Semiannual Report - Financial Statements
T. Rowe Price
Tax-Free Short-Intermediate Fund
August 31, 1997
Portfolio Highlights
SECTOR Diversification
Percent ofPercent of
Net AssetsNet Assets
2/28/97 8/31/97
______________________________________________________________
Prerefunded Bonds 25% 22%
Dedicated Tax Revenue 13 12
General Obligation State 10 11
General Obligation Local 12 10
Air and Sea Transportation Revenue 8 8
Hospital Revenue 9 7
Lease Revenue 4 7
Solid Waste Revenue 4 5
Nuclear Revenue 3 5
Educational Revenue 5 5
Electric Revenue - 3
Industrial and Pollution Control Revenue 5 3
Water and Sewer Revenue 1 2
All Others 1 2
Other Assets Less Liabilities - - 2
___________________________________________________________________
Total100% 100%
T. Rowe Price Tax-Free Short-Intermediate 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 $ 5.35 $5.37 $ 5.25 $ 5.32 $ 5.36 $ 5.22
Investment activities
Net investment
income 0.11 0.23 0.23 0.22 0.22 0.24
Net realized
and unrealized
gain (loss) - (0.02) 0.12 (0.07) (0.04) 0.14
Total from
investment
activities 0.11 0.21 0.35 0.15 0.18 0.38
Distributions
Net investment
income (0.11) (0.23) (0.23) (0.22) (0.22) (0.24)
Net realized
gain (0.02) - - - - -
Total
distributions(0.13)(0.23) (0.23) (0.22) (0.22) (0.24)
NET ASSET VALUE
End of period $ 5.33 $5.35 $ 5.37 $ 5.25 $ 5.32 $ 5.36
Ratios/Supplemental Data
Total return 2.13% 4.02% 6.87% 2.91% 3.49% 7.51%
Ratio of expenses
to average net
assets 0.54%! 0.56% 0.57% 0.59% 0.60% 0.63%
Ratio of net
investment
income to
average
net assets 4.21%! 4.30% 4.39% 4.19% 4.18% 4.61%
Portfolio
turnover rate 106.1%! 84.3% 69.9% 93.1% 51.1% 38.5%
Net assets,
end of period
(in thousands)$435,962$443,631$445,228$454,084$540,728$454,162
! Annualized.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Short-Intermediate Fund
Unaudited August 31, 1997
Statement of Net Assets
Par Value
In thousands
ALABAMA 1.0%
Marshall County Health Care Auth.
Guntersville-Arab Medical Center
10.25%, 10/1/13 $ 3,830 $ 4,153
Total Alabama (Cost $4,121) 4,153
ARIZONA 2.6%
Arizona, COP, 5.40%, 9/1/98 (AMBAC Insured) 1,000 1,015
Arizona Transportation Board
6.35%, 7/1/05 (Prerefunded
7/1/01!) 6,400 6,943
Maricopa County, GO, Mesa Unified
School Dist. No. 4
Zero Coupon, 7/1/98 (FGIC Insured) 2,675 2,584
Phoenix, Street and Highway User
7.30%, 7/1/98 (Escrowed to Maturity) 900 926
Total Arizona (Cost $11,100) 11,468
CALIFORNIA 0.1%
California Housing Fin. Agency,
Multi-Unit Rental Housing
5.75%, 8/1/98 500 508
Total California (Cost $499) 508
COLORADO 3.2%
Denver City and County Airport
6.00%, 11/15/03 (MBIA Insured) * 3,965 4,231
7.30%, 11/15/00 * 4,750 5,121
7.50%, 11/15/25 * 4,640 4,761
Total Colorado (Cost $13,990) 14,113
CONNECTICUT 3.2%
Connecticut Special Assessment
Unemployment Compensation
5.50%, 5/15/00 (AMBAC Insured) 8,300 8,571
5.50%, 5/15/01 (AMBAC Insured) 5,000 5,197
Total Connecticut (Cost $13,705) 13,768
DISTRICT OF COLUMBIA 0.6%
Metropolitan Washington D.C. Airports Auth.
6.00%, 10/1/00 (MBIA Insured) * $ 1,500 $ 1,571
6.80%, 10/1/98 (FGIC Insured) * 875 900
Total District of Columbia (Cost $2,444) 2,471
FLORIDA 5.5%
Dade County, Resource Recovery Fac.
6.00%, 10/1/99 (AMBAC Insured) * 10,740 11,129
Dunedin Utility Systems
6.00%, 10/1/14 (FGIC Insured)
(Prerefunded 10/1/99!) 3,000 3,114
Jacksonville, Excise Tax, 6.90%, 10/1/98
(MBIA Insured) 3,610 3,725
Reedy Creek Improvement Dist., Florida
Utilities
5.00%, 10/1/02 (AMBAC Insured) 6,000 6,168
Total Florida (Cost $23,928) 24,136
GEORGIA 4.7%
Atlanta Airport Fac., 5.50%, 1/1/01
(AMBAC Insured) 5,000 5,192
Forsyth County School Dist., GO, 5.50%,
2/1/99 3,000 3,062
Metropolitan Atlanta Rapid Transit Auth.,
Sales Tax
5.90%, 7/1/99 1,850 1,907
Municipal Electric Auth. of Georgia
5.00%, 1/1/02 (MBIA Insured) 10,000 10,191
Total Georgia (Cost $20,201) 20,352
HAWAII 0.9%
Hawaii, GO, 6.25%, 3/1/02 (FGIC Insured) 3,800 4,075
Total Hawaii (Cost $4,013) 4,075
ILLINOIS 2.0%
Chicago - O' Hare Int'l. Airport, Int'l
Terminal
7.25%, 1/1/00 (MBIA Insured) * 2,000 2,126
Cook County, GO
7.375%, 11/1/08 (MBIA Insured)
(Prerefunded 11/1/99!) $ 5,500 $ 5,972
Southwestern Illinois Dev. Auth.
Solid Waste Disposal, Shell Oil, Wood River
VRDN (Currently 3.80%) * 400 400
Total Illinois (Cost $8,448) 8,498
INDIANA 4.3%
Indiana HFFA
Clarion Health Partners
6.00%, 2/15/00 5,330 5,528
6.00%, 2/15/01 5,600 5,867
Indianapolis, Public Improvement
6.70%, 1/1/17 (Prerefunded 1/1/02!) 6,550 7,236
Total Indiana (Cost $18,418) 18,631
LOUISIANA 5.0%
Louisiana, GO, 6.00%, 8/1/00 (FGIC Insured) 7,250 7,597
Louisiana Offshore Terminal Auth., LOOP,
5.40%, 9/1/98 12,500 12,674
Louisiana PFA, Student Loan, 6.10%, 9/1/00 1,425 1,471
Plaquemines Parish, The British
Petroleum Company
VRDN (Currently 3.85%) * 200 200
Total Louisiana (Cost $21,766) 21,942
MARYLAND 5.6%
Maryland, GO, 6.75%, 10/15/99 3,000 3,167
Maryland DOT, 6.50%, 11/1/99 3,895 4,093
Maryland Energy Fin. Administration
Wheelabrator
5.30%, 12/1/00 * 825 842
5.45%, 12/1/01 * 1,185 1,217
Maryland HHEFA
Francis Scott Key Medical Center
6.75%, 7/1/23 (FGIC Insured)
(Prerefunded 7/1/00!) 5,560 6,029
Maryland HHEFA
Peninsula Regional Medical Center
4.60%, 7/1/02 $ 955 $ 955
Montgomery County, GO, Consolidated
Public Improvement
6.80%, 11/1/00
(Prerefunded 11/1/99!) 3,315 3,561
Northeast Maryland Waste Disposal Auth.
Southwest Resource Recovery Fac.
7.00%, 1/1/01 (MBIA Insured) 1,000 1,081
7.05%, 1/1/02 (MBIA Insured) 2,430 2,670
Washington Suburban Sanitary Dist.,
GO, 5.00%, 6/1/00 800 817
Total Maryland (Cost $23,897) 24,432
MASSACHUSETTS 7.5%
Boston, GO, 5.00%, 11/1/99 (FGIC Insured) 2,100 2,141
Massachusetts, GO
5.50%, 7/1/00 12,000 12,388
7.625%, 6/1/08 (Prerefunded 6/1/01!) 4,000 4,519
Massachusetts Turnpike Auth., GO, BAN,
5.00%, 6/1/99 13,500 13,696
Total Massachusetts (Cost $32,321) 32,744
MICHIGAN 2.7%
Detroit Sewage Disposal, 5.00%, 7/1/02
(FGIC Insured) 7,400 7,565
Michigan Hosp. Fin. Auth.
Mercy Health
6.00%, 8/15/01 2,450 2,582
6.00%, 8/15/02 1,595 1,692
Total Michigan (Cost $11,751) 11,839
MINNESOTA 0.5%
Minnesota PFA, Water Pollution Control,
5.70%, 3/1/99 2,000 2,050
Total Minnesota (Cost $1,994) 2,050
MISSISSIPPI 2.7%
Mississippi Higher Ed. Assistance
Student Loan
6.00%, 7/1/00 $ 5,000 $ 5,134
6.10%, 1/1/01 5,000 5,156
Mississippi Hosp. Equipment and Fac. Auth.
Rush Medical Foundation, 5.40%, 1/1/07 1,305 1,306
Total Mississippi (Cost $11,558) 11,596
MISSOURI 2.1%
Missouri Higher Ed. Loan Auth., Student Loan
5.375%, 2/15/99 2,600 2,633
St. Louis, Lambert Int'l. Airport
6.00%, 7/1/02 (FGIC Insured) * 2,770 2,935
6.00%, 7/1/03 (FGIC Insured) * 3,465 3,691
Total Missouri (Cost $9,093) 9,259
NEVADA 1.6%
Clark County School Dist., GO, 6.00%,
6/15/02 (FGIC Insured) 6,570 6,993
Total Nevada (Cost $6,880) 6,993
NEW JERSEY 2.0%
New Jersey Transportation Trust Fund Auth.
5.00%, 6/15/99 3,500 3,556
6.00%, 6/15/00 5,000 5,232
Total New Jersey (Cost $8,719) 8,788
NEW MEXICO 0.3%
Gallup, PCR, Plains Electric Generation
and Transmission Coop.
5.50%, 8/15/98 (MBIA Insured) 1,390 1,411
Total New Mexico (Cost $1,389) 1,411
NEW YORK 12.6%
Dormitory Auth. of the State of New York
City Univ., 9.25%, 7/1/00 $ 5,180 $ 5,832
Mental Health Services Fac., 6.00%, 8/15/0310,905 11,623
State Univ. Ed. Fac.
7.20%, 5/15/99 3,000 3,145
7.25%, 5/15/99 3,580 3,756
Municipal Assistance Corp. of New York
City, 5.00%, 7/1/99 6,000 6,101
Nassau County, GO, 6.30%, 11/1/02
(FGIC Insured) 3,295 3,575
New York City, GO
5.25%, 8/1/99 7,900 8,034
5.25%, 8/1/00 5,900 6,020
New York City Municipal Water Fin.
Auth., Water and Sewer
6.50%, 6/15/20
(Prerefunded 6/15/02!) 5,000 5,492
Port Auth. of New York and New
Jersey, 4.90%, 9/1/97 * 1,500 1,500
Total New York (Cost $54,208) 55,078
NORTH CAROLINA 0.3%
North Carolina Eastern Municipal Power Agency
5.00%, 1/1/98 (MBIA Insured) 1,500 1,505
Total North Carolina (Cost $1,502) 1,505
OHIO 1.8%
Cuyahoga County, Univ. Hosp.
6.00%, 1/15/01 (MBIA Insured) 2,120 2,228
6.00%, 1/15/02 (MBIA Insured) 2,340 2,476
Ohio Building Auth., Adult Correctional Fac.
5.75%, 4/1/01 (AMBAC Insured) 2,920 3,057
Total Ohio (Cost $7,670) 7,761
PENNSYLVANIA 9.0%
New Castle Area Hosp. Auth., St. Frances Hosp.
Zero Coupon, 11/15/97 2,535 2,513
Pennsylvania, GO, 5.125%, 9/15/03
(AMBAC Insured) 5,000 5,158
Pennsylvania Higher Ed. Fac. Auth.,
Student Loan
VRDN (Currently 3.40%) * $ 1,800 $ 1,800
Pennsylvania Intergovernmental
Cooperative Auth.
Philadelphia Funding Program
5.75%, 6/15/99 (FGIC Insured) 5,000 5,143
5.75%, 6/15/00 (FGIC Insured) 5,000 5,196
6.00%, 6/15/02 (FGIC Insured) 5,000 5,329
Philadelphia, Water and Sewer
7.50%, 8/1/10 (Prerefunded 8/1/01!) 10,000 11,297
Pittsburgh, Water and Sewer
6.50%, 9/1/14 (FGIC Insured)
(Prerefunded 9/1/01!) 2,500 2,739
Total Pennsylvania (Cost $38,609) 39,175
RHODE ISLAND 0.5%
Rhode Island Student Loan, 6.20%, 12/1/98 2,000 2,040
Total Rhode Island (Cost $2,000) 2,040
SOUTH CAROLINA 5.6%
South Carolina Public Service Auth.
Santee Cooper
6.25%, 1/1/00 (AMBAC Insured) 3,000 3,134
6.25%, 1/1/01 (AMBAC Insured) 2,000 2,119
6.50%, 7/1/24 (AMBAC Insured)
(Prerefunded 7/1/02!) 10,000 11,049
7.10%, 7/1/21 (Prerefunded 7/1/01!) 7,125 7,934
Total South Carolina (Cost $23,467) 24,236
TENNESSEE 0.6%
Shelby County, GO, 5.25%, 4/1/99 2,500 2,546
Total Tennessee (Cost $2,524) 2,546
TEXAS 2.1%
Dallas-Fort Worth Regional Airport,
5.50%, 11/1/98 2,000 2,034
Fort Worth, GO, 6.00%, 3/1/01 5,000 5,274
Goose Creek Independent School Dist., GO
Zero Coupon, 2/15/99 $ 1,200 $ 1,127
Texas Housing Agency
6.25%, 3/1/98 305 308
6.25%, 9/1/98 255 259
Total Texas (Cost $8,837) 9,002
UTAH 0.1%
Utah Housing Fin. Agency, 6.00%, 1/1/99 240 244
Total Utah (Cost $240) 244
VIRGINIA 3.9%
Fairfax County Economic Dev. Auth.,
Ogden Martin
7.75%, 2/1/11 * 5,445 5,831
Hampton Roads Medical College, 6.30%,
11/15/02 1,000 1,069
Harrisonburg Redev. and Housing Auth.
Mallside Forest Apartments
5.00%, 11/14/97
(Escrowed to Maturity) * 2,100 2,100
Virginia HDA, 5.90%, 1/1/00 * 1,865 1,912
Virginia Polytechnic Institute and State Univ.
5.375%, 6/1/00 1,000 1,030
5.375%, 6/1/01 750 777
Virginia Public School Auth., School
Fin., 5.50%, 8/1/02 4,150 4,350
Total Virginia (Cost $16,894) 17,069
WASHINGTON 3.6%
Chelan County Public Utility Dist.,
7.55%, 7/1/62 * 6,515 7,151
Washington Public Power Supply System
6.30%, 7/1/01 (FSA Insured) 2,000 2,126
7.25%, 7/1/00 2,000 2,145
7.625%, 7/1/10 (Prerefunded 1/1/01!) 4,000 4,473
Total Washington (Cost $15,793) 15,895
WISCONSIN 3.4%
Wisconsin, GO, 6.30%, 5/1/11
(Prerefunded 5/1/02!) $ 9,000 $ 9,699
Wisconsin Public Power Agency
7.50%, 7/1/10 (AMBAC Insured)
(Prerefunded 7/1/00!) 4,800 5,299
Total Wisconsin (Cost $14,755) 14,998
WYOMING 0.0%
Lincoln County, PCR, Exxon, VRDN
(Currently 3.80%) * 100 100
Total Wyoming (Cost $100) 100
Total Investments in Securities
101.6% of Net Assets (Cost $436,834) $442,876
Other Assets Less Liabilities (6,914)
NET ASSETS $435,962
_________
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 17
Accumulated net realized gain/loss -
net of distributions (197)
Net unrealized gain (loss) 6,042
Paid-in-capital applicable to 81,796,791
shares of $0.01 par value capital stock
outstanding; 1,000,000,000 shares authorized 430,100
NET ASSETS $435,962
_________
NET ASSET VALUE PER SHARE $ 5.33
_________
* Interest subject to alternative minimum tax
! Used in determining portfolio maturity
AMBAC AMBAC Indemnity Corp.
BAN Bond Anticipation Note
COP Certificates of Participation
DOT Department of Transportation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance Corp.
GO General Obligation
HDA Housing Development Authority
HFFA Health Facility Financing Authority
HHEFA Health & Higher Educational Facility Authority
MBIA Municipal Bond Investors Assurance Corp.
PCR Pollution Control Revenue
PFA Public Facility Authority
VRDN Variable Rate Demand Note
T. Rowe Price Tax-Free Short-Intermediate Fund
Unaudited
Statement of Operations
In thousands
6 Months
Ended
8/31/97
Investment Income
Interest income $ 10,462
Expenses
Investment management 937
Shareholder servicing 141
Custody and accounting 68
Registration 21
Prospectus and shareholder reports 12
Legal and audit 6
Directors 3
Miscellaneous 3
Total expenses 1,191
Net investment income 9,271
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 514
Futures (225)
Net realized gain (loss) 289
Change in net unrealized gain or loss on securities (526)
Net realized and unrealized gain (loss) (237)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 9,034
_________
T. Rowe Price Tax-Free Short-Intermediate Fund
Unaudited
Statement of Changes in Net Assets
In thousands
The accompanying notes are an integral part of these financial statements.
6 Months Year
Ended Ended
8/31/97 2/28/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 9,271 $ 18,881
Net realized gain (loss) 289 2,473
Change in net unrealized gain or loss (526) (3,995)
Increase (decrease) in net assets
from operations 9,034 17,359
Distributions to shareholders
Net investment income (9,271) (18,881)
Net realized gain (1,656) -
Decrease in net assets from distributions(10,927)(18,881)
Capital share transactions*
Shares sold 52,580 82,162
Distributions reinvested 8,710 15,046
Shares redeemed (67,066) (97,283)
Increase (decrease) in net assets
from capital
share transactions (5,776) (75)
Net Assets
Increase (decrease) during period (7,669) (1,597)
Beginning of period 443,631 445,228
End of period $435,962 $443,631
_____________________
*Share information
Shares sold 9,896 15,440
Distributions reinvested 1,641 2,826
Shares redeemed (12,623) (18,288)
Increase (decrease) in shares outstanding(1,086) (22)
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Short-Intermediate Fund
UnauditedAugust 31, 1997
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Tax-Free Short-Intermediate 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 December 23, 1983.
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 $242,698,000 and $225,501,000, 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.
At August 31, 1997, the aggregate cost of investments for federal income tax
and financial reporting purposes was $436,834,000, and net unrealized gain
aggregated $6,042,000, of which $6,052,000 related to appreciated investments
and $10,000 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 $156,000 was payable at August 31, 1997. The fee is computed
daily and paid monthly, and consists of an individual fund fee equal to 0.10%
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 $155,000 for the six
months ended August 31, 1997, of which $30,000 was payable at period-end.
T. Rowe Price Tax-Free Short-Intermediate Fund
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 Short-
Intermediate 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.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
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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.
F56-051 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,
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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
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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
