Semiannual Report - Financial Statements
T. Rowe Price
Tax-Free
Income Fund
August 31, 1997
Portfolio Highlights
SECTOR Diversification
Percent ofPercent of
Net AssetsNet Assets
2/28/97 8/31/97
______________________________________________________________
_____
Hospital Revenue 14% 13%
Nuclear Revenue 12 13
Housing Finance Revenue 10 10
Dedicated Tax Revenue 9 9
Prerefunded Bonds 8 9
General Obligation Local 7 7
General Obligation State 8 6
Escrowed to Maturity 5 5
Ground Transportation Revenue 3 5
Electric Revenue 5 4
Lease Revenue 5 4
Educational Revenue 4 4
Water and Sewer Revenue 5 3
Industrial and Pollution Control Revenue 1 2
All Others 4 5
Other Assets Less Liabilities - 1
___________________________________________________________________
Total100% 100%
T. Rowe Price Tax-Free Income Fund
Unaudited
For a share outstanding throughout each period
Financial Highlights
6 Months Year
Ended Ended
8/31/972/28/97 2/29/96 2/28/95 2/28/94 2/28/93
NET ASSET VALUE
Beginning of
period $ 9.59 $9.66 $ 9.25 $ 9.66 $ 9.84 $ 9.09
Investment activities
Net investment
income 0.26 0.52 0.52 0.53 0.54 0.56
Net realized
and unrealized
gain (loss) 0.12 (0.07) 0.41 (0.37) - 0.75
Total from
investment
activities 0.38 0.45 0.93 0.16 0.54 1.31
Distributions
Net investment
income (0.26) (0.52) (0.52) (0.53) (0.54) (0.56)
Net realized
gain - - - (0.04) (0.18) -
Total
distributions(0.26)(0.52) (0.52) (0.57) (0.72) (0.56)
NET ASSET VALUE
End of period $ 9.71 $9.59 $ 9.66 $ 9.25 $ 9.66 $ 9.84
Ratios/Supplemental Data
Total return 3.99% 4.81% 10.31% 1.90% 5.50% 14.88%
Ratio of
expenses to
average net
assets 0.55%! 0.57% 0.58% 0.59% 0.59% 0.61%
Ratio of net
investment
income to
average
net assets 5.34%! 5.41% 5.49% 5.80% 5.40% 5.98%
Portfolio
turnover rate 42.0%! 40.7% 48.7% 49.3% 71.2% 76.7%
Net assets,
end of period
(in millions) $1,352 $1,337 $1,376 $1,329 $1,453 $ 1,442
! Annualized.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Income Fund
Unaudited
August 31, 1997
Statement of Net Assets
Par Value
In thousands
ALABAMA 2.3%
Alabama, GO
Zero Coupon, 9/1/03 $ 10,000 $ 7,290
Zero Coupon, 3/1/04 10,000 7,023
Zero Coupon, 9/1/04 5,500 3,722
Alabama Water Pollution Control
Auth., Revolving Fund Loan
6.75%, 8/15/17 (AMBAC Insured) 2,750 3,069
Alexander City Special Care Fac.
Fin. Auth., Russell Hosp.
6.00%, 12/1/22 3,250 3,293
Baldwin County, Eastern Shore Health
Care Auth.
Thomas Hosp., 6.75%, 4/1/21 1,900 2,042
Mobile, GO
Capital Improvement Warrants
Zero Coupon, 8/15/16 (MBIA Insured) 4,330 1,317
Zero Coupon, 8/15/17 (MBIA Insured) 4,435 1,255
Mobile IDB, Mobile Energy, 6.95%, 1/1/20 1,500 1,631
Total Alabama (Cost $27,780) 30,642
ALASKA 2.2%
Alaska Housing Fin.
5.85%, 12/1/14 (MBIA Insured) 3,405 3,470
5.875%, 12/1/24 (MBIA Insured) 11,000 11,138
General Mortgage
Zero Coupon, 12/1/17 (MBIA Insured) 6,250 1,877
Valdez Marine Terminal, British Petroleum
Pipelines
5.65%, 12/1/28 13,850 13,609
Total Alaska (Cost $29,569) 30,094
ARIZONA 0.6%
Salt River Agricultural Improvement and
Power Dist., Electric
6.50%, 1/1/22 8,000 8,592
Total Arizona (Cost $7,696) 8,592
ARKANSAS 0.5%
Little Rock Health Fac. Board, Baptist
Medical Center
6.85%, 11/1/08 2,495 2,869
North Little Rock, Electric, 6.50%,
7/1/15 (MBIA Insured) $ 4,000 $ 4,574
Total Arkansas (Cost $6,476) 7,443
CALIFORNIA 6.5%
Foothill / Eastern Transportation Corridor
Agency
California Toll Road
Zero Coupon, 1/1/15 5,000 1,797
Zero Coupon, 1/1/17 20,000 6,364
Zero Coupon, 1/1/26 5,000 923
Los Angeles City, GO
5.80%, 9/1/09 (FGIC Insured) 2,400 2,533
6.00%, 9/1/14 (MBIA Insured) 5,000 5,266
Los Angeles City, Wastewater
7.15%, 6/1/20 (Prerefunded 6/1/00!) 10,500 11,519
Los Angeles County
Marina del Rey, COP
6.25%, 7/1/03 4,000 4,267
6.50%, 7/1/08 3,250 3,445
Los Angeles County Metropolitan
Transportation Auth.
Sales Tax
6.25%, 7/1/13 (MBIA Insured) 8,965 9,634
7.40%, 7/1/15 5,530 5,934
Los Angeles County Public Works Fin. Auth.
5.50%, 10/1/18 (FSA Insured) 7,000 7,123
Los Angeles Harbor Dept.
7.60%, 10/1/18 (Escrowed to Maturity) 3,200 3,991
San Bernardino, Sisters of Charity Health Care
7.00%, 7/1/21 (Prerefunded 7/1/01!) 3,000 3,347
San Francisco City and County Airport
6.30%, 5/1/11 (AMBAC Insured) 2,000 2,161
San Jose Redev. Agency, Merged Area Redev.
5.00%, 8/1/21 (MBIA Insured) 10,000 9,364
San Mateo County Transit Dist., 5.25%,
6/1/16 (MBIA Insured) 6,000 5,985
Southern California Public Power Auth.,
6.75%, 7/1/11 4,050 4,703
Total California (Cost $80,182) 88,356
COLORADO 2.5%
Boulder County, Longmont United Hosp.
8.20%, 12/1/20 (Prerefunded 12/1/00!)$ 2,000 $ 2,249
Denver City and County Airport
5.50%, 11/15/25 (MBIA Insured) 9,800 9,743
E-470 Public Highway Auth.
Zero Coupon, 9/1/13 (MBIA Insured) 10,000 4,216
Zero Coupon, 9/1/14 (MBIA Insured) 11,295 4,474
Zero Coupon, 9/1/17 (MBIA Insured) 10,000 3,293
Zero Coupon, 8/31/26
(Prerefunded 8/31/05!) 7,000 998
Jefferson County School Dist., GO
6.00%, 12/15/12 (AMBAC Insured) 8,000 8,357
Total Colorado (Cost $32,347) 33,330
CONNECTICUT 1.2%
Connecticut, State Special Tax,
7.125%, 6/1/10 7,350 8,755
Connecticut Dev. Auth., Mystic
Marinelife Aquarium
7.00%, 12/1/27 1,700 1,759
Connecticut HEFA, Yale-New Haven Hosp.
7.10%, 7/1/25 (MBIA Insured)
(Prerefunded 7/1/00!) 5,825 6,366
Total Connecticut (Cost $14,948) 16,880
DELAWARE 0.3%
Delaware HFA, Beebe Medical Center, 6.75%,
6/1/14 3,500 3,725
Total Delaware (Cost $3,424) 3,725
DISTRICT OF COLUMBIA 0.8%
Dist. of Columbia, GO
5.50%, 6/1/13 (AMBAC Insured) 5,350 5,377
Dist. of Columbia
American Assoc. for the Advancement
of Science
5.125%, 1/1/27 (AMBAC Insured) 2,500 2,323
Dist. of Columbia
American Univ.
5.625%, 10/1/26 (AMBAC Insured) $ 2,780 $ 2,786
Total District of Columbia (Cost $10,234) 10,486
FLORIDA 3.4%
Broward County Resource Recovery
Broward Waste Energy, L.P. North
7.95%, 12/1/08 10,640 11,593
Broward Waste Energy, L.P. South
7.95%, 12/1/08 870 947
Dade County
Capital Appreciation
Zero Coupon, 2/1/09 (MBIA Insured) 12,185 6,749
Zero Coupon, 2/1/13 (MBIA Insured) 9,000 3,878
Florida Board of Ed., GO, Public Ed.
Capital Outlay
7.25%, 6/1/23 6,210 6,752
Jacksonville Transportation Auth., GO
7.375%, 7/1/20 (Prerefunded 7/1/00!) 8,750 9,644
Port St. Lucie
Capital Appreciation
Zero Coupon, 9/1/16 (FGIC Insured) 5,000 1,700
Zero Coupon, 9/1/26 (FGIC Insured) 5,000 878
Sarasota County Public Hosp. Board
Sarasota Memorial Hosp., FR
(Currently 4.55%), 10/1/21 (MBIA Insured)4,000 3,920
Total Florida (Cost $42,901) 46,061
GEORGIA 7.2%
Coweta County Residential Care Fac. for
the Elderly Auth.
Wesley Woods of Newnan-Peachtree City
8.20%, 10/1/16 1,350 1,548
8.25%, 10/1/26 1,800 2,070
Fulton-Dekalb Hosp. Auth.
Grady Memorial Hosp.
6.80%, 1/1/07 (AMBAC Insured)
(Escrowed to Maturity) 5,530 6,368
Fulton-Dekalb Hosp. Auth.
Grady Memorial Hosp.
6.80%, 1/1/08 (AMBAC Insured)
(Escrowed to Maturity) $ 5,905 $ 6,840
6.85%, 1/1/09 (AMBAC Insured)
(Escrowed to Maturity) 6,310 7,348
6.85%, 1/1/10 (AMBAC Insured)
(Escrowed to Maturity) 6,745 7,864
Georgia Private Colleges and Univ. Auth.,
Emory Univ.
5.125%, 11/1/27 3,110 2,974
Gwinnett County School Dist., GO
6.40%, 2/1/11 1,905 2,163
6.40%, 2/1/12 1,255 1,427
Henry County School Dist., GO, 6.45%, 8/1/112,100 2,375
Metropolitan Atlanta Rapid Transit Auth.
Sales Tax
6.55%, 7/1/20 (Prerefunded 7/1/01!) 5,500 6,015
6.90%, 7/1/16 (MBIA Insured)
(Prerefunded 7/1/04!) 5,655 6,493
Municipal Electric Auth. of Georgia
5.00%, 1/1/21 (MBIA Insured) 11,500 10,806
5.70%, 1/1/19 (FGIC Insured) 5,100 5,292
6.125%, 1/1/14 (FGIC Insured) 5,500 5,779
6.40%, 1/1/07 (AMBAC Insured) 7,500 8,418
7.25%, 1/1/24 (AMBAC Insured) 6,500 8,222
8.125%, 1/1/17 5,680 5,867
Total Georgia (Cost $88,741) 97,869
IDAHO 0.0%
Idaho Housing Agency, 7.70%, 7/1/17
(FHA Guaranteed) 580 610
Total Idaho (Cost $580) 610
ILLINOIS 4.1%
Chicago, GO
5.50%, 1/1/18 (AMBAC Insured) 6,630 6,654
6.25%, 1/1/15 (AMBAC Insured) 1,000 1,108
Chicago Board of Ed., GO, Chicago School
Reform
5.75%, 12/1/27 (AMBAC Insured) $ 4,500 $ 4,579
Cook, Dupage, Kane, Lake, McHenry,
and Will Counties
Regional Transportation Auth.
7.75%, 6/1/19 (FGIC Insured) 5,350 6,931
Illinois HFA
Glen Oaks Medical Center
7.00%, 11/15/19
(Escrowed to Maturity) 3,300 3,764
Highland Park Hosp.
5.75%, 10/1/26 (MBIA Insured) 2,000 2,017
Hinsdale Hosp.
9.00%, 11/15/15
(Escrowed to Maturity) 4,670 5,430
Loyola Univ. Health
5.00%, 7/1/24 (MBIA Insured) 10,510 9,680
Illinois Regional Transportation Auth.
6.70%, 11/1/21 (FGIC Insured) 5,000 5,856
Metropolitan Pier and Exposition Auth.,
McCormick Place
5.25%, 6/15/27 (AMBAC Insured) 10,000 9,606
Total Illinois (Cost $52,335) 55,625
INDIANA 1.3%
Indiana HFFA, Clarion Health Partners,
5.50%, 2/15/16 9,205 9,069
Indiana State Office Building Commission,
Correctional Fac.
5.50%, 7/1/20 (AMBAC Insured) 5,750 5,683
St. Joseph's County Hosp Auth., St.
Joseph's Medical Center
6.70%, 12/1/02 (MBIA Insured) 1,985 2,186
Total Indiana (Cost $16,186) 16,938
KENTUCKY 1.4%
Carroll County, PCR, Kentucky Utilities,
7.45%, 9/15/16 15,000 16,921
Kentucky Economic Dev. Fin. Auth.
Sisters of Charity of Nazareth
VRDN (Currently 3.65%) 1,300 1,300
Kentucky Turnpike Auth., Economic Dev.
7.25%, 5/15/10 (Prerefunded 5/15/00!) 855 932
Total Kentucky (Cost $17,973) 19,153
LOUISIANA 1.5%
East Baton Rouge Mortgage Fin. Auth.,
Single Family
7.375%, 3/1/10
(Escrowed to Maturity) $ 2,800 $ 3,199
Lake Charles Harbor and Terminal Dist,
Port Fac.
DuPont (CONOCO)
VRDN (Currently 3.75%) 900 900
Louisiana Offshore Terminal Auth., LOOP,
7.60%, 9/1/10 10,440 11,403
Louisiana Public Fac. Auth., Xavier Univ.
5.25%, 9/1/27 (MBIA Insured) ** 5,000 4,796
Total Louisiana (Cost $18,963) 20,298
MAINE 0.2%
Maine Housing Auth., 6.10%, 11/15/15
(AMBAC Insured) 3,000 3,117
Total Maine (Cost $3,000) 3,117
MARYLAND 5.2%
Baltimore City, Convention Center
6.00%, 9/1/17 (FGIC Insured) 1,750 1,834
Baltimore County, Pickersgill Retirement
Community
7.70%, 1/1/21 (Prerefunded 1/1/02!) 2,000 2,280
Gaithersburg Economic Auth., Asbury Methodist Home
7.85%, 1/1/20 (Prerefunded 1/1/00!) 3,000 3,284
Maryland CDA
Single Family
5.95%, 4/1/16 7,500 7,713
5.95%, 7/1/23 5,000 5,103
6.45%, 4/1/14 2,000 2,106
7.25%, 4/1/19 2,500 2,632
7.60%, 4/1/17 7,810 8,161
Maryland HHEFA
Johns Hopkins Hosp., Zero Coupon, 7/1/19 8,250 2,464
Johns Hopkins Univ., 7.50%, 7/1/20 9,475 9,921
Kennedy Kreiger Institute, 6.75%, 7/1/22 1,500 1,574
Univ. of Maryland Medical System
7.00%, 7/1/22 (FGIC Insured) 1,500 1,826
Maryland Stadium Auth., Sports Fac.
5.75%, 3/1/18 (AMBAC Insured) $ 3,000 $ 3,091
Maryland Water Quality Fin. Administration
Revolving Loan Fund
7.25%, 9/1/12 (Prerefunded 9/1/00!) 1,950 2,149
Maryland-National Capital Park and
Planning Commission, GO
BAN, Prince George's County
VRDN (Currently 3.75%) 1,900 1,900
Montgomery County Housing Opportunities
Commission
Single Family, 7.50%, 7/1/17 1,070 1,128
Prince George's County, Dimensions
Health, 5.30%, 7/1/24 7,685 7,346
Univ. of Maryland, Auxiliary Fac. and
Tuition, 5.75%, 4/1/17 5,000 5,193
Total Maryland (Cost $64,677) 69,705
MASSACHUSETTS 2.1%
Massachusetts Bay Transportation Auth., GO
General Transportation
7.00%, 3/1/14 3,150 3,738
7.00%, 3/1/21 6,200 7,493
Massachusetts HEFA
Harvard Univ., 6.25%, 4/1/20 5,000 5,586
Massachusetts General Hosp.
6.00%, 7/1/15 (AMBAC Insured) 4,500 4,644
Massachusetts Housing Fin. Agency,
6.30%, 12/1/14 6,250 6,575
Total Massachusetts (Cost $25,082) 28,036
MICHIGAN 1.1%
Michigan HDA
6.45%, 12/1/14 2,120 2,222
7.55%, 12/1/15 1,750 1,844
Michigan Hosp. Fin. Auth.
Bay Medical Center, 8.25%, 7/1/12 1,000 1,112
Henry Ford Hosp., 5.25%, 11/15/20 5,000 4,799
Mercy Health, 5.50%, 8/15/20 5,500 5,401
Univ. of Michigan Hosp., VRDN (Currently 3.75%)100 100
Total Michigan (Cost $14,838) 15,478
MINNESOTA 1.1%
Northern Minnesota Municipal Power Agency,
7.35%, 1/1/02 $ 5,000 $ 5,276
Rochester Health Care Fac.
Mayo Foundation/Mayo Medical Center
6.25%, 11/15/21 3,000 3,193
Univ. of Minnesota, Residual Interest
Bond / Inverse Floater
(Currently 5.686%), 8/15/03 5,800 5,930
Total Minnesota (Cost $13,079) 14,399
MISSISSIPPI 0.8%
Claiborne County, PCR
Systems Energy Resources
7.30%, 5/1/25 2,750 2,906
9.875%, 12/1/14 3,400 3,686
Mississippi Home, Single Family, 9.25%,
3/1/12 (FGIC Insured) 586 628
Mississippi Hosp. Equipment and Fac. Auth.
Rush Medical Foundation
6.00%, 1/1/16 ** 1,245 1,242
6.00%, 1/1/22 ** 935 926
Warren County, PCR, Mississippi Power
and Light
7.00%, 4/1/22 1,500 1,640
Total Mississippi (Cost $10,654) 11,028
MISSOURI 0.8%
Joplin IDA, Tri-State Osteopathic Hosp.,
8.25%, 12/15/14 1,375 1,517
Missouri Environmental Improvement and
Energy Resources Auth., Union Electric
3.775%, 12/1/20 7,785 7,785
Missouri HEFA, Bethesda Health Group,
7.50%, 8/15/12 1,250 1,392
Total Missouri (Cost $10,359) 10,694
NEBRASKA 0.2%
Omaha Public Power Dist., Electric
6.20%, 2/1/17 (Escrowed to Maturity) 3,000 3,276
Total Nebraska (Cost $2,988) 3,276
NEVADA 0.6%
Clark County School Dist., GO
Limited Tax School Improvement
7.00%, 6/1/11 (MBIA Insured) $ 3,500 $ 4,171
Nevada, GO, Municipal Bond Bank
7.25%, 11/1/10 (Escrowed to Maturity) 3,050 3,443
Nevada Housing Division, Single Family,
7.85%, 10/1/15 965 1,017
Total Nevada (Cost $7,458) 8,631
NEW HAMPSHIRE 0.4%
New Hampshire HHEFA, Wentworth Douglass Hosp.
5.375%, 1/1/15 (MBIA Insured) 5,600 5,685
Total New Hampshire (Cost $5,578) 5,685
NEW JERSEY 0.5%
New Jersey Sports and Exposition Auth.,
Monmouth Park
8.00%, 1/1/25 4,500 5,030
New Jersey Turnpike Auth., 6.50%, 1/1/16
(MBIA Insured) 2,000 2,292
Total New Jersey (Cost $6,542) 7,322
NEW MEXICO 0.7%
Farmington, PCR
Public Service Co. of New Mexico
6.30%, 12/1/16 2,400 2,490
6.375%, 4/1/22 4,325 4,498
Gallup, PCR, Plains Electric Generation
and Transmission
6.65%, 8/15/17 (MBIA Insured) 2,000 2,201
Total New Mexico (Cost $8,717) 9,189
NEW YORK 14.9%
Dormitory Auth. of the State of New York
City Univ.
5.75%, 7/1/13 10,000 10,423
5.75%, 7/1/18 (AMBAC Insured) 5,000 5,281
6.00%, 7/1/14 10,000 10,715
Dormitory Auth. of the State of New York
State Univ. Ed. Fac., 5.25%, 5/15/19 $ 3,325 $ 3,220
Vassar College, 7.25%, 7/1/15 2,000 2,198
Metropolitan Transportation Auth. of
New York, Commuter Fac.
5.75%, 7/1/21 (MBIA Insured) 12,750 13,035
Municipal Assistance Corp. of New
York City, 5.50%, 7/1/99 5,000 5,128
New York City, GO
6.00%, 12/1/18 (FSA Insured)
(Escrowed to Maturity) 5,000 5,036
6.00%, 2/15/25 5,000 5,087
6.00%, 8/15/26 5,000 5,088
6.00%, 10/15/26 5,500 5,604
6.25%, 8/1/09 9,550 10,235
6.375%, 8/1/04 4,145 4,451
8.00%, 8/1/16 180 207
New York City Municipal Water Fin.
Auth., Water and Sewer
5.75%, 6/15/29 10,500 10,659
New York State Environmental Fac., PCR
State Water Revolving Fund, 6.90%, 11/15/155,365 6,131
New York State Housing Fin. Agency
State Univ. Construction
7.80%, 5/1/01 (Escrowed to Maturity) 2,000 2,236
New York State Local Gov't. Assistance
5.00%, 4/1/21 5,000 4,616
5.50%, 4/1/21 16,135 15,903
7.20%, 4/1/04 (Prerefunded 4/1/01!) 5,000 5,562
New York State Medical Care Fac. Fin. Agency
Albany and St. John's Medical Center
6.20%, 2/15/28 (FHA Guaranteed) 3,480 3,721
Buffalo General Hosp.
6.00%, 8/15/14 (FHA Guaranteed) 8,940 9,427
Mental Health, 6.50%, 8/15/24 6,000 6,502
New York Hosp.
6.50%, 8/15/29 (AMBAC Insured) 4,625 5,080
New York State Urban Dev.
Senior Lien
5.375%, 7/1/22 9,000 8,812
5.50%, 7/1/26 10,000 10,007
Triborough Bridge and Tunnel Auth.
5.20%, 1/1/22 $ 7,700 $ 7,431
5.50%, 1/1/17 18,500 18,943
Total New York (Cost $184,925) 200,738
NORTH CAROLINA 1.8%
Cumberland County, Civic Center, COP
6.40%, 12/1/24 (AMBAC Insured) 2,750 3,006
North Carolina Eastern Municipal
Power Agency
7.50%, 1/1/10 (Escrowed to Maturity) 8,980 10,766
North Carolina Housing Fin. Agency,
7.40%, 3/1/28 1,995 2,126
North Carolina Medical Care Commission
Duke Univ. Hosp., 5.25%, 6/1/26 5,000 4,855
Stanley Memorial Hosp.
7.80%, 10/1/19 (Prerefunded 10/1/99!) 3,000 3,279
Total North Carolina (Cost $21,266) 24,032
NORTH DAKOTA 0.4%
Mercer County, PCR, Basin Electric Power
6.05%, 1/1/19 (AMBAC Insured) 4,500 4,746
Total North Dakota (Cost $4,539) 4,746
OHIO 1.9%
Cleveland, Waterworks, 5.50%, 1/1/13
(MBIA Insured) 4,765 4,940
Dayton Special Fac., Emery Air Freight,
6.05%, 10/1/09 2,500 2,625
Franklin County, GO
6.375%, 12/1/17
(Prerefunded 12/1/01!) 2,000 2,183
6.80%, 12/1/09
(Prerefunded 12/1/00!) 2,860 3,123
6.80%, 12/1/10
(Prerefunded 12/1/00!) 3,240 3,538
Montgomery County Hosp. Fac., Kettering
Medical Center
7.375%, 4/1/02 (MBIA Insured) 2,500 2,661
Ohio Air Quality Dev. Auth., PCR,
Cleveland Electric
6.00%, 8/1/20 3,500 3,522
Ohio Water Dev. Auth., PCR, Cleveland
Electric, 7.70%, 8/1/25 $ 2,700 $ 3,037
Total Ohio (Cost $23,869) 25,629
OKLAHOMA 0.4%
Tulsa County Home Fin. Auth., Single Family
6.90%, 8/1/10 (FGIC Insured)
(Escrowed to Maturity) 4,250 4,975
Total Oklahoma (Cost $4,227) 4,975
PENNSYLVANIA 1.1%
Beaver County IDA, PCR, Cleveland Electric,
7.75%, 7/15/25 3,900 4,397
Pennsylvania Convention Center Auth.
6.70%, 9/1/14 (FSA Insured) 5,000 5,603
Pennsylvania Intergovernmental Cooperative
Auth.
Special Tax, 6.75%, 6/15/21 (FGIC Insured)
(Prerefunded 6/15/05!) 4,750 5,392
Total Pennsylvania (Cost $13,949) 15,392
PUERTO RICO 1.6%
Puerto Rico Commonwealth, GO
5.65%, 7/1/15 (MBIA Insured) 7,300 7,696
Puerto Rico Ind. Medical Higher Ed. and
Environmental Pollution Control Fac.
Fin. Auth.
Catholic Univ. of Puerto Rico,
9.25%, 12/1/97 1,730 1,751
Puerto Rico Infrastructure Fin. Auth.
7.50%, 7/1/09 9,955 10,447
7.75%, 7/1/08 1,740 1,829
Total Puerto Rico (Cost $20,540) 21,723
RHODE ISLAND 1.5%
Rhode Island Health and Ed. Building
Bryant College, 6.125%, 6/1/19
(MBIA Insured) 5,000 5,228
Rhode Island Hosp.
Residual Interest Bond / Inverse Floater
(Currently 9.816%), 8/15/21
(FGIC Insured) 1,000 1,208
Rhode Island Housing and Mortgage Fin.
Homeownership Opportunity
6.70%, 10/1/14 $ 5,000 $ 5,318
7.85%, 10/1/16 8,000 8,449
Total Rhode Island (Cost $18,854) 20,203
SOUTH CAROLINA 2.4%
Fairfield County, PCR, South Carolina
Electric and Gas
6.50%, 9/1/14 4,000 4,351
Greenville Hosp. Board of Trustees,
Hosp. Fac., 5.50%, 5/1/16 2,750 2,757
Piedmont Municipal Power Agency
6.50%, 1/1/14 (FGIC Insured) 3,000 3,429
6.50%, 1/1/14 (FGIC Insured)
(Escrowed to Maturity) 500 572
South Carolina Public Service Auth.
Santee Cooper
6.25%, 1/1/22 (AMBAC Insured) 17,750 18,990
7.00%, 7/1/12 (Prerefunded 7/1/01!) 1,650 1,831
Total South Carolina (Cost $29,583) 31,930
SOUTH DAKOTA 0.2%
South Dakota HDA, Homeownership,
6.65%, 5/1/14 2,000 2,127
Total South Dakota (Cost $2,000) 2,127
TENNESSEE 1.8%
Chattanooga Health Ed. and Housing Fac. Board
Memorial Hosp.
6.625%, 9/1/07 (MBIA Insured) 2,950 3,379
6.625%, 9/1/08 (MBIA Insured) 3,150 3,625
Metropolitan Gov't. of Nashville and
Davidson Counties
Water and Sewer
Zero Coupon, 1/1/12 (FGIC Insured) 11,250 12,866
Shelby County Health Ed. and Housing Fac. Board
Le Bonheur Children's Medical Center
5.50%, 8/15/12 (MBIA Insured)
(Escrowed to Maturity) 4,250 4,354
Total Tennessee (Cost $22,728) 24,224
TEXAS 7.9%
Amarillo Health Fac., Sears Panhandle
Retirement
7.75%, 8/15/26 $ 5,000 $ 5,198
Arlington Independent School Dist., GO,
Capital Appreciation
Zero Coupon, 2/15/16 9,650 3,280
Brazos River Auth., Houston Lighting
and Power
8.25%, 5/1/15 18,000 18,774
Denison Hosp. Auth., Texoma Medical
Center, 7.00%, 8/15/14 4,245 4,590
Harris County, GO
Toll Road
Zero Coupon, 8/15/00 (MBIA Insured) 1,240 1,087
Zero Coupon, 8/15/04 (MBIA Insured) 6,000 4,287
Harris County Health Fac. Dev.
Memorial Hosp.
7.125%, 6/1/15 (Prerefunded 6/1/02!) 2,500 2,820
Sisters of Charity of the Incarnate Word
7.10%, 7/1/21 (Prerefunded 7/1/01!) 4,000 4,451
St. Luke's Episcopal Hosp.
VRDN (Currently 3.70%) 6,400 6,400
Texas Medical Center
7.375%, 5/15/20 (MBIA Insured)
(Prerefunded 5/15/00!) 7,645 8,384
Harris County HFA, Sisters of Charity
VRDN (Currently 3.30%) 5,100 5,100
Harris County Hosp. Dist., 7.40%,
2/15/10 (AMBAC Insured) 1,500 1,789
Matagorda County Navigation Dist., PCR
Central Power and Light, 7.50%, 12/15/14 1,500 1,643
Houston Lighting and Power
7.20%, 12/1/18 (FGIC Insured) 3,600 3,884
Northwest Texas Independent School Dist., GO
School Buildings, Zero Coupon, 8/15/17 4,000 1,229
San Antonio Electric and Gas, 5.25%, 2/1/01 5,000 5,134
Texas, GO
Veterans Housing Assistance
6.25%, 12/1/15 3,045 3,127
7.40%, 12/1/20 14,205 15,643
Texas Department of Housing and Community
Affairs
NHP Foundation, 6.40%, 1/1/27 3,500 3,619
Tyler Health Fac. Dev.
East Texas Medical Center
5.50%, 11/1/17 (FSA Insured) $ 5,215 $ 5,189
5.50%, 11/1/17 (MBIA Insured) 1,700 1,692
Total Texas (Cost $101,338) 107,320
UTAH 0.6%
Intermountain Power Agency
5.75%, 7/1/19 (MBIA Insured) 3,000 3,061
Power Supply, 7.50%, 7/1/21 4,750 4,969
Total Utah (Cost $7,584) 8,030
VERMONT 0.5%
Vermont Ed. and Health Buildings Fin. Agency
Medical Center Hosp. of Vermont
7.35%, 9/1/13 (FGIC Insured) 4,650 4,956
7.45%, 9/1/23 (FGIC Insured) 2,000 2,137
Total Vermont (Cost $6,650) 7,093
VIRGINIA 4.9%
Fairfax County IDA, Inova Health Care
6.00%, 8/15/26 7,200 7,433
Fairfax County Water Auth.
6.00%, 4/1/22 (Prerefunded 4/1/07!) 10,250 10,985
Hanover County IDA, Memorial Regional
Medical Center
6.375%, 8/15/18 (MBIA Insured) 4,185 4,750
Henrico County IDA
Bon Secours Health, St. John's Hosp.
7.50%, 9/1/15 (Prerefunded 7/1/00!) 1,750 1,931
Bon Secours Health, St. Mary's Hosp.
7.50%, 9/1/07 (Prerefunded 8/1/00!) 1,495 1,625
Peninsula Ports Auth., Shell Oil, VRDN
(Currently 3.80%) 1,470 1,470
Virginia HDA
6.25%, 7/1/11 5,000 5,209
6.75%, 7/1/14 7,435 8,010
6.80%, 7/1/17 8,900 9,573
Virginia HDA
6.90%, 7/1/13 $ 11,100 $ 11,540
Virginia Transportation Board, Route 28
Project, 6.50%, 4/1/18 3,000 3,259
Total Virginia (Cost $61,921) 65,785
WASHINGTON 6.4%
Chelan County Public Utility Dist. No. 1
Columbia River-Rock Hydroelectric
Zero Coupon, 6/1/18 (MBIA Insured) 10,100 3,171
King County, GO, 5.70%, 12/1/10 3,545 3,728
Port of Seattle, 7.40%, 12/1/09 1,000 1,112
Tacoma
Electric
6.25%, 1/1/15 (FGIC Insured) 7,550 8,120
Residual Interest Bond / Inverse Floater
(Currently 8.901%), 1/2/15
(AMBAC Insured)
(Prerefunded 1/1/01!) 5,000 5,813
Solid Waste Utilities
5.50%, 12/1/17 (AMBAC Insured) 10,000 10,034
Washington, GO, 5.70%, 10/1/15 14,000 14,729
Washington HFA, Sisters of Providence
VRDN (Currently 3.80%) 7,590 7,590
Washington Public Power Supply System
5.60%, 7/1/15 (MBIA Insured) 6,500 6,539
6.25%, 7/1/12 (FSA Insured) 5,000 5,364
6.25%, 7/1/17 (MBIA Insured) 6,000 6,426
7.25%, 7/1/09 3,000 3,518
7.25%, 7/1/15 (Prerefunded 1/1/00!) 2,200 2,385
7.50%, 7/1/15 (Prerefunded 7/1/99!) 7,110 7,664
Total Washington (Cost $79,322) 86,193
WEST VIRGINIA 0.8%
Kanawha County Building Commission
Charleston Area Medical Center
7.50%, 11/1/08 (Prerefunded 11/1/99!) 2,250 2,447
West Virginia Hosp. Fin. Auth.
Charleston Area Medical Center
5.75%, 9/1/13 (MBIA Insured) $ 4,200 $ 4,355
West Virginia State Parkways
Economic Dev. and Tourism Auth.
Residual Interest Bond / Inverse Floater
(Currently 7.576%), 5/16/19
(FGIC Insured) 3,600 3,699
Total West Virginia (Cost $9,911) 10,501
WISCONSIN 0.6%
Wisconsin HEFA, United Health Group
5.50%, 12/15/16 (MBIA Insured) 6,540 6,471
Wisconsin Public Power Agency
7.00%, 7/1/02 (AMBAC Insured) 1,500 1,629
Total Wisconsin (Cost $7,738) 8,100
Total Investments in Securities
99.2% of Net Assets (Cost $1,244,251) $1,341,403
Other Assets Less Liabilities 10,292
NET ASSETS $1,351,695
__________
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 660
Accumulated net realized gain/loss -
net of distributions (6,489)
Net unrealized gain (loss) 97,152
Paid-in-capital applicable to 139,179,852
shares of $1.00 par value capital stock
outstanding; 500,000,000 shares authorized 1,260,372
NET ASSETS $1,351,695
___________
NET ASSET VALUE PER SHARE $ 9.71
___________
** When-issued security
! Used in determining portfolio maturity
AMBAC AMBAC Indemnity Corp.
BAN Bond Anticipation Note
CDA Community Development Administration
COP Certificates of Participation
FGIC Financial Guaranty Insurance Company
FHA Federal Housing Authority
FR Floating rate
FSA Financial Security Assurance Corp.
GO General Obligation
HDA Housing Development Authority
HEFA Health & Educational Facility Authority
HFA Health Facility Authority
HFFA Health Facility Financing Authority
HHEFA Health & Higher Educational Facility Authority
IDA Industrial Development Authority
IDB Industrial Development Bond
MBIA Municipal Bond Investors Assurance Corp.
PCR Pollution Control Revenue
VRDN Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Income Fund
Unaudited
Statement of Operations
In thousands
6 Months
Ended
8/31/97
Investment Income
Interest income $ 39,674
Expenses
Investment management 3,203
Shareholder servicing 372
Custody and accounting 93
Prospectus and shareholder reports 29
Registration 18
Directors 5
Legal and audit 5
Miscellaneous 9
Total expenses 3,734
Net investment income 35,940
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 3,082
Futures (638)
Net realized gain (loss) 2,444
Change in net unrealized gain or
loss on securities 14,904
Net realized and unrealized gain (loss) 17,348
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 53,288
T. Rowe Price Tax-Free Income Fund
Unaudited
Statement of Changes in Net Assets
In thousands
6 Months Year
Ended Ended
8/31/97 2/28/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 35,940 $ 72,545
Net realized gain (loss) 2,444 (3,053)
Change in net unrealized gain or loss 14,904 (7,061)
Increase (decrease) in net assets
from operations 53,288 62,431
Distributions to shareholders
Net investment income (35,940) (72,541)
Capital share transactions*
Shares sold 76,213 133,711
Distributions reinvested 23,480 48,012
Shares redeemed (101,972) (210,494)
Increase (decrease) in net assets
from capital share transactions (2,279) (28,771)
Net Assets
Increase (decrease) during period 15,069 (38,881)
Beginning of period 1,336,626 1,375,507
End of period $1,351,695$1,336,626
_____________________
*Share information
Shares sold 7,938 14,128
Distributions reinvested 2,443 5,064
Shares redeemed (10,620) (22,237)
Increase (decrease) in shares outstanding(239) (3,045)
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Income Fund
Unaudited
August 31, 1997
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Tax-Free 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 26, 1976.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities 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.
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 original issue discounts on municipal
securities are amortized for both financial reporting and tax purposes.
Market discounts are recognized upon disposition of the security 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. 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.
Note 2 - Investment Transactions
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $272,156,000 and $269,426,000, respectively, for the
six months ended August 31, 1997.
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 $7,665,000, of which $4,521,000 expires in
2003, and $3,144,000 in 2005. The fund intends to retain gains realized in
future periods that may be offset by available capital loss carryforwards.
At August 31, 1997, the aggregate cost of investments for federal income tax
and financial reporting purposes was $1,244,251,000, and net unrealized gain
aggregated $97,152,000, of which $97,791,000 related to appreciated
investments and $639,000 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, of which $544,000 was payable at August 31, 1997. 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 0.30% for assets in excess of $80
billion. At August 31, 1997, and for the six months then ended, the effective
annual group fee rates were 0.32% and 0.33%, respectively. 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 a
wholly owned subsidiary 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.,
is the fund's transfer and dividend disbursing agent and provides shareholder
and administrative services to the fund. The fund incurred expenses pursuant
to these related party agreements totaling approximately $344,000 for the six
months ended August 31, 1997, of which $68,000 was payable at period-end.
T. Rowe Price Shareholder Services
Investment Services And Information
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and
T. Rowe Price OnLine.
Discount Brokerage*
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
Investment Information
Combined Statement Overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and results.
T. Rowe Price Report Quarterly investment newsletter discussing
markets and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
T. Rowe Price Mutual Funds
Stock Funds
Domestic
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
Science & Technology
Small-Cap Stock**
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
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
Emerging Markets Bond
Global Government Bond
International Bond
Money Market Funds
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 Funds
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
T. Rowe Price No-Load
Variable Annuity
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
*Closed to new investors.
**Formerly the OTC Fund.
Please call for a prospectus. Read it carefully before you invest or send
money.
The T. Rowe Price No-Load Variable Annuity [V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY.
T. Rowe Price refers to the underlying portfolios' investment managers and
the distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price
Insurance Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The
Security Benefit Group of Companies and the T. Rowe Price companies are not
affiliated. The variable annuity may not be available in all states. The
contract has limitations. Call a representative for costs and complete
details of the coverage.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
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 Tax-Free Income Fund(registered trademark).
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.
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4200 West Cypress St.
10th Floor
Tampa, FL 33607
Invest With Confidence (registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor.
F45-051 8/31/97
THE SHAREHOLDER LETTER AND REPORT FOR THE COMBINED TAX-FREE FUNDS ARE
ATTACHED HERE BY ACCESSING THE FOLLOWING:
Semiannual Report
Tax-Free
Funds
August 31, 1997
T. Rowe Price
Report Highlights
Tax-Free Funds
o Municipal bonds outperformed Treasuries during most of the
past six months. Inflation remained subdued despite strong
economic growth.
o The spreads between yields on higher- and lower-quality
bonds continued to narrow, resulting in stronger relative
performance for the lower-quality sector of the market.
o All five funds generated modest to good returns for the six
months ended August 31.
o Your funds relied to a great extent on credit research,
yield curve positioning, and duration management to enhance
returns.
o Despite strong economic growth, we believe the environment
is still favorable for fixed income investors due to low
inflation and fiscal restraint.
Fellow Shareholders
The municipal bond market and your funds generated attractive
returns during the six months ended August 31, 1997. Strong
economic growth in the first quarter of 1997 led the Federal
Reserve to raise the federal funds target rate a quarter-point
to 5.50% in March because of concerns that inflation might
accelerate. However, despite robust economic growth, the Fed has
left rates unchanged since March as inflation remained subdued.
MARKET ENVIRONMENT
Interest rates fluctuated as the market wrestled with a
conflicting combination of strong economic growth and declining
inflation. Both money market and longer-term bond yields began
rising before the March rate hike and continued to rise for a
short time afterward in anticipation of further tightening.
However, excellent news on inflation and progress on controlling
the federal budget deficit diminished fears of further rate
increases. Short-term taxable rates subsequently fell in
mid-April to their earlier levels. Long-term taxable bond yields
also began to fall in the late spring after climbing above 7% in
April. The 30-year Treasury bond yield averaged just over 6.50%
in July and August and 6.80% for the past six months, almost
identical to its average over the two preceding years.
Long-term municipal interest rates followed a similar pattern,
rising in March, peaking in April, then falling in late June and
July when data signaled an economic slowdown. Rates reversed in
August as stronger-than-expected economic data changed the
outlook for the third quarter. Municipal bonds outperformed
Treasuries throughout most of the period except for June when
the highest monthly supply in four years overwhelmed demand. The
yield on long-term AAA GO bonds began the six-month period at
5.50% and ranged between 5.75% and 5.15% before settling at
5.35% at the end of August. Five-year AAA GO yields were 4.40%
six months ago and finished at 4.35%, while one-year notes ended
higher at 3.85%, up from 3.70% last February. Overall, both the
municipal and Treasury yield curves flattened as short-term
rates rose modestly in anticipation of further Fed tightening
and long-term rates trended lower on positive inflation news.
Municipal Bond and Note Yields chart
30-Yr AAA 5-Yr AAA 1-Yr Moody
8/31/96 5.75 4.55 3.9
5.55 4.5 3.85
5.5 4.4 3.7
11/96 5.35 4.2 3.7
5.45 4.35 3.6
5.55 4.45 3.7
2/97 5.5 4.35 3.7
5.75 4.75 3.9
5.6 4.8 3.95
5/97 5.5 4.55 3.9
5.45 4.4 3.85
5.15 4.15 3.85
8/31/97 5.35 4.35 3.85
High-yield bonds were the best-performing sector of the tax-free
market, as their yields fell further than those of
investment-grade bonds. While all sectors benefited from an
expanding economy, the impact was strongest on BBB and
lower-rated securities since their issuers' financial condition
had the most room for improvement. This trend was evidenced by
reports from Moody's and Standard & Poor's that upgrades
exceeded downgrades by more than three to one. Expanding use of
insurance on municipal bonds has resulted in a reduced supply of
A rated and BBB rated bonds, which also contributed to the
strength of lower-quality bonds.
The Taxpayer Relief Act of 1997 contained positive news for
municipal bonds, maintaining favorable tax treatment for
corporations that purchase municipals and eliminating the cap on
the amount of outstanding tax-exempt debt permitted for
non-hospital organizations. Also, the reduction in the capital
gains rate should be favorable for long-term investors. However,
the bill did not raise the income thresholds for the alternative
minimum tax, which would have reduced the number of taxpayers
subject to it, as was widely expected.
TAX-EXEMPT MONEY FUND
Performance Comparison
Periods Ended 8/31/97 6 Months 12 Months
___________________________________________________________
Tax-Exempt Money Fund 1.61% 3.14%
Lipper Tax-Exempt Money
Market Funds Average 1.54 3.01
Our longer-maturity strategy resulted in good returns, enabling
your fund to outperform its peer group during both the 6- and
12-month periods ended August 31, 1997.
The tax-exempt short-term market was fairly stable during the
past six months. Despite the hike in the federal funds rate,
short-term interest rates moved only modestly higher in a calm,
measured fashion. The yield on one-year securities closed the
period 15 basis points (100 basis points equal one percent)
higher than at the end of February and fluctuated within a range
of only 25 basis points.
During the past six months, tax-exempt money fund assets
expanded to a record $154.2 billion, while new issuance of
short-term securities fell 13.3%, or $4.2 billion, from last
year's volume through August. Strong demand, coupled with
contracting supply, helped keep potentially wide yield movements
at bay.
Your fund ended the period with a weighted average maturity of
60 days, close to the 58 days at the end of February. Our
maturity posture was longer than our peer group average of 49
days, as it has been for the last six months. This strategy
enabled us to take advantage of the positively sloped short-term
yield curve, as the difference between overnight and one-year
yields averaged 33 basis points from the end of February through
the end of August.
TAX-FREE SHORT-INTERMEDIATE FUND
Performance Comparison
Periods Ended 8/31/97 6 Months 12 Months
____________________________________________________________
Tax-Free Short-Intermediate Fund 2.13% 5.33%
Lipper Short-Intermediate
Debt Funds Average 2.17 5.25
Your fund performed roughly in line with the average for its
peer group during the past 6- and 12-month periods, as shown in
the table. Fund exposure to lower-rated bonds enhanced results,
while its slightly shorter duration in June and July detracted
from performance. (For example, a fund with a duration of three
years would fall or rise about 3% in price in response to a one
percentage point rise or fall in interest rates.)
Returns over the last six months were roughly equal to the
coupon earned on a five-year AAA general obligation bond. Yield
spreads between higher- and lower-quality bonds continued to
tighten, causing the latter to outperform the former.
We maintained a slightly defensive posture toward interest rate
risk throughout the period, after shortening duration to 2.8
years from about 3.0 years in January. Through mid-April, as
five-year AAA general obligation yields rose from their February
lows to 4.85%, our defensive posture proved valid. We then began
to extend duration slightly to take advantage of higher yields.
Initial signs of a second quarter economic slowdown began to
emerge, and bond prices started to rise, pushing yields lower.
We began to take profits in June, a bit early as it turned out
since the rally continued into July, driving five-year
high-grade bond yields back down to their February lows. The
fund maintained its conservative posture through August,
performing well relative to its peers.
One effect of the economic expansion was an upgrade in the
credit quality of many issuers. We continued to increase our
allocation to lower-rated issuers whose credit outlook seemed
favorable. New York State lease-backed debt was our largest
exposure to BBB rated securities at the end of August (5.4% of
assets). In line with our expectations, these bonds were
recently upgraded by Standard & Poor's. The favorable outlook
for these bonds caused the yield differential between them and
higher-rated securities to be cut in half since our last
purchase in March. Overall, municipal credit quality should
continue to improve until economic growth slows significantly.
TAX-FREE INSURED INTERMEDIATE BOND FUND
Your fund's defensive duration restrained performance over the
past six and 12 months, resulting in returns that were solid but
slightly lagged the peer group average, as shown in the table.
Performance Comparison
Periods Ended 8/31/97 6 Months 12 Months
______________________________________________________________
Tax-Free Insured Intermediate
Bond Fund 2.79% 6.91%
Lipper Intermediate
Municipal Debt Funds Average 2.89 7.03
The fund's duration was maintained at a neutral to somewhat
defensive level between 5.3 and 5.5 years throughout the past
six months (see page 3 for an explanation of duration). We
entered the period with a relatively short duration, which
reduced fund exposure to interest rate risk; we had shortened
the fund's duration in February from 5.6 years to 5.3 years
since we considered the risk to be increasing. This moderate
shortening helped fund performance during the early part of the
period but proved to be too conservative over the longer run.
Asset allocation along the yield curve made a significant
contribution to performance. Early in the period, intermediate
yields rose (and prices fell) more than longer-term yields,
producing a flattening of the yield curve in response to a
stronger economy and the Fed's tighter monetary policy. Then, as
the economy appeared to slow in the second quarter, intermediate
yields fell further than long-term yields, causing the yield
curve to steepen once again.
The market share of new issues carrying insurance continued to
increase. Through August, insured bonds accounted for 51% of new
municipal issuance compared with 46% in 1996 and 34% in 1992.
This increase is primarily due to the generally rising credit
quality of municipal bond issuers who have benefited from the
current economic expansion. As credit quality increases, more
issuers qualify for insurance. Nevertheless, we continue our
practice of reviewing the credit quality of each issue as though
it were uninsured.
TAX-FREE INCOME FUND
During the past six months, returns were strong for high-quality
long-term bonds. In this environment, your fund outperformed the
average returns for its peer group during both the 6- and
12-month periods shown in the table.
Performance Comparison
Periods Ended 8/31/97 6 Months 12 Months
_____________________________________________________________
Tax-Free Income Fund 3.99% 8.98%
Lipper General Municipal
Debt Funds Average 3.87 8.83
Long-term interest rates moved in a range of about 70 basis
points during the past six months, with medium-quality yields
briefly rising near 6.00% and declining to 5.30%.
We kept the fund's duration within a neutral band during the
period,since we did not expect a break outside the trading range
(see page 3 for an explanation of duration). We also shifted the
portfolio to a slightly more "barbelled" maturity structure by
increasing weightings in bonds with maturities beyond 10 years
and shorter than five years, which enabled performance to
benefit from a flattening yield curve. Compared with six months
ago, the fund's weighted average maturity was slightly longer
but its effective duration was slightly shorter, as lower rates
caused more bonds in the portfolio to trade to shorter call
dates.
Lower-quality investments were good performers over the past six
months as some of their issuers enjoyed credit upgrades.
Exposure to BBB and lower-rated investments was trimmed at the
end of August, after we took some profits when yield spreads
narrowed and increased our weighting in A rated securities. We
will continue to add selectively to lower-quality bonds with
positive credit outlooks.
Our goals over the past six months were to maintain or improve
the fund's yield, to look for ways to add value through credit
research, and to lower exposure to the 5- through 10-year
maturity range. Recently, we bought lower-coupon bonds selling
at a discount (below par) for their potential price
appreciation, and also higher-coupon bonds selling at a premium
(above par) for their income. The flatter yield curve created
some relative value in shorter-term bonds, which prompted us to
purchase some one- and two-year maturities.
TAX-FREE HIGH YIELD FUND
Your fund's robust returns exceeded those of its peer group
average for both the 6- and 12-month periods ended August 31, as
shown in the following table.
Performance Comparison
Periods Ended 8/31/97 6 Months 12 Months
___________________________________________________________
Tax-Free High Yield Fund 4.66% 10.28%
Lipper High Yield Municipal
Debt Funds Average 4.46 9.68
In our last report we mentioned that we expected the high-yield
segment of the market to maintain its narrow yield spreads
versus higher-quality bonds; since then, these spreads have
narrowed even further due to strong demand and lower high-yield
issuance. As the yield gap narrowed, high-yield bonds
outperformed higher-quality bonds on a relative basis. A prime
example of this was the trading activity in general obligation
bonds issued by New York City. Long a benchmark in the BBB
category, New York GO bonds were trading at yields 80 basis
points higher than those of AAA municipals of similar
maturities. That differential declined over the past year to
only 40 basis points. This type of relative performance occurred
generally throughout the high-yield sector.
This ongoing contraction in yields affected the manner in which
we managed the fund-specifically, it dampened our interest in
buying lower-quality bonds. Over the past six months, we allowed
fund exposure to below-investment-grade bonds to fall from 23%
to 20% of net assets, principally through upgrades and
refinancings. We remain buyers of lower-quality bonds when the
returns appear reasonable, keeping in mind our goal of providing
the highest yields possible. However, we will not take
significant risks when the rewards do not appear to be
commensurate. As a result, we do not expect to materially
increase our exposure to lower-quality bonds until the yield
relationships improve.
Quality diversification pie chart on 8/31/97
AAA 7%
AA 27%
A 15%
BBB 31%
BB and Below 20%
We began the six-month period with a duration of 7.2 years, which was neutral
at the time. We shortened it to 6.8 years through most of the period, which
developed into a modestly long position versus our peer group, whose
durations fell even more. At the end of August, duration stood at 7.0 years,
the weighted average maturity at 18.7 years, and fund cash levels were near
5%.
OUTLOOK
The municipal market is facing a pickup in supply in coming months, as
issuers line up to borrow over both the short and long term. Interest rates
have stayed within the narrow range established over the past two years, with
relatively low volatility, and remain attractive for issuers.
Given the high level of consumer and business confidence, we expect the
economy to continue to perform well, although not quite as well as in the
first half of the year. The Federal Reserve has expressed uncertainty about
why inflation has remained so low at this stage of the expansion and is
maintaining a bias toward tightening in an effort to keep inflation in check.
Until signs of accelerating inflation appear, there is little reason for us
to adopt a defensive posture in the funds. The overall environment for fixed
income investors is still favorable, due to continuing low inflation and
fiscal restraint despite above-trend economic growth.
Respectfully submitted,
Mary J. Miller
Director, Municipal Bond Department
September 19, 1997
T. Rowe Price Tax-Free Funds
Portfolio Highlights
Key Statistics
2/28/97 8/31/97
Tax-Exempt Money Fund
_______________________________________________________________________
Price Per Share $ 1.00 $ 1.00
Dividends Per Share
For 6 months 0.015 0.016
For 12 months 0.030 0.031
Dividend Yield (7-Day Compound) * 3.02% 3.04%
Weighted Average Maturity (days) 58 60
Weighted Average Quality ** First Tier First Tier
Tax-Free Short-Intermediate Fund
_______________________________________________________________________
Price Per Share $ 5.35 $ 5.33
Dividends Per Share
For 6 months 0.11 0.11
For 12 months 0.23 0.22
Dividend Yield *
For 6 months 4.37% 4.27%
For 12 months 4.39 4.37
Weighted Average Maturity (years) 3.6 3.8
Weighted Average Effective Duration (years) 2.8 2.8
Weighted Average Quality *** AA AA-
T. Rowe Price Tax-Free Funds
Portfolio Highlights
Key Statistics
2/28/97 8/31/97
Tax-Free Insured Intermediate Bond Fund
_______________________________________________________________________
Price Per Share $10.80 $ 10.86
Dividends Per Share
For 6 months 0.24 0.24
For 12 months 0.48 0.48
Dividend Yield *
For 6 months 4.58% 4.44%
For 12 months 4.56 4.56
Weighted Average Maturity (years) 7.4 8.5
Weighted Average Effective Duration (years) 5.3 5.4
Weighted Average Quality *** AA AA
Tax-Free Income Fund
_______________________________________________________________________
Price Per Share $ 9.59 $ 9.71
Dividends Per Share
For 6 months 0.26 0.26
For 12 months 0.52 0.52
Dividend Yield *
For 6 months 5.48% 5.40%
For 12 months 5.54 5.51
Weighted Average Maturity (years) 17.0 17.4
Weighted Average Effective Duration (years) 7.7 7.5
Weighted Average Quality *** AA- AA-
Portfolio Highlights
Key Statistics
2/28/97 8/31/97
Tax-Free High Yield Fund
_______________________________________________________________________
Price Per Share $12.12 $ 12.33
Dividends Per Share
For 6 months 0.35 0.35
For 12 months 0.70 0.70
Dividend Yield *
For 6 months 5.94% 5.74%
For 12 months 6.02 5.92
Weighted Average Maturity (years) 19.1 18.7
Weighted Average Effective Duration (years) 7.2 7.0
Weighted Average Quality *** BBB+ A-
* 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.
** All securities purchased in the money fund are rated in the two highest
categories (tiers) as established by national rating agencies or, if
unrated, are deemed of comparable quality by T. Rowe Price.
*** Based on T. Rowe Price research.
T. Rowe Price Tax-Free Funds
Average Annual Compound Total Return
This table shows how each 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 Since Inception
8/31/97 1 Year 5 Years 10 Years Inception Date
_____________________________________________________________________
Tax-Exempt Money3.14% 2.77% 3.72% - 4/8/81
Tax-Free Short-
Intermediate 5.33 4.73 5.45 - 12/23/83
Tax-Free Insured
Intermediate
Bond 6.91 - - 6.64% 11/30/92
Tax-Free Income 8.98 6.95 7.51 - 10/26/76
Tax-Free High
Yield10.28 7.49 8.39 - 3/1/85
Investment returns represent past performance and will vary. Shares of the
bond funds may be worth more or less at redemption than at original purchase.
The Money Fund's $1.00 share price is not guaranteed, nor is the fund insured
or guaranteed by the U.S. government.
Performance Comparison
These charts show the value of a hypothetical $10,000 investment in each 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.
Tax-Exempt Money Fund SEC Chart
Lipper Tax-Exempt T. Rowe Price
Money Market Tax-Exempt
Funds Index Money Fund
8/31/87 $ 10,000 $ 10,000
8/88 10,458 10,470
8/89 11,066 11,086
8/90 11,679 11,694
8/91 12,227 12,211
8/92 12,610 12,575
8/93 12,867 12,838
8/94 13,124 13,118
8/95 13,543 13,547
8/96 13,956 13,976
8/97 $ 14,380 $ 14,416
Tax-Free High Yield Fund SEC Chart
Lipper High Yield T. Rowe Price
Lehman Revenue Municipal Debt High Yield
Bond Index Funds Average Fund
8/31/87 $ 10,000 $ 10,000 $10,000
8/88 10,854 10,714 10,671
8/89 12,191 11,940 11,811
8/90 12,995 12,568 12,637
8/91 14,620 13,851 13,993
8/92 16,347 15,301 15,595
8/93 18,477 17,071 17,652
8/94 18,449 17,252 17,787
8/95 20,091 18,585 19,172
8/96 21,264 19,584 20,290
8/97 $ 23,350 $ 21,465 $22,376
Tax-Free Income Fund SEC Chart
Lipper General T. Rowe Price
Lehman Municipal Municipal Debt Tax-Free
Bond Index Funds Average Income Fund
8/31/87 $10,000 $10,000 $ 10,000
8/88 10,688 10,684 10,472
8/89 11,862 11,888 11,263
8/90 12,623 12,447 11,860
8/91 14,111 13,923 13,201
8/92 15,687 15,507 14,740
8/93 17,601 17,421 16,733
8/94 17,626 17,250 16,600
8/95 19,188 18,556 17,945
8/96 20,193 19,467 18,924
8/97 $22,060 $21,257 $ 20,623
Tax-Free Short-Intermediate Fund SEC Chart
Lipper Short- T. Rowe Price
Lehman 3-Year Intermediate Debt Tax-Free Short-
GO Bond Index Funds Average Intermediate Fund
8/31/87 $ 10,000 $10,000 $ 10,000
8/88 10,417 10,514 10,431
8/89 11,112 11,196 11,026
8/90 11,844 11,901 11,734
8/91 12,891 12,892 12,599
8/92 14,023 13,919 13,492
8/93 14,947 14,949 14,367
8/94 15,333 15,228 14,679
8/95 16,381 16,126 15,542
8/96 17,026 16,728 16,139
8/97 $ 17,972 $17,647 $ 16,999
Tax-Free Insured Intermediate Fund SEC chart
Lipper Intermediate Tax-Free
Lehman 7-Year GO Municipal Debt Insured Intermediate
Bond Index Funds Average Bond Fund
11/30/92 $ 10,000 $ 10,000 $ 10,000
8/93 10,900 10,892 11,103
8/94 11,022 11,011 11,308
8/95 12,008 11,810 12,212
8/96 12,499 12,300 12,696
8/97 $ 13,489 $ 13,191 $ 13,572
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access (registered trademark)
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
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 Tax-Free Funds.
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T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor.
C03-051 8/31/97
