6/1/16.............. 6,000 5,311
5.25%, 6/1/17...................................................... 3,000 2,641
Southern California Public Power Auth., 5.00%, 7/1/15...................... 4,650 3,930
Transmission Project, 6.125%, 7/1/18................................... 2,000 1,969
- ---------------------------------------------------------------------------------------------------------------------------
COLORADO -- 1.6%
Boulder County, Longmont United Hosp., 8.20%, 12/1/20
(Pre-refunded 12/1/00+)............................................ 2,000 2,352
Colorado HFA, Sisters of Charity HealthCare System, 5.25%, 5/15/14......... 3,000 2,653
Douglas County, Highlands Ranch Metropolitan Dist., GO,
8.68%, 10/15/94 (Escrowed to Maturity)............................. 1,465 1,477
8.68%, 10/15/95 (Escrowed to Maturity)............................. 1,625 1,709
Highlands Ranch Water & Sewer Dist., GO,
8.68%, 10/15/94 (Escrowed to Maturity)............................. 2,205 2,223
8.68%, 10/15/95 (Escrowed to Maturity)............................. 2,260 2,377
Jefferson County School Dist., GO, (AMBAC Insured), 6.00%, 12/15/12........ 8,500 8,570
- ---------------------------------------------------------------------------------------------------------------------------
CONNECTICUT -- 1.1%
Connecticut HEFA, Yale-New Haven Hosp., (MBIA Insured), 7.10%, 7/1/25...... 5,825 6,275
Connecticut State, Special Tax, GO, 7.125%, 6/1/10......................... 7,350 8,281
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -------
<S> <C> <C>
DELAWARE -- 1.3%
Delaware HFA, Beebe Medical Center, 6.75%, 6/1/14.......................... $ 3,500 $ 3,466
The Medical Center of Delaware, (MBIA Insured), 9.25%, 10/1/15......... 13,000 13,937
- ---------------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA -- 0.5%
Washington D.C. Metropolitan Transit Auth., (FGIC Insured), 5.25%, 7/1/14.. 7,500 6,653
- ---------------------------------------------------------------------------------------------------------------------------
FLORIDA -- 3.9%
Broward County Resource Recovery, Broward Waste Energy
L.P. North, 7.95%, 12/1/08......................................... 11,750 12,886
L.P. South, 7.95%, 12/1/08............................................. 3,225 3,537
Dade County School Dist., Dade County School Board Foundation, Inc., COP,
(MBIA Insured), 5.75%, 5/1/12...................................... 8,000 7,724
Florida, Board of Ed. (Public Ed. Capital Outlay), GO,
7.25%, 6/1/23 (Pre-refunded 6/1/00+)............................... 35 39
7.25%, 6/1/23...................................................... 5,640 6,212
Florida Dept. of Transportation, (FGIC Insured), 5.00%, 7/1/16............. 5,000 4,266
Jacksonville Electric Auth., St. John River, 5.50%, 10/1/13................ 5,400 5,037
Jacksonville Transportation Auth., GO, 7.375%, 7/1/20
(Pre-refunded 7/1/00+)............................................. 8,750 9,935
Orlando-Orange County Expressway Auth., (AMBAC Insured), 5.25%, 7/1/12..... 4,000 3,637
GEORGIA -- 7.3%
Effingham County School Dist., GO, (MBIA Insured), 6.25%, 2/1/09........... 1,545 1,620
Fulton-Dekalb Hosp. Auth., Grady Memorial Hosp., GO, (AMBAC Insured),
6.80%, 1/1/07 (Escrowed to Maturity)............................... 5,530 6,063
6.80%, 1/1/08 (Escrowed to Maturity)............................... 5,905 6,447
6.85%, 1/1/09 (Escrowed to Maturity)............................... 6,310 6,884
6.85%, 1/1/10 (Escrowed to Maturity)............................... 6,745 7,349
(MBIA Insured), 5.50%, 1/1/12.......................................... 2,000 1,870
5.50%, 1/1/20...................................................... 5,000 4,491
Georgia, GO, 6.25%, 3/1/11................................................. 3,500 3,696
Georgia Hosp. Fin. Auth., Pooled Hospital Loan, VRDN (Currently 3.25%)..... 500 500
Gwinnett County, Water & Sewage Auth., Zero Coupon, 8/1/09................. 2,750 1,159
Gwinnett County School Dist., GO, 6.40%, 2/1/09............................ 3,415 3,587
6.40%, 2/1/10...................................................... 3,655 3,812
6.40%, 2/1/11...................................................... 3,905 4,079
6.40%, 2/1/12...................................................... 1,255 1,313
Henry County School Dist., GO, 6.45%, 8/1/11............................... 2,000 2,080
Metropolitan Atlanta Rapid Transit Auth., Sales Tax, 6.55%, 7/1/20......... 5,500 5,584
Municipal Electric Auth. of Georgia, 8.125%, 1/1/17 (Pre-refunded 1/1/98+). 5,680 6,342
(AMBAC Insured), 6.40%, 1/1/07......................................... 7,500 8,008
6.00%, 1/1/22...................................................... 500 488
7.25%, 1/1/24...................................................... 6,500 7,554
(FGIC Insured), 5.50%, 1/1/12.......................................... 1,800 1,698
6.125%, 1/1/14..................................................... 5,500 5,490
5.70%, 1/1/19...................................................... 5,100 4,800
Paulding County, Water and Sewer, (MBIA Insured), 6.00%, 12/1/13........... 5,000 4,994
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
T. Rowe Price Tax-Free Income Fund
Statement of Net Assets
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -------
<S> <C> <C>
IDAHO -- 0.1%
Idaho Housing Agency, 7.70%, 7/1/17........................................ $ 945 $ 986
- ---------------------------------------------------------------------------------------------------------------------------
ILLINOIS -- 3.0%
Chicago - O'Hare Int'l. Airport, 10.625%, 1/1/15........................... 22,750 23,871
Illinois, Sales Tax, 6.875%, 6/15/15 (Pre-refunded 6/15/97+)............... 1,500 1,615
Illinois HFA, Hinsdale Health System, 9.00%, 11/15/15...................... 4,930 5,600
Holy Cross Hosp., 6.70%, 3/1/14........................................ 1,000 987
Regional Transportation Auth., Cook, Dupage, Kane, Lake,
McHenry, and Will Counties, (AMBAC Insured), 7.20%, 11/1/20........ 8,000 9,040
- ---------------------------------------------------------------------------------------------------------------------------
INDIANA -- 0.2%
Hosp. Auth. of St. Joseph County, St. Joseph's Medical Center,
(MBIA Insured), 6.70%, 12/1/02..................................... 1,985 2,170
- ---------------------------------------------------------------------------------------------------------------------------
KANSAS -- 0.7%
Johnson County, Internal Improvement, GO, 6.125%, 9/1/12................... 4,500 4,564
Kansas, Dept. of Transportation, 5.375%, 3/1/13............................ 5,500 5,136
- ---------------------------------------------------------------------------------------------------------------------------
KENTUCKY -- 1.8%
Carroll County PCR, 7.45%, 9/15/16......................................... 15,000 16,346
Kentucky Turnpike Auth., Economic Dev., 7.25%, 5/15/10
(Pre-refunded 5/15/00+)............................................ 1,000 1,122
(AMBAC Insured), 5.50%, 7/1/11......................................... 7,000 6,610
- ---------------------------------------------------------------------------------------------------------------------------
LOUISIANA -- 1.1%
East Baton Rouge Mortgage Fin. Auth., 7.375%, 3/1/10 (Escrowed to Maturity) 2,800 2,912
Louisiana Offshore Terminal Auth., LOOP, 7.60%, 9/1/10..................... 10,440 11,374
- ---------------------------------------------------------------------------------------------------------------------------
MAINE -- 0.3%
Maine Turnpike Auth., (MBIA Insured), 6.00%, 7/1/18........................ 4,000 3,920
- ---------------------------------------------------------------------------------------------------------------------------
MARYLAND -- 5.8%
Baltimore City, Capital Acquisition Program IDA, VRDN (Currently 3.15%).... 600 600
Baltimore City, Convention Center, (FGIC Insured), 6.00%, 9/1/17........... 5,500 5,416
Baltimore County, Pickersgill Retirement Community, 7.70%, 1/1/21.......... 2,000 2,121
Calvert County PCR, Baltimore Gas and Electric, 5.55%, 7/15/14............. 5,000 4,599
Gaithersburg, First Mortgage Economic Dev. (Asbury Methodist Home),
7.85%, 1/1/20 (Pre-refunded 1/1/00+)............................... 3,000 3,442
Housing Opportunities Commission of Montgomery County, 7.50%, 7/1/17....... 1,115 1,152
Maryland Community Dev. Administration, Single Family Program,
7.25%, 4/1/19...................................................... 2,500 2,583
6.45%, 4/1/14...................................................... 2,000 2,001
7.60%, 4/1/17 *.................................................... 8,000 8,326
Maryland HHEFA, Good Samaritan Hosp., 5.75%, 7/1/19........................ 3,000 2,759
Howard County General Hosp. Auth., 5.50%, 7/1/13................... 3,750 3,269
Johns Hopkins Hosp., Zero Coupon, 7/1/19........................... 9,000 1,883
Johns Hopkins Univ., 7.50%, 7/1/20................................. 9,475 10,368
Kennedy Kreiger Institute, 6.75%, 7/1/22........................... 1,500 1,470
Peninsula Regional Medical Center, 5.00%, 7/1/23................... 2,750 2,215
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -------
<S> <C> <C>
MARYLAND (cont'd)
Maryland HHEFA (cont'd)
Suburban Hosp., 5.125%, 7/1/21......................................... $ 3,000 $ 2,479
Univ. of Maryland Medical System, 9.50%, 1/1/14 (Pre-refunded 7/22/96+) 5,500 6,107
(FGIC Insured), 5.00%, 7/1/20...................................... 8,005 6,667
7.00%, 7/1/22...................................................... 1,500 1,688
Maryland Water Quality Fin. Administration, Revolving Loan Fund,
7.25%, 9/1/12...................................................... 1,950 2,146
Prince Georges County, Dimensions Health Corp., 5.30%, 7/1/24.............. 9,000 7,431
- ---------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS -- 2.0%
Massachusetts Bay Transportation Auth., General Transportation System,
6.25%, 3/1/12...................................................... 2,340 2,377
7.00%, 3/1/14...................................................... 3,150 3,517
GO, 7.00%, 3/1/21...................................................... 6,200 6,946
Massachusetts HEFA, Harvard Univ., 6.25%, 4/1/20........................... 5,000 5,175
Massachusetts General Hosp., (AMBAC Insured), 6.00%, 7/1/15............ 4,500 4,426
Massachusetts Municipal Wholesale Electric Power Supply System,
6.125%, 7/1/19..................................................... 5,000 4,788
- ---------------------------------------------------------------------------------------------------------------------------
MICHIGAN -- 0.8%
Michigan Building Auth., 5.30%, 10/1/12.................................... 5,000 4,570
Michigan HDA, 6.45%, 12/1/14............................................... 2,120 2,121
7.55%, 12/1/15..................................................... 1,750 1,836
Michigan Hosp. Fin. Auth., Bay Medical Center, 8.25%, 7/1/12............... 1,000 1,080
Warren County, PCR, Michigan Power and Light, 7.00%, 4/1/22................ 1,500 1,524
- ---------------------------------------------------------------------------------------------------------------------------
MINNESOTA -- 3.3%
Minnesota, GO, 5.30%, 8/1/10............................................... 8,530 7,981
5.30%, 8/1/11...................................................... 9,555 8,888
Northern Minnesota Municipal Power Agency, 7.35%, 1/1/02................... 5,000 5,492
Ramsey County, Capital Improvement, GO, 5.75%, 12/1/07..................... 1,915 1,958
5.85%, 12/1/08..................................................... 2,000 2,027
Rochester Health Care Fac., Mayo Foundation/Mayo Medical Center,
5.80%, 11/15/07.................................................... 1,500 1,511
5.875%, 11/15/08................................................... 2,880 2,906
5.90%, 11/15/09.................................................... 2,000 2,005
5.90%, 11/15/10.................................................... 4,000 3,991
6.25%, 11/15/21.................................................... 3,000 3,018
Univ. of Minnesota, Residual Interest Bond / Inverse Floater, 8/15/03
(Currently 6.021%)................................................. 5,800 5,148
- ---------------------------------------------------------------------------------------------------------------------------
MISSISSIPPI -- 0.6%
Adams County, Jefferson Davis Memorial Hosp., 7.90%, 10/1/08............... 3,050 3,266
Claiborne County, PCR, Systems Energy Resources, 9.875%, 12/1/14........... 3,400 3,934
Mississippi Home Corp., Single Family Mortgage, (FGIC Insured),
9.25%, 3/1/12...................................................... 1,095 1,187
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
T. Rowe Price Tax-Free Income Fund
Statement of Net Assets
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -------
<S> <C> <C>
MISSOURI -- 1.0%
Joplin IDA, Tri-State Osteopathic Hosp. Assoc., 8.25%, 12/15/14............ $ 3,000 $ 3,254
Missouri HEFA, Bethesda Health Group, 7.50%, 8/15/12....................... 1,250 1,265
Sisters of Mercy Health System, VRDN (Currently 3.15%)................. 5,000 5,000
SSM Health Care, (MBIA Insured), 6.25%, 6/1/07......................... 2,690 2,815
St. Anthony's Medical Center, VRDN (Currently 3.20%)................... 900 900
- ---------------------------------------------------------------------------------------------------------------------------
NEBRASKA -- 0.5%
Omaha Public Power, Electric System, 6.20%, 2/1/17......................... 7,000 7,063
- ---------------------------------------------------------------------------------------------------------------------------
NEVADA -- 1.1%
Clark County School Dist., Limited Tax School Improvement, GO,
(MBIA Insured), 7.00%, 6/1/11...................................... 3,500 3,850
Nevada, Municipal Bond Bank, GO, 7.25%, 11/1/10 (Escrowed to Maturity)..... 3,050 3,478
Nevada Housing Division, 12.50%, 10/1/96................................... 60 63
7.85%, 10/1/15..................................................... 1,145 1,180
Washoe County School Dist., GO, (MBIA Insured), 5.75%, 6/1/14.............. 7,000 6,666
- ---------------------------------------------------------------------------------------------------------------------------
NEW JERSEY -- 1.2%
New Jersey Housing & Mortgage Fin. Agency, 6.60%, 11/1/14.................. 2,250 2,273
New Jersey Turnpike Auth., 6.50%, 1/1/16................................... 9,600 10,077
Salem County Pollution Control Fin. Auth., (MBIA Insured), 6.25%, 6/1/31... 4,550 4,549
- ---------------------------------------------------------------------------------------------------------------------------
NEW MEXICO -- 0.3%
Gallup, PCR, Plains Electric Generation and Transmission Coop.,
(MBIA Insured), 6.65%, 8/15/17..................................... 4,000 4,180
- ---------------------------------------------------------------------------------------------------------------------------
NEW YORK -- 8.7%
Dormitory Auth. of the State of New York, City Univ., 5.75%, 7/1/13........ 5,000 4,720
6.00%, 7/1/14...................................................... 6,000 5,824
5.00%, 7/1/20...................................................... 10,000 8,134
Cornell Univ., VRDN (Currently 3.05%).................................. 2,300 2,300
Dept. of Health of the State of New York, 5.50%, 7/1/20................ 4,000 3,516
5.50%, 7/1/23.................................................... 4,250 3,729
State Univ. Ed. Fac., 5.75%, 5/15/24................................... 5,000 4,601
Vassar College, 7.25%, 7/1/15.......................................... 2,000 2,205
Municipal Assistance Corp. for the City of New York, 7.375%, 7/1/08........ 2,500 2,672
New York City, GO, 5.80%, 8/1/03........................................... 5,665 5,669
7.50%, 2/1/08...................................................... 2,500 2,726
8.00%, 8/1/16 (Pre-refunded 8/1/01+)............................... 4,725 5,601
8.00%, 8/1/16...................................................... 4,275 4,994
VRDN (Currently 3.20%)............................................. 3,900 3,900
New York City Municipal Water Fin. Auth., (FGIC Insured), VRDN
(Currently 3.15%).................................................. 1,500 1,500
(MBIA Insured), 5.50%, 6/15/15......................................... 6,960 6,425
New York State, GO, 5.625%, 3/1/13......................................... 5,000 4,749
New York State Housing Fin. Agency, Univ. Construction,
7.80%, 5/1/01 (Escrowed to Maturity)............................... 2,000 2,314
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -------
<S> <C> <C>
NEW YORK (cont'd)
New York State Local Gov't. Assistance Corp., Public Benefit Corp.,
7.20%, 4/1/04...................................................... $ 5,000 $ 5,569
6.00%, 4/1/12...................................................... 3,000 2,968
5.375%, 4/1/14..................................................... 8,000 7,198
6.00%, 4/1/14...................................................... 4,750 4,669
5.50%, 4/1/21...................................................... 7,580 6,757
New York State Medical Care Fac. Fin. Auth, Mental Health Services,
5.375%, 2/15/14.................................................... 3,500 3,083
Presbyterian Hospital, 5.50%, 8/15/24.................................. 5,000 4,452
St. Luke's-Roosevelt Hosp. 5.60%, 8/15/13 ............................. 2,185 2,047
New York State Power Auth., 7.375%, 1/1/18 (Pre-refunded 1/1/96+).......... 1,600 1,698
New York State Urban Dev. Corp., Correctional Capital Fac., 5.375%, 1/1/23. 2,000 1,708
Triborough Bridge and Tunnel Auth., (AMBAC Insured), 6.00%, 1/1/15......... 2,500 2,479
- ---------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA -- 2.7%
Charlotte-Mecklenberg Hosp. Auth., North Carolina HealthCare System,
6.25%, 1/1/20...................................................... 5,000 5,013
North Carolina Eastern Municipal Power Agency, 7.50%, 1/1/10
(Escrowed to Maturity)............................................. 4,650 5,342
7.50%, 1/1/10...................................................... 4,330 4,808
6.50%, 1/1/18 (Esrowed to Maturity)................................ 2,655 2,864
6.50%, 1/1/18...................................................... 3,935 3,944
6.00%, 1/1/26...................................................... 3,500 3,227
North Carolina Housing Fin. Agency, 7.40%, 3/1/28.......................... 2,250 2,310
North Carolina Medical Care Commission, Stanley Memorial Hosp., ...........
7.80%, 10/1/19..................................................... 3,000 3,208
North Carolina Municipal Power Agency, Catawba Electric, (MBIA Insured),
5.75%, 1/1/20...................................................... 6,000 5,635
- ---------------------------------------------------------------------------------------------------------------------------
OHIO -- 2.1%
Cleveland, Waterworks, (MBIA Insured), 5.50%, 1/1/13....................... 4,000 3,771
Columbus, Sewerage System, 6.25%, 6/1/08................................... 2,250 2,350
Waterworks Enlargement, GO, 6.00%, 5/1/13.............................. 2,000 2,000
Cuyahoga County, Univ. Hosp. of Cleveland, VRDN (Currently 3.25%).......... 2,100 2,100
Franklin County, GO, 6.80%, 12/1/09 (Pre-refunded 12/1/00+)................ 2,860 3,178
6.80%, 12/1/10 (Pre-refunded 12/1/00+)............................. 3,240 3,601
County Courthouse (Limited Tax), GO, 6.375%, 12/1/17
(Pre-refunded 12/1/01+)............................................ 2,000 2,187
Hamilton County, The Metropolitan Sewer Dist. of Greater Cincinnati,
(FGIC Insured), 5.00%, 12/1/14..................................... 8,000 6,959
Montgomery County Hosp. Fac., Kettering Medical Center,
(MBIA Insured), 7.375%, 4/1/02..................................... 2,500 2,747
- ---------------------------------------------------------------------------------------------------------------------------
OKLAHOMA -- 0.4%
Oklahoma Municipal Power Auth., Power Supply System,
(MBIA Insured), 5.875%, 1/1/12..................................... 1,500 1,500
Tulsa County Home Fin. Auth., Single Family Mortgage, (FGIC Insured),
6.90%, 8/1/10 (Escrowed to Maturity)............................... 4,250 4,548
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
T. Rowe Price Tax-Free Income Fund
Statement of Net Assets
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -------
<S> <C> <C>
OREGON -- 1.0%
Oregon, Veterans' Welfare, GO, VRDN (Currently 3.05%)...................... $ 9,700 $ 9,700
Portland, Sewer System Revenue, 6.25%, 6/1/15.............................. 4,250 4,268
- ---------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA -- 2.4%
Allegheny County Hosp. Dev. Auth., Montefiore Hosp. Assoc. of
Western Pennsylvania, 9.75%, 7/1/05 (Pre-refunded 7/1/96+)......... 12,000 13,338
Pennsylvania, GO, (MBIA Insured), 5.60%, 6/15/14........................... 11,000 10,360
Pennsylvania Public School Building Auth., Commonwealth of Pennsylvania,
9.625%, 11/1/03 (Pre-refunded 11/1/95+)............................ 910 967
Pennsylvania IDA, Economic Dev., (AMBAC Insured), 5.50%, 1/1/14............ 8,250 7,587
- ---------------------------------------------------------------------------------------------------------------------------
PUERTO RICO -- 3.7%
Puerto Rico Aqueduct and Sewer Auth., 7.90%, 7/1/07........................ 2,000 2,220
7.875%, 7/1/17..................................................... 11,500 12,757
Puerto Rico Highway and Transportation Auth., VRDN (Currently 3.65%)....... 3,050 3,047
Puerto Rico Housing Bank and Fin. Agency, Loan Insurance Claims,
4.125%, 12/1/96.................................................... 10,660 10,519
Puerto Rico Ind., Med., Higher Ed. & Environmental Pollution Control
Fac. Fin. Auth., Catholic Univ. of Puerto Rico, 9.25%, 12/1/97..... 6,330 7,314
Puerto Rico Infrastructure Fin. Auth., 7.75%, 7/1/08....................... 1,740 1,923
7.50%, 7/1/09...................................................... 9,955 10,929
Puerto Rico Public Fin. Corp., GO, Floating Rate, 7/1/95
(Currently 6.35%)(Escrowed to Maturity) ........................... 1,685 1,717
- ---------------------------------------------------------------------------------------------------------------------------
RHODE ISLAND -- 1.4%
Rhode Island Health & Ed. Building Corp., Bryant College, (MBIA Insured),
6.125%, 6/1/19..................................................... 5,000 4,890
Rhode Island Hosp., (FGIC Insured), Residual Interest Bond / Inverse
Floater, 8/15/21, (Currently 10.334%).............................. 1,000 1,071
Rhode Island Housing & Mortgage Fin. Corp., Homeownership Opportunity,
6.70%, 10/1/14..................................................... 5,000 5,068
7.85%, 10/1/16..................................................... 8,000 8,404
- ---------------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA -- 2.7%
Charleston, Waterworks & Sewer System, 10.375%, 1/1/15
(Pre-refunded 1/1/95+)............................................. 10,000 10,519
Darlington County, PCR, Carolina Power & Light, (MBIA Insured),
6.60%, 11/1/10..................................................... 4,000 4,235
Greenville Hosp. System, Board of Trustees, Hosp. Fac., 5.50%, 5/1/16...... 5,250 4,694
Piedmont Municipal Power Agency, (FGIC Insured), 6.50%, 1/1/14............. 3,500 3,678
(MBIA Insured), 6.30%, 1/1/14.......................................... 2,390 2,404
5.375%, 1/1/25..................................................... 3,900 3,433
South Carolina Public Service Auth., Santee Cooper,
7.00%, 7/1/12 (Pre-refunded 7/1/01+)............................... 1,650 1,849
6.625%, 7/1/31 (Pre-refunded 7/1/02+).............................. 5,000 5,520
- ---------------------------------------------------------------------------------------------------------------------------
SOUTH DAKOTA -- 0.9%
South Dakota Building Auth., 7.50%, 12/1/16................................ 10,000 10,761
South Dakota Housing Dev. Auth., Homeownership Mortgage, 6.65%, 5/1/14..... 2,000 2,022
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -------
<S> <C> <C>
TENNESSEE -- 1.8%
Chattanooga Ind. Dev. Board, Dupont, 6.35%, 7/1/22......................... $ 2,000 $ 2,015
Chattanooga-Hamilton County Hosp. Auth., Erlanger Medical Center,
VRDN (Currently 3.15%)............................................. 3,700 3,700
Health & Ed. Board of the Metropolitan Gov't of Nashville and
Davidson County, Vanderbilt Univ., 5.125%, 7/1/13.................. 4,000 3,562
Health, Ed. & Housing Fac. Board of the City of Chattanooga, Memorial Hosp.,
(MBIA Insured), 6.625%, 9/1/07..................................... 2,950 3,195
6.625%, 9/1/08..................................................... 3,150 3,394
Memphis, GO, VRDN (Currently 3.20%)........................................ 900 900
Electric System, 6.75%, 1/1/11 (Pre-refunded 1/1/00+).................. 2,500 2,743
Metropolitan Nashville Airport Auth., (FGIC Insured),
VRDN (Currently 3.10%)............................................. 1,000 1,000
The Health, Ed. and Housing Facility Board of the County of Shelby,
Le Bonhuer Children's Medical Center, (MBIA Insured), 5.50%, 8/15/12... 4,500 4,240
- ---------------------------------------------------------------------------------------------------------------------------
TEXAS -- 7.5%
Brazos River Auth., Houston Lighting & Power, 8.25%, 5/1/15................ 18,000 19,815
Dallas-Fort Worth Regional Airport, 10.00%, 11/1/12........................ 20,000 20,713
Denison Hosp. Auth., Texoma Medical Center, 7.00%, 8/15/14................. 4,245 4,272
Harris County, GO, (MBIA Insured), Zero Coupon, 8/15/04.................... 6,000 3,466
Harris County Health Fac. Dev. Corp., Memorial Hosp., 7.125%, 6/1/15....... 2,500 2,712
Sisters of Charity of the Incarnate Word, 7.10%, 7/1/21................ 4,000 4,216
St. Luke's Episcopal Hosp., VRDN (Currently 3.15%)..................... 5,000 5,000
Texas Medical Center, (MBIA Insured), 7.375%, 5/15/20.................. 7,645 8,247
Harris County Hosp. Dist., (AMBAC Insured), 7.40%, 2/15/10................. 1,500 1,711
Matagorda County Navigation Dist. Number One, PCR, Central Power & Light,
7.50%, 12/15/14.................................................... 1,500 1,629
Houston Lighting & Power, (FGIC Insured), 7.20%, 12/1/18............... 3,600 3,949
Tarrant County Health Fac. Dev. Corp., Harris Methodist Health System,
6.00%, 9/1/24...................................................... 3,000 2,856
Texas Public Fin. Auth., GO, 7.00%, 10/1/08 (Pre-refunded 1/1/99+)......... 3,000 3,285
Texas Veterans, GO, 8.25%, 12/1/10......................................... 3,900 4,194
7.40%, 12/1/20..................................................... 14,205 15,548
- ---------------------------------------------------------------------------------------------------------------------------
UTAH -- 0.9%
Intermountain Power Agency, 7.20%, 7/1/19.................................. 6,200 6,621
7.50%, 7/1/21...................................................... 4,750 5,182
- ---------------------------------------------------------------------------------------------------------------------------
VERMONT -- 0.8%
Vermont Ed. and Health Buildings Fin. Agency, Medical Center Hosp.
of Vermont, (FGIC Insured), 7.35%, 9/1/13............................. 4,650 4,659
7.45%, 9/1/23...................................................... 2,000 1,998
Middlebury College, 6.00%, 11/1/22..................................... 4,585 4,469
- ---------------------------------------------------------------------------------------------------------------------------
VIRGINIA -- 6.2%
Augusta County IDA, Augusta Hosp. Corp., (AMBAC Insured), 5.50%, 9/1/15.... 2,500 2,296
Chesapeake Bay Bridge and Tunnel Dist., (MBIA Insured), 6.375%, 7/1/22..... 2,500 2,522
Fairfax County IDA, Fairfax Hosp. System, VRDN (Currently 3.00%)........... 700 700
</TABLE>
9
<PAGE>
T. Rowe Price Tax-Free Income Fund
Statement of Net Assets
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -------
<S> <C> <C>
VIRGINIA (cont'd)
Fairfax County Water Auth., 6.00%, 4/1/22.................................. $ 17,500 $ 17,061
5.75%, 4/1/29...................................................... 6,350 5,885
Henrico County IDA, Bon Secours Health System, St. John's Hosp.,
7.50%, 9/1/15...................................................... 1,950 2,145
St. Mary's Hosp., 7.50%, 9/1/07........................................ 1,805 1,975
Richmond Metropolitan Auth., Expressway Revenue, 6.375%, 7/15/16........... 7,000 7,135
(FGIC Insured), 5.75%, 7/15/22..................................... 3,000 2,822
Virginia Housing Dev. Auth., Commonwealth Mortgage, 6.90%, 7/1/13.......... 11,100 11,328
6.25%, 7/1/11**.................................................... 5,000 5,013
6.75%, 7/1/14**.................................................... 7,435 7,430
6.80%, 7/1/17**.................................................... 8,900 8,893
Virginia Transportation Board, Northern Virginia Transportation Dist.,
5.25%, 5/15/19..................................................... 3,000 2,638
U.S. Route 58 Corridor Dev. Program, 6.00%, 5/15/19.................... 2,925 2,848
Winchester IDA, Winchester Medical Center, Inc., (AMBAC Insured),
Embedded Interest Rate Swap, 5.51%, 1/1/05............................. 1,500 1,369
5.61%, 1/1/06...................................................... 1,500 1,365
5.71%, 1/1/07...................................................... 1,600 1,451
- ---------------------------------------------------------------------------------------------------------------------------
WASHINGTON -- 3.5%
Port of Seattle, 7.40%, 12/1/09............................................ 1,000 1,143
Tacoma Electric System, (FGIC Insured), 6.25%, 1/1/15...................... 7,550 7,567
Washington HFA, Sisters of Providence, VRDN (Currently 3.35%).............. 1,700 1,700
Washington Public Power Supply System, 7.25%, 7/1/09....................... 3,000 3,361
5.375%, 7/1/15..................................................... 10,500 9,172
7.25%, 7/1/15 (Pre-refunded 1/1/00+)............................... 2,200 2,465
7.50%, 7/1/15 (Pre-refunded 7/1/99+)............................... 4,310 4,857
7.50%, 7/1/15...................................................... 2,800 3,022
(FGIC Insured), Zero Coupon, 7/1/09.................................... 3,000 1,204
(MBIA Insured), 5.60%, 7/1/15.......................................... 7,500 6,862
6.25%, 7/1/17...................................................... 6,000 5,935
- ---------------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA -- 1.0%
Kanawha County Building Commission, Charleston Area Medical Center,
7.50%, 11/1/08..................................................... 2,250 2,443
West Virginia State Parkway, Economic Dev. & Tourism Auth., (FGIC Insured),
Residual Interest Bond / Inverse Floater, 5/16/19 (Currently 8.032%) 3,600 3,177
West Virginia State Univ. Board of Trustees, (AMBAC Insured), 6.00%, 4/1/12 8,000 7,931
- ----------------------------------------------------------------------------------------------------------------------------
WISCONSIN -- 0.1%
Wisconsin Public Power Agency, (AMBAC Insured), 7.00%, 7/1/02.............. 1,500 1,648
============================================================================================================================
TOTAL INVESTMENTS IN SECURITIES - 100.1% (COST - $1,324,104)............... 1,361,054
============================================================================================================================
Other Assets Less Liabilities - 0.1%....................................... (1,575)
----------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Value
-------
<S> <C> <C>
NET ASSETS CONSISTING OF:
Accumulated net investment income - net of distributions................... $ 632
Accumulated realized gains/losses - net of distributions................... (13,076)
Net unrealized appreciation of investments................................. 36,802
Paid-in-capital applicable to 147,501,950 shares of $1.00 par value
capital stock outstanding; 500,000,000 shares authorized........... 1,335,121
---------
NET ASSETS - 100.0%........................................................ $1,359,479
==========
NET ASSET VALUE PER SHARE.................................................. $9.22
=====
</TABLE>
* - Interest subject to alternative minimum tax
** - When-issued security
+ - Used in determining portfolio maturity
AMBAC - AMBAC Indemnity Corp.
BIGI - Bond Investors Guaranty Insurance
COP - Certificates of Participation
FGIC - Financial Guaranty Insurance Company
GO - General Obligation
HEFA - Health & Educational Facility Authority
HDA - Housing Development Authority
HFA - Health Facility Authority
HHEFA - Health & Higher Educational Facility Authority
IDA - Industrial Development Authority
MBIA - Municipal Bond Investors Assurance Corp.
PCR - Pollution Control Revenue
PFA - Public Facility Authority
TRAN - Tax Revenue Anticipation Note
VRDN - Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
T. Rowe Price Tax-Free Income Fund
Statement of Operations / Six Months Ended August 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Amounts in Thousands
--------------------
<S> <C> <C>
INVESTMENT INCOME
Interest income............................................................... $ 42,886
Expenses
Investment management fees.................................................. $ 3,408
Shareholder servicing fees & expenses....................................... 426
Custodian and accounting fees & expenses.................................... 125
Prospectus & shareholder reports............................................ 29
Registration fees & expenses................................................ 27
Legal & auditing fees....................................................... 22
Directors' fees & expenses.................................................. 13
Proxy & annual meeting...................................................... 10
Miscellaneous............................................................... 14
---------
Total expenses.............................................................. 4,074
----------
Net investment income......................................................... 38,812
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss)
Securities.................................................................. (12,804)
Options..................................................................... 168
Futures..................................................................... 1,701
---------
Net realized loss........................................................... (10,935)
Change in net unrealized appreciation or depreciation......................... (50,088)
---------
Net loss on investments....................................................... (61,023)
--------
DECREASE IN NET ASSETS FROM OPERATIONS........................................ $(22,211)
========
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
T. Rowe Price Tax-Free Income Fund
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------------
Six Months Ended Year Ended
Aug. 31, 1994 Feb. 28, 1994
---------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income................................... $ 38,812 $ 79,920
Net realized gain (loss) on investments................. (10,935) 45,315
Change in net unrealized appreciation or
depreciation of investments........................... (50,088) (44,503)
---------- ---------
Increase (decrease)in net assets from operations........ (22,211) 80,732
---------- ---------
Distributions to shareholders
Net investment income................................... (38,812) (79,920)
Net realized gain on investments........................ (5,930) (27,101)
---------- ---------
Decrease in net assets from distributions to shareholders (44,742) (107,021)
---------- ---------
Capital share transactions
Sold 10,664 and 26,880 shares........................... 98,277 265,837
Distributions reinvested of 3,401 and 7,772 shares...... 31,298 76,861
Redeemed 16,879 and 30,902 shares....................... (155,724) (305,474)
---------- ---------
Increase (decrease)in net assets from capital share transactions (26,149) 37,224
---------- ---------
Total increase (decrease)................................. (93,102) 10,935
NET ASSETS
Beginning of period..................................... 1,452,581 1,441,646
---------- ---------
End of period........................................... $1,359,479 $1,452,581
========== =========
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
T. Rowe Price Tax-Free Income Fund
Notes to Financial Statements / August 31, 1994 (Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Tax-Free Income Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company.
A) Security Valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining 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 remaining maturities less than one year are
stated at fair value which is determined by using a matrix system that
establishes a value for each security based on money market yields.
Financial futures contracts and options on futures contracts are valued at
closing settlement 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.
B) Premiums and Discounts - Premiums on municipal securities are amortized
for both financial and tax reporting purposes. Discounts, other than
original issue, are not amortized for financial reporting purposes.
C) 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 an identified cost basis. 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 which may differ from generally accepted accounting principles.
Payments ("variation margin") made or received by the Fund, dependent on the
daily fluctuations in the value of the futures contracts, are recorded as
unrealized gains or losses until the contracts are closed.
NOTE 2 - INVESTMENT TRANSACTIONS
As a part of its investment program, the Fund engages in the following
activities, the nature and risk of which are set forth more fully in the
Fund's Prospectus and Statement of Additional Information.
A) Futures - A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument at a specified price, date, time and place designated at the time
the contract is made. Risks arise from the possible illiquidity of the
futures market and from movements in security values. At August 31, 1994,
the Fund had a short position in 150 U. S. Treasury Bond futures contracts
which expire in September, 1994, and which have a contract value of
$15,558,000. Net unrealized depreciation of $148,000 on these contracts at
August 31, 1994, is included in the accompanying financial statements.
Municipal securities having a market value of $2,282,000 were pledged as
initial margin on these contracts.
B) Other - Purchases and sales of portfolio securities, other than short-term
securities, aggregated $370,476,000 and $334,929,000 respectively, for the
six months ended August 31, 1994.
14
<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 and distribute all of
its income.
At August 31, 1994, the aggregate cost of investments for federal
income tax and financial reporting purposes was $1,324,104,000 and net
unrealized appreciation aggregated $36,951,000, of which $56,408,000 related
to appreciated investments and $19,457,000 to depreciated investments.
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, computed daily and paid monthly, consisting 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 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at August 31,
1994, and for the six months then ended was 0.34%. The Fund pays a pro rata
portion of the Group Fee based on the ratio of the Fund's net assets to those
of the Group.
T. Rowe Price Services, Inc. (TRPS) is a wholly owned subsidiary of
the Manager. TRPS provides transfer and dividend disbursing agent functions
and shareholder services for all accounts. The Manager, under a separate
agreement, calculates the daily share price and maintains the financial
records of the Fund. For the six months ended August 31, 1994, the Fund
incurred fees totalling approximately $359,000 for these services provided by
related parties. At August 31, 1994, investment management and service fees
payable were $661,000.
15
<PAGE>
T. Rowe Price Tax-Free Income Fund
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
For a share outstanding throughout each period
--------------------------------------------------------------------
Six Months Year Ended
Ended --------------------------------------------------------
Aug. 31, Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
1994 1994 1993 1992 1991 1990
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.66 $ 9.84 $ 9.09 $ 8.79 $ 8.66 $ 8.57
------ ------ ------ ------ ------ ------
Investment Activities
Net investment income..................... 0.26 0.54 0.56 0.57 0.57 0.59
Net realized and unrealized gain (loss)... (0.40) -- 0.75 0.30 0.13 0.09
------ ------ ------ ------ ------ ------
Total from Investment Activities.............. (0.14) 0.54 1.31 0.87 0.70 0.68
------ ------ ------ ------ ------ ------
Distributions
Net investment income..................... (0.26) (0.54) (0.56) (0.57) (0.57) (0.59)
Net realized gain......................... (0.04) (0.18) -- -- -- --
------ ------ ------ ------ ------ ------
Total Distributions........................... (0.30) (0.72) (0.56) (0.57) (0.57) (0.59)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD................ $ 9.22 $ 9.66 $ 9.84 $ 9.09 $ 8.79 $ 8.66
====== ====== ====== ====== ====== ======
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Total Return.................................. (1.39)% 5.50% 14.88% 10.17% 8.40% 8.15%
Ratio of Expenses to Average Net Assets....... 0.59%+ 0.59% 0.61% 0.62% 0.63% 0.64%
Ratio of Net Investment Income
to Average Net Assets..................... 5.63%+ 5.40% 5.98% 6.34% 6.59% 6.80%
Portfolio Turnover Rate....................... 51.8%+ 71.2% 76.7% 57.9% 79.7% 140.5%
Net Assets, End of Period (in thousands) $1,359,479 $1,452,581 $1,441,646 $1,245,297 $1,128,635 $1,123,143
=====================================================================================================================
</TABLE>
+ Annualized.
16
<PAGE>
Fellow Shareholders
Solid economic growth continued through the summer despite increases in
interest rates during late winter and spring. Real GDP increased 3.8% in the
second quarter, and payroll employment gains averaged 270,000 per month in
the three months ended August 31. The civilian unemployment rate remained
around 6.1% while the capacity utilization rate stayed at about 84% -- both
measures indicating little slack left in the economy. The Federal Reserve
paused to reassess the health of the economy in July, but continued to
increase rates in August when the strength of the economy became clearer. In
addition, fears of a pickup in inflation became evident.
Short-term interest rates continued to rise during the three months
ended August 31 because of these concerns and the Fed's fifth tightening
move, which raised its target for the federal funds rate another 50 basis
points to 4.75%. Intermediate-term interest rates did not rise as much as
short-term rates, while the yield on the benchmark 30-year Treasury bond was
essentially unchanged during the period. This contrasts with the preceding
quarter, when note and bond yields rose between 75 and 125 basis points in
response to earlier Fed moves.
In the tax-exempt market, short-term yields also rose while
intermediate- and long-term yields were mostly flat. The yield on six-month
notes closed the quarter at 3.65%, 40 basis points higher than at the end of
the May 31 quarter. Intermediate-term bonds with five-year maturities
actually rose slightly in price with yields declining five basis points to
4.75%, while the yield on AAA 30-year General Obligation bonds was up five
basis points to 6.1% during the period. This yield continued to average about
82% of the yield on long-term Treasury bonds, indicating that long-term
municipal bonds would benefit investors in income tax brackets over 18%.
Municipal Bond and Note Yields
[ARTWORK APPEARS HERE]
The disproportionate rise in short-term rates relative to longer-term
rates has led to a "flattening" of the yield curve typical of an economic
expansion. Notwithstanding the sharp rise in long-term rates earlier this
year, bond yields ordinarily do not fluctuate as much as money market yields
over the business cycle since bonds, with their long-term horizons, are less
susceptible to cyclical pressures. As a result, the "slope" of the yield
curve usually flattens in times of prosperity and steepens when the economy
is slowing down.
SUMMARY AND OUTLOOK
We expect the general rise in interest rates to lead to slower economic
growth during the second half of the year--but not to a decisive slowdown.
The Federal Reserve is likely to lift its target for the fed funds rate even
further to ensure that the economy does not continue growing at above-average
rates, spurring inflationary pressures. Further tightening moves will surely
lead to higher yields on money market securities, but the outlook for
intermediate- and long-term interest rates is more complex. To the extent
that economic growth slows, the 200-basis-point increase in long-term rates
over year-ago levels may be enough of a cushion against moderately higher
inflation. If economic growth is above average or if inflation gains
<PAGE>
momentum, however, we would expect intermediate- and long-term rates to trend
higher.
We are a bit more optimistic about the tax-exempt market than the
taxable market since demand for tax-free income remains strong. In addition,
the supply of new issues is down from levels of the past two years--a
situation that we expect to continue for the balance of the year. This
combination of strong demand and reduced supply should help tax-free bonds
outperform their taxable equivalents.
We appreciate the continued confidence that all of our shareholders
have placed in us.
Respectfully submitted,
/s/ William T. Reynolds
William T. Reynolds
Director
Fixed-Income Division
September 23, 1994
A Word About Derivatives
As you are probably aware, derivatives are securities whose returns are
determined by an underlying index, asset, or security. Some derivatives can
be extremely risky and others conservative, actually serving to reduce risk.
We have historically been cautious regarding the use of these instruments.
Over the past quarter, derivative usage other than for hedging principal
volatility represented less than 3% of any municipal bond fund's assets.
While our past use of derivatives has not been significant, we feel
that there are times when certain types of derivatives are appropriate. We
want to assure you that, as with any investment of your money, we will employ
a prudent and professional approach in the use of derivatives.
TAX-EXEMPT MONEY FUND
We began the quarter with expectations that tax-exempt short-term interest
rates would rise sharply because of both fundamental and technical factors.
Our fundamental outlook was validated by the Fed's mid-August tightening
move, but the market's reaction to the heavy seasonal slate of new offerings
was different from past experience. Typically, municipal note yields rise in
late July and August as supply outstrips demand and yields become attractive
relative to taxable securities until the new supply is absorbed.
This year, the move to higher yields from technical considerations
was muted for several reasons, including: an overall reduction in seasonal
borrowings from previous years; an extension in maturities past money market
range; and the restructuring of newly issued notes into variable rate
securities. While these factors alleviated supply pressures, on the demand
side money fund assets were firm throughout the quarter, and the short-term
market received support from long-term investors who held higher-than-normal
cash positions against rising interest rates.
Even though yields on short-term tax-exempt securities remained less
attractive than in the past compared with taxable equivalents, we extended
our weighted average maturity late in the quarter as it became apparent that
we might not see the previously favorable relationships. Our note purchases
were concentrated in the four- to nine-month maturity range. This maturity
range offers higher yields than shorter-term securities while preserving our
flexibility to take advantage of rising rates. Your Fund turned in favorable
performances for the three- and six-month periods, as is shown below.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ---------
<S> <C> <C>
Tax-Exempt Money Fund 0.58% 1.10%
Donoghue's Tax-Free
Money Fund Average* 0.55 1.06
=========================================================
</TABLE>
*Stockbroker and General Purpose Funds.
2
<PAGE>
TAX-FREE SHORT-INTERMEDIATE FUND
Intermediate-term interest rates took a breather after a volatile first
quarter, moving in a narrow range and ending the quarter virtually unchanged.
The contraction in the number of new issues and steady demand for
intermediate-term bonds, which are more defensive than long-term bonds, lent
stability to this part of the market. Issuance of new debt is about 40% below
year-ago levels throughout the country, with certain regional exceptions, and
new issuance of intermediate-term bonds has been particularly light.
We used this stable environment to lower our effective duration and
weighted average maturity slightly to 2.4 and 2.9 years, respectively, from
their levels at the end of the previous fiscal quarter. The weighted average
quality of portfolio securities was virtually unchanged at the AA level. In
line with our defensive posture, we emphasized higher-coupon bonds with
shorter durations rather than bonds with lower coupons, and avoided the
potential tax problem posed by "market discount" bonds, which allows capital
gains to be taxed as ordinary income in certain instances.
With inflationary pressures likely to increase, we expect to keep the
Fund's duration at the short end of our neutral range. Your Fund performed in
line with the average for its peer group during the quarter and outperformed
for the longer period, as shown below.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
---------- --------
<S> <C> <C>
Tax-Free Short-Intermediate
Fund 1.03% 0.90%
Lipper Short Municipal
Debt Fund Average 1.01 0.64
========================================================
</TABLE>
TAX-FREE INSURED INTERMEDIATE BOND FUND
A stable market environment during the quarter, strong demand for tax-free
income, and a reduction in the supply of new issues caused municipal bond
yields in the five- to 10-year range to decline by five basis points. AAA
General Obligation yields in this maturity range closed the quarter 70% to
73%, respectively, of the yields on similar Treasuries--versus 71% and 74% at
the end of May.
Portfolio duration was extended slightly from 5.3 years to 5.4 years
during the quarter. The weighted average maturity was also slightly longer at
7.2 years, compared with 7.0 years in May. We sold securities in the five- to
seven-year area and reinvested the proceeds in both cash and 10-year
securities. This type of maturity structure should set the stage for better
relative performance as the yield curve flattens. Your Fund also emphasized
high coupon bonds that cushion price declines when rates rise and eliminate
the "market discount" problem (which allows capital gains to be taxed as
income in some instances).
Over the past six months this Fund has performed well against its
peers with a somewhat defensive posture. At this point we see little reason
to change course, considering our expectation for higher interest rates. An
even more defensive posture could be warranted if the economy continues to
grow strongly.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ---------
<S> <C> <C>
Tax-Free Insured Intermediate
Bond Fund 1.31% 0.36%
Lipper Intermediate Municipal
Debt Fund Average 1.37 -0.28
=========================================================
</TABLE>
3
<PAGE>
TAX-FREE INCOME FUND
During the last three- and six-month periods we managed the Fund less
aggressively than in prior years, believing that stronger economic growth and
the Federal Reserve's tightening would result in higher interest rates. The
Fund's duration, which measures sensitivity to changing rates, remained in
the 7.5- to 7.7-year range and reflects a neutral posture relative to the
market. The Fund's weighted average maturity of approximately 17 1/2 years is
down significantly from year-ago levels, and the Fund's portfolio contains
less volatile bonds than in the past.
Throughout the first eight months of the year, we have been buying
securities exhibiting relatively low volatility, whose expected returns are
generated primarily by income. Specifically, we have been concentrating on
bonds with higher coupons with maturities in the vicinity of 20 years. In
most instances we preferred high-quality bonds since the yields on
lower-quality securities are not high enough to compensate for the additional
risk.
We chose not to be fully defensive in the last quarter since rates
have already risen substantially and municipal bonds offered good value
compared with other fixed-income securities on an after-tax basis.
A major benefit of the rise in rates so far this year is an increase
in the Fund's dividend yield from 5.57% to 5.74%. Additionally, your Fund
outperformed its peer group in both the three- and six-month periods.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ---------
<S> <C> <C>
Tax-Free Income Fund 1.45% -1.39%
Lipper General Municipal
Debt Fund Average 1.38 -1.83
=========================================================
</TABLE>
TAX-FREE HIGH YIELD FUND
The quarter ended August 31 was favorable for the Fund. We maintained a neutral
posture as our concern about rising interest rates was offset significantly by
favorable market conditions for municipal bonds. We currently define as neutral
a duration between 6.75 and 7.5 years and a weighted average maturity (WAM)
between 20 and 22 years. We maintained an effective duration of 7.5 and a WAM of
around 20 years. The percentage of securities with maturities of 10 years or
longer was unchanged at 85% from the previous quarter. The Fund's weighted
average credit quality held steady at BBB+, and exposure to below-investment-
grade securities was unchanged at 24% of net assets.
The relatively low level of new issues coming to market served as
support for tax-exempt bond prices, as previously discussed. Looking ahead to
the third fiscal quarter, we may adopt a slightly more defensive posture,
particularly if inflationary pressures show signs of building up. The Fund's
three- and six-month results compared favorably with peer group averages
shown below.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ----------
<S> <C> <C>
Tax-Free High Yield Fund 1.73% -1.01%
Lipper High Yield Municipal
Debt Fund Average 1.58 -1.47
=========================================================
</TABLE>
4
<PAGE>
Financial Summary
<TABLE>
<CAPTION>
Net Asset Value Dividend Per Share Dividend Yield*
Per Share 3 Months Ended 3 Months Ended
------------------ ------------------ -------------------
05/31/94 08/31/94 05/31/94 08/31/94 05/31/94 08/31/94
<C> <C> <C> <C> <C> <C>
Tax-Exempt Money $ 1.00 $ 1.00 $ 0.005 $ 0.006 2.38% 2.66%
Tax-Free Short-Intermediate 5.26 5.26 0.053 0.054 4.00 4.08
Tax-Free Insured Intermediate Bond 10.34 10.36 0.111 0.114 4.28 4.41
Tax-Free Income 9.22 9.22 0.129 0.133 5.57 5.74
Tax-Free High Yield 11.71 11.73 0.180 0.181 6.07 6.18
</TABLE>
* 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;
the Tax-Exempt Money Fund reports a 7-day compound yield.
Quality Diversification
<TABLE>
<CAPTION>
Weighted Average
Quality Ratings* Quality*
---------------------------------------------- ---------------------
1 2 3 4 5-10 05/31/94 08/31/94
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money 13% 85% 2% 0% 0% 1.9 1.9
Tax-Free Short-Intermediate 22 54 22 2 - 2.1 2.1
Tax-Free Insured Intermediate Bond 14 74 12 - - 1.9 2.0
Tax-Free Income 10 52 26 11 1 2.4 2.4
Tax-Free High Yield 5 18 16 36 25 3.6 3.6
</TABLE>
* On a T. Rowe Price scale of 1 to 10, with Grade 1 representing highest
quality.
5
Duration and Maturity
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Effective Duration (years) Maturity (years)
-------------------------- ------------------
05/31/94 08/31/94 05/31/94 08/31/94
<S> <C> <C> <C> <C>
Tax-Exempt Money - - 49* 58*
Tax-Free Short-Intermediate 2.6 2.4 3.1 2.9
Tax-Free Insured Intermediate Bond 5.3 5.4 7.0 7.2
Tax-Free Income 7.6 7.7 17.6 17.8
Tax-Free High Yield 7.3 7.5 19.6 20.6
</TABLE>
* Maturity is in days.
5
<PAGE>
Shareholder Services
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information and services -- at no extra cost.
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE--Shareholder service representatives are available from 8:00 a.m. to
10:00 p.m., Monday - Friday, and weekends from 9:00 a.m. to 5:00 p.m., E.T. 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.
AUTOMATED 24-HOUR SERVICES
Tele*Access/(R)/ (1-800-638-2587) provides information such as account
balance, date and amount of your last transaction, latest dividend payment, and
fund prices and yields. Additionally, you have the ability to request
prospectuses, statements, account and tax forms; reorder checks; and initiate
purchase, redemption, and exchange orders for identically registered accounts.
PC*Access/(R)/ provides the same information as Tele*Access, but on a
personal computer via dial-up modem.
ACCOUNT SERVICES
Checking--Write checks for $500 or more on any money market and bond
fund accounts (except the High Yield Fund).
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.
INVESTMENT INFORMATION
Combined Statement--A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your 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.
Quarterly 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--A quarterly newsletter with relevant articles
on market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Insights--A library of information that 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, Retirement Planning Kit (also
available on disk for PC use), and Guide to Risk-Adjusted Performance can help
you determine and reach your investment goals.
DISCOUNT BROKERAGE
You can trade stocks, bonds, options, precious metals, and other securities
at a substantial savings over regular commission rates. Call a shareholder
service representative for more information.
6
<PAGE>
T. Rowe Price No-Load Mutual Funds
STABILITY
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money
Market
Tax-Exempt Money
CONSERVATIVE INCOME
Adjustable Rate
U.S. Government
Short-Term Bond
Short-Term Global Income
Summit Limited-Term Bond
U.S. Treasury Intermediate
Florida Insured Intermediate
Tax-Free
Maryland Short-Term
Tax-Free Bond
Summit Municipal
Intermediate
Tax-Free Insured
Intermediate Bond
Tax-Free Short-Intermediate
INCOME
Global Government Bond
GNMA
New Income
Spectrum Income
Summit GNMA
U.S. Treasury Long-Term
California Tax-Free Bond
Georgia Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Tax-Free Income
Virginia Tax-Free Bond
AGGRESSIVE INCOME
High Yield
International Bond
Tax-Free High Yield
CONSERVATIVE GROWTH
Balanced
Capital Appreciation
Dividend Growth
Equity Income
Equity Index
Growth & Income
Spectrum Growth
Value
GROWTH
Blue Chip Growth
European Stock
Growth Stock
International Stock
Japan
Mid-Cap Growth
New Era
Small-Cap Value
AGGRESSIVE GROWTH
International Discovery
Latin America
New America Growth
New Asia
New Horizons
OTC
Science & Technology
PERSONAL STRATEGY FUNDS
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
Call if you want to know about any T. Rowe Price Fund. We'll send you a
prospectus with more complete information, including management fees and other
expenses. Read it carefully before you invest or send money.
7
<PAGE>
SemiAnnual Report
T. Rowe Price
- -------------
Tax-Free Funds
August 31, 1994
[LOGO OF RAM APPEARS HERE]
For yield, price, last transaction
and current balance, 24 hours,
7 days a week, call:
1-800-638-2587 toll free
625-7676 Baltimore area
For assistance with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distri-
bution only to shareholders and to
others who have received a copy of
the prospectus of the T. Rowe Price
Tax-Free Funds.
[LOGO OF T. ROWE PRICE APPEARS HERE]
<PAGE>
Chart for Tax-Free Funds semiannual report (Aug. 31, 1994)
Chart 1. Municipal bond and note yields. Line graphs of 30-year AAA GO bonds,
5-year AAA GO, and 6-month Moody's Investment Grade 1 Note, showing yields from
8/31/93 through 8/31/94.
