PRICE T ROWE STATE TAX FREE INCOME TRUST, 497, 1998-07-02

PRICE T ROWE STATE TAX FREE INCOME TRUST
497, 1998-07-02

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Prospectuses dated July 1, 1998, should be inserted here.

<PAGE>

PROSPECTUS

July 1, 1998
California Tax-Free Funds

A long-term bond fund and a money market fund for investors seeking income that
is exempt from federal and California state income taxes.

(T. ROWE PRICE RAM LOGO)
T. Rowe Price
<PAGE>

FACTS AT A GLANCE
California Tax-Free Funds

Investment Goal
The highest level of income exempt from federal and California state income
taxes consistent with each fund's investment program.

As with all mutual funds, these funds may not meet their goals.

Strategy and Risk/Reward

California Tax-Free Money Fund Invests in high-quality, short-term municipal
securities. Its average maturity will not exceed 90 days.

Your investment in the fund is neither insured nor guaranteed by the U.S.
government, and there is no assurance that the fund will be able to maintain a
stable net asset value of $1.00 per share. Because the fund concentrates its
investments in securities of California issuers, an investment in this fund may
be riskier than an investment in more broadly diversified money funds.

Risk/Reward Lowest.

California Tax-Free Bond Fund Invests primarily in investment-grade municipal
bonds. The fund's average maturity is expected to exceed 15 years.

Risk/Reward: Significantly higher income than the money fund and also the
potential for price declines when interest rates rise.

Investor Profile
California taxpayers who, because of their tax bracket, can benefit from income
that is exempt from federal and California state income taxes. Not appropriate
for tax-deferred retirement plans, such as IRAs.

Fees and Charges

100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.

Investment Manager

Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $139 billion, including
over $7.1 billion in municipal bond assets, for more than six million
individual and institutional investor accounts as of March 31, 1998.
<PAGE>

CONTENTS
1

ABOUT THE FUNDS
Transaction and Fund Expenses 2
Financial Highlights 4
Fund, Market, and Risk Characteristics 6
2
ABOUT YOUR ACCOUNT

Pricing Shares and Receiving Sale Proceeds 15
Distributions and Taxes 16
Transaction Procedures and Special Requirements 19
3

MORE ABOUT THE FUNDS
Organization and Management 22
Understanding Performance Information 24
Investment Policies and Practices 25
4
INVESTING WITH T. ROWE PRICE

Account Requirements and Transaction Information 35
Opening a New Account 35
Purchasing Additional Shares 36
Exchanging and Redeeming 37
Rights Reserved by the Fund 38
Shareholder Services 39
Discount Brokerage 41
Investment Information 42
T. Rowe Price California Tax-Free Income Trust
Prospectus

July 1, 1998

This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
funds, dated July 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.

Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>

ABOUT THE FUNDS
1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
. Like all T. Rowe Price funds, these funds are 100% no load.

These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.

Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in a fund goes to work for you, subject to
the fees explained below. Annual Fund Expenses provides an estimate of how
much it would cost to operate each fund for a year, based on 1998 fiscal year
expenses (and any applicable expense limitations). These are costs you pay
indirectly because they are deducted from each fund's total assets before the
daily share price is calculated and before dividends and other distributions
are made. In other words, you will not see these expenses on your account
statement.

<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <S> <C> <C> <S>
Shareholder Transaction
Expenses Money Fund Bond Fund
Sales charge "load" None None
on purchases
-------------------------------------------------------------
Sales charge "load"
on reinvested None None
distributions
-------------------------------------------------------------
Redemption fees None None
-------------------------------------------------------------
Exchange fees None None
Percentage of Fiscal 1998 Average Net Assets
Annual Fund Expenses
Management fee 0.30%/a/ 0.42%
-------------------------------------------------------------
Marketing fees None None
(12b-1)
-------------------------------------------------------------
Total other
(shareholder
servicing, custodial, 0.25% 0.16%
auditing, etc.)
-------------------------------------------------------------
Total fund expenses 0.55%/a/ 0.58%
-----------------------------------------------------------------------------------------------
</TABLE>

/a/
The money fund's management fee and its total expenses ratio would have been
0.42% and 0.67%, respectively, had T. Rowe Price not agreed to reduce
management fees in accordance with the expense limitation described in
Table 3.
Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts, when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
. A management fee The percent of fund assets paid to the fund's investment
manager. Each fund's fee comprises a group fee, 0.32% as of February 28,
1998, and an individual fund fee of 0.10%.
<PAGE>

ABOUT THE FUNDS 3

. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.

. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.

For further details on fund expenses, please see Organization and Management.

. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:

<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<S> <S> <C> <C> <C> <C> <S>
Fund 1 year 3 years 5 years 10 years
Money $ 6 $18 $31 $ 69
--------------------------------------------
Bond 6 19 32 73
-----------------------------------------------------------------
</TABLE>

. Table 2 is just an example; actual expenses can be higher or lower than
those shown.

Table 3 sets forth the expense ratio limitation for the money fund and the
period for which it is effective. T. Rowe Price has agreed to waive its fees
and bear any expenses to the extent such fees or expenses would cause the
fund's ratio of expenses to average net assets to exceed the indicated
percentage limitation. Subject to shareholder approval, fees waived or
expenses paid or assumed are subject to reimbursement to T. Rowe Price by the
fund through the indicated reimbursement date, but no reimbursement will be
made if it would result in the fund's expense ratio exceeding its specified
limit.

<TABLE>
Table 3 Expense Ratio Limitation
<CAPTION>
<S> <S> <S> <S> <S> <S>
Expense Ratio
Fund Limitation Period Limitation Reimbursement Date
Money/a/ 3/1/97-2/28/99 0.55% 2/28/01
--------------------------------------------------------------------------------------
</TABLE>

/a/The money fund previously operated under a 0.55% limitation that expired
February 28, 1995. Effective March 1, 1997, T. Rowe Price agreed to extend the
existing expense limitation of 0.55% for a period of two years from March 1,
1997, through February 28, 1999. Subject to shareholder approval, fees waived
or expenses paid or assumed under these agreements are subject to
reimbursement to T. Rowe Price by the fund whenever the expense ratio is below
0.55%; however, no reimbursement will be made after February 28, 1997 (for the
first agreement), or February 28, 1999 (for the second agreement), or if it
would result in the expense ratio exceeding 0.55%. Any amounts reimbursed will
have the effect of increasing fees otherwise paid by the fund.
<PAGE>

T. ROWE PRICE 4
FINANCIAL HIGHLIGHTS
----------------------------------------------------------

Table 4, which provides information about each fund's financial history, is
based on a single share outstanding throughout each fiscal year. Each fund's
section of the table is part of the fund's financial statements, which are
included in its annual report and are legally regarded as part of the
Statement of Additional Information (available upon request). The financial
statements in the annual report were audited by Coopers & Lybrand L.L.P., the
funds' independent accountants.

<TABLE>
Table 4 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Net Asset Net Realized
Value, Net and Unrealized Total From Net Net Net Asset
Period Beginning Investment Gain (Loss) on Investment Investment Realized Total Value,
Ended of Period Income (Loss) Investments Activities Income Gain Distributions End of Period
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <S>
Money Fund
1989 $ 1.000 $0.47/a/ -- $0.047 $(0.047) -- $(0.047) $ 1.000
------------------------------------------------------------------------------------------------------------
1990 1.000 0.53 -- 0.053 (0.053) -- (0.053) 1.000
------------------------------------------------------------------------------------------------------------
1991 1.000 0.46/b/ -- 0.046 (0.046) -- (0.046) 1.000
------------------------------------------------------------------------------------------------------------
1992/d/ 1.000 0.35/b/ -- 0.035 (0.035) -- (0.035) 1.000
------------------------------------------------------------------------------------------------------------
1993 1.000 0.23/b/ -- 0.023 (0.023) -- (0.023) 1.000
------------------------------------------------------------------------------------------------------------
1994 1.000 0.19/b/ -- 0.019 (0.019) -- (0.019) 1.000
------------------------------------------------------------------------------------------------------------
1995 1.000 0.25/b/ -- 0.025 (0.025) -- (0.025) 1.000
------------------------------------------------------------------------------------------------------------
1996/d/ 1.000 0.32/b/ -- 0.032 (0.032) -- (0.032) 1.000
------------------------------------------------------------------------------------------------------------
1997 1.000 0.28/b/ -- 0.028 (0.028) -- (0.028) 1.000
------------------------------------------------------------------------------------------------------------
1998 1.000 0.30/b/ -- 0.030 (0.030) -- (0.030) 1.000
Bond Fund
1989 $ 9.44 $0.57/a/ $(0.13) $0.44 $(0.57) -- $(0.57) $ 9.31
------------------------------------------------------------------------------------------------------------
1990 9.31 0.59/c/ 0.08 0.67 (0.59) -- (0.59) 9.39
------------------------------------------------------------------------------------------------------------
1991 9.39 0.58/c/ 0.12 0.70 (0.58) -- (0.58) 9.51
------------------------------------------------------------------------------------------------------------
1992///d/ 9.51 0.59/c/ 0.34 0.93 (0.59) -- (0.59) 9.85
------------------------------------------------------------------------------------------------------------
1993 9.85 0.57/c/ 0.80 1.37 (0.57) -- (0.57) 10.65
------------------------------------------------------------------------------------------------------------
1994 10.65 0.56/c/ 0.01 0.57 (0.56) $(0.23) (0.79) 10.43
------------------------------------------------------------------------------------------------------------
1995 10.43 0.55/c/ (0.41) 0.14 (0.55) (0.02) (0.57) 10.00
------------------------------------------------------------------------------------------------------------
1996/d/ 10.00 0.55 0.45 1.00 (0.55) -- (0.55) 10.45
------------------------------------------------------------------------------------------------------------
1997 10.45 0.55 0.02 0.57 (0.55) -- (0.55) 10.47
------------------------------------------------------------------------------------------------------------
1998 10.47 0.54 0.41 0.95 (0.54) (0.54) 10.88
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

Footnotes appear on next page. (continued on next page)
<PAGE>

ABOUT THE FUNDS 5

<TABLE>
Table 4 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Total Return
(Includes Ratio of
Period Reinvested Net Assets Ratio of Expenses to Net Investment Income Portfolio
Ended Distributions) ($ Thousands) Average Net Assets to Average Net Assets Turnover Rate
<S> <C> <C> <C> <C> <C> <S>
Money Fund
1989 4.76%/a/ $ 75,180 0.80%/a/ 4.69%/a/ --
-------------------------------------------------------------------------------------------
1990 5.40 87,270 0.80 5.28 --
-------------------------------------------------------------------------------------------
1991 4.73/b/ 82,408 0.71/b/ 4.64/b/ --
-------------------------------------------------------------------------------------------
1992/d/ 3.55/b/ 70,302 0.55/b/ 3.50/b/ --
-------------------------------------------------------------------------------------------
1993 2.31/b/ 66,617 0.55/b/ 2.29/b/ --
-------------------------------------------------------------------------------------------
1994 1.92/b/ 74,016 0.55/b/ 1.90/b/ --
-------------------------------------------------------------------------------------------
1995 2.55/b/ 76,289 0.55/b/ 2.51/b/ --
-------------------------------------------------------------------------------------------
1996///d/ 3.24/b/ 72,739 0.55/b/ 3.20/b/ --
-------------------------------------------------------------------------------------------
1997 2.87/b/ 82,210 0.55/b/ 2.82/b/ --
-------------------------------------------------------------------------------------------
1998 3.01/b/ 92,406 0.55/b/ 2.98/b/
Bond Fund
1989 4.93%/a/ $ 42,902 1.00%/a/ 6.23%/a/ 77.0%
-------------------------------------------------------------------------------------------
1990 7.35/c/ 65,056 0.93/c/ 6.25/c/ 88.4
-------------------------------------------------------------------------------------------
1991 7.84/c/ 84,375 0.73/c/ 6.29/c/ 192.7
-------------------------------------------------------------------------------------------
1992/d/ 10.05/c/ 108,494 0.60/c/ 6.07/c/ 80.3
-------------------------------------------------------------------------------------------
1993 14.41/c/ 143,973 0.60/c/ 5.69/c/ 57.5
-------------------------------------------------------------------------------------------
1994 5.37/c/ 151,936 0.60/c/ 5.19/c/ 73.4
-------------------------------------------------------------------------------------------
1995 1.60/c/ 131,953 0.60/c/ 5.60/c/ 78.0
-------------------------------------------------------------------------------------------
1996///d/ 10.28 146,194 0.63 5.40 61.9
-------------------------------------------------------------------------------------------
1997 5.64 160,813 0.62 5.29 47.3
-------------------------------------------------------------------------------------------
1998 9.31 195,100 0.58 5.09 35.0
------------------------------------------------------------------------------------------------------------
</TABLE>

/a/
Excludes expenses in excess of a 0.80% voluntary expense limitation in effect
through February 28, 1989.

/b/
Excludes expenses in excess of a 0.55% voluntary expense limitation in effect
November 7, 1990, through February 28, 1999.

/c/
Excludes expenses in excess of a 0.60% voluntary expense limitation in effect
November 7, 1990, through February 28, 1995, and an 0.80% voluntary expense
limitation in effect November 1, 1989, through November 6, 1990.

/d/ Fiscal year ended February 29.
<PAGE>

T. ROWE PRICE 6
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------

To help you decide whether these funds are appropriate for you, this section
takes a closer look at their investment objectives and approaches.

<TABLE>
Table 5 California Funds Comparison Guide
<CAPTION>
<S> <S> <S> <S> <S> <S> <S>
Credit-Quality Expected Share Expected Average
Fund Categories Income Price Fluctuation Maturity
Money Two highest Lowest Stable 90 days or less
---------------------------------------------------------------------
Bond Primarily four highest High High Over 15 years
---------------------------------------------------------------------------------------------
</TABLE>

What is each fund's objective and investment program?

. The California Tax-Free Money Fund's objective is preservation of capital,
liquidity, and, consistent with these objectives, the highest current income
exempt from federal and California state income taxes. The fund invests in
municipal securities that mature in 397 days or less, and its dollar-weighted
average maturity will not exceed 90 days. The fund's yield will fluctuate in
response to changes in interest rates, but the share price is managed to
remain stable at $1.00. Although the fund has maintained a constant share
price since its inception, and fund managers will make every effort to
continue to meet this objective in the future, the price could drop below
$1.00 under certain circumstances, such as a major change in interest rates
or default on one or more fund holdings. Unlike most bank accounts or
certificates of deposit, your investment in the fund is not insured or
guaranteed by the U.S. government.

. The California Tax-Free Bond Fund's investment objective is, consistent with
prudent portfolio management, the highest level of income exempt from federal
and California state income taxes by investing primarily in investment-grade
California municipal bonds. The fund's dollar-weighted average maturity is
expected to exceed 15 years.

. Each fund will invest at least 65% of its total assets in California
municipal securities. However, due to seasonal variations or shortages in the
supply of suitable short-term California securities, each fund may invest in
municipals whose interest is exempt from federal but not California state
income taxes. Every effort will be made to minimize such investments, but
they could compose up to 10% of each fund's annual income.

. Income from California municipal securities is exempt from federal and
California state income taxes.
<PAGE>

ABOUT THE FUNDS 7
What are the funds' credit-quality guidelines?

. The money fund will generally purchase securities rated within the two
highest money market rating categories assigned by established rating
agencies, or, if not rated, of equivalent investment quality as determined by
T. Rowe Price. All securities purchased by the fund will present minimal
credit risks in the opinion of T. Rowe Price.

. The bond fund will generally purchase investment-grade securities, which
means their ratings are within the four highest credit categories (AAA, AA,
A, BBB) as determined by a national rating organization or, if unrated, by T.
Rowe Price. The fund may occasionally purchase below investment-grade
securities (including those with the lowest or no rating), but no such
purchase will be made if it would cause the fund's noninvestment-grade bonds
to exceed 5% of its net assets. Unrated bonds may be less liquid than rated
bonds.

Investment-grade securities include a range from the highest rated to medium
quality. Securities in the BBB category may be more susceptible to adverse
economic conditions or changing circumstances, and the securities at the
lower end of the BBB category have certain speculative characteristics.

. The funds may retain a security whose credit quality is downgraded after
purchase.

What are the main risks of investing in municipal bond and money market funds?

Since they are managed to maintain a $1.00 share price, money market funds
should have little risk of principal loss. However, the potential for
realizing a loss of principal in a bond or money market fund could derive
from:

. Interest rate or market risk The decline in bond prices that accompanies a
rise in the overall level of interest rates (please see Table 6). A sharp and
unexpected rise in interest rates could cause a money fund's price to drop
below one dollar. However, the very short-term securities held in money
market portfolios - a means of achieving an overall fund objective of
principal stability - reduces their potential for price fluctuation.

. Credit risk The chance that any of a fund's holdings will have its credit
rating downgraded or will default (fail to make scheduled interest and
principal payments), potentially reducing a fund's income level and share
price. Money funds invest in very high-rated securities, thus reducing this
risk.

. Political risk The chance that a significant restructuring of federal income
tax rates, or even serious discussion on the topic in Congress, could cause
municipal bond prices to fall. The demand for municipal bonds is strongly
influenced by the value of tax-exempt income to investors. Broadly lower
income tax rates could reduce the advantage of owning municipal bonds.
<PAGE>

T. ROWE PRICE 8
. Geographical risk The chance of price declines resulting from developments
in a single state.

. A more detailed discussion of these and other risk considerations is
contained in the funds' Statement of Additional Information.

What are the particular risks associated with single-state funds versus those
that invest nationally?

A fund investing within a single state is, by definition, less diversified
geographically than one investing across many states. The risk arises from
the fund's greater exposure to that state's economy and politics, factors
that loom large in establishing the credit quality of bonds issued by the
state and its political subdivisions. For example, general obligation bonds
of a state or locality that has a high income level, reasonable debt levels,
and a positive long-term outlook should have a higher credit rating than
those of a state without those attributes.

Of course, many municipal bonds are not general obligations backed by the
state's "full faith and credit" (its full taxing and revenue raising
resources) and may not rely on any government for money to service their
debt. Bonds issued by governmental authorities may depend wholly on revenues
generated by the project they financed or on other dedicated revenue streams.
The credit quality of these "revenue" bonds may vary significantly from that
of the state's general obligations.

. Significant political and economic developments within a state may have
direct and indirect repercussions on virtually all municipal bonds issued in
the state.

How does the portfolio manager try to reduce risk?

Consistent with each fund's objective, the portfolio manager actively seeks
to reduce risk and increase total return. Risk management tools include:

. Diversification of assets to reduce the impact of a single holding on a
fund's net asset value.

. Thorough credit research by our own analysts.

. Adjustment of fund duration to try to reduce the negative impact of rising
interest rates or take advantage of the benefits of falling rates. (Duration
is a more accurate measure than maturity of a fund's sensitivity to interest
rate changes.)

What is the credit quality of California general obligations?

As of June 1, 1998, the state was rated A1 by Moody's, A+ by Standard &
Poor's, and AA- by Fitch. Both Moody's and Standard & Poor's carry a positive
outlook on the state. Fitch upgraded the state from A+ to AA- in October of

<PAGE>

ABOUT THE FUNDS 9
1997. This upgrade and the positive outlook by the other rating agencies
reflect California's economic improvement and return to financial stability
following the recession of the early 1990s.

Restrictions on taxes and spending, such as Proposition 13 and Article XIIB
of the constitution, have resulted in a broad shift by local governments away
from general obligation debt toward lease revenue financing, which is subject
to annual appropriation and generally does not require voter approval.
Lease-backed debt is generally viewed as a less secure form of borrowing and
therefore entails more credit risk than general obligation borrowing.
California will continue to be exposed to similar initiatives which could put
pressure on the expenditures of the state and local governments and restrict
their ability to raise revenues.

. Credit ratings and the financial and economic conditions of the state, local
governments, public authorities, and others in which each fund may invest are
subject to change at any time.

What about the quality of the funds' other holdings?

In addition to the state's general obligations, the funds will invest a
portion of their assets in securities that are rated according to the
issuer's individual creditworthiness, such as bonds of local governments and
public authorities. While local governments in California depend principally
on their own revenue sources, they could experience budget shortfalls due to
reallocations of tax revenues or responsibilities by the state.

This was the case in the early 1990s as the state struggled to achieve fiscal
balance during the recession. The combination of increasing responsibilities
and declining resources resulted in the downgrades of many large counties and
other local governments during the last seven years.

The funds may invest in certain sectors with special risks, such as health
care, which could be affected by federal or state legislation, electric
utilities with exposure to nuclear power plants, and private activity bonds
without government backing.

Each fund sometimes invests in obligations of the Commonwealth of Puerto Rico
and its public corporations (as well as the U.S. territories of Guam and the
Virgin Islands) that are exempt from federal and California state income
taxes. These investments require careful assessment of certain risk factors,
including reliance on substantial federal assistance and favorable tax
programs that have recently become subject to phaseout by Congress. As of
June 1, 1998, Puerto Rico's general obligations were rated Baa1 by Moody's
and A by Standard & Poor's.
<PAGE>

T. ROWE PRICE 10
. The yield of each fund will fluctuate with changing market conditions and
interest rate levels. A bond fund's share price will also fluctuate; when you
sell your shares, you may lose money.

What are derivatives and can the funds invest in them?

The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella - from conventional instruments, such as callable
bonds, futures, and options, to more exotic investments, such as stripped
mortgage securities and structured notes. While the term "derivative" only
recently became widely known among the investing public, derivatives have in
fact been employed by investment managers for many years.

The money fund does not invest in high-risk, highly leveraged derivatives.
The bond fund will invest in derivatives only if the expected risks and
rewards are consistent with its objective, policies, and overall risk profile
as described in this prospectus. The bond fund uses derivatives in situations
in which they may enable the fund to accomplish the following: increase
yield; hedge against a decline in principal value; invest in eligible asset
classes with greater efficiency and lower cost than is possible through
direct investment; or adjust portfolio duration.

The bond fund will not invest in any high-risk, highly leveraged derivative
instrument that is expected to cause the price volatility of the portfolio to
be meaningfully different from that of a long-term (over 15 year maturity),
investment-grade bond.

The following are some characteristics of municipal securities.

Who issues municipal securities?

State and local governments and governmental authorities sell notes and bonds
(usually called "municipals") to pay for public projects and services.

Who buys municipal securities?

Individuals are the primary investors, and a principal way they invest is
through mutual funds. Prices of municipals may be affected by major changes
in cash flows of money into or out of municipal funds. For example,
substantial and sustained redemptions from municipal bond funds could result
in lower prices for these securities.
<PAGE>

ABOUT THE FUNDS 11
Is interest income from municipal issues always exempt from federal taxes?

No. Since 1986 income from so-called "private activity" municipals has been
subject to the federal alternative minimum tax (AMT). For instance, some
bonds financing airports, stadiums, and student loan programs fall into this
category. Shareholders subject to the AMT must include income derived from
private activity bonds in their AMT calculation. Relatively few taxpayers are
required to pay the tax. Normally, each fund will not purchase any security
if, as a result, more than 20% of the fund's income would be subject to the
AMT. The funds will report annually to shareholders the portion of income, if
any, subject to the AMT. (Please see Distributions and Taxes - Tax
Information.)

. Municipal securities are also called "tax-exempts" because the interest
income they provide is usually exempt from federal income taxes.

Why are yields on municipals usually below those on otherwise comparable
taxable securities?

Since the income provided by most municipals is exempt from federal taxation,
investors are willing to accept lower yields on a municipal bond than on an
otherwise similar (in quality and maturity) taxable bond.

Why are yields on California bonds often below those of comparable issues from
other states?

Strong demand for California securities, due to a relatively high state
income tax rate tends to push their prices up and yields down.

What are the major differences between money market and bond funds?

. Price Bond funds have fluctuating share prices. Money market funds are
managed to maintain a stable share price.

. Maturity Short- and intermediate-term bond funds have longer average
maturities (from one to 10 years) than money market funds (90 days or less).
Longer-term bond funds have the longest average maturities (10 years or
more).

. Income Limited-term bond funds typically offer more income than money market
funds and less income than longer-term bond funds.

You may want to review some fundamentals that apply to all fixed income
investments.

Is a fund's yield fixed or will it vary?

It will vary. The yield is calculated every day by dividing a fund's net
income per share, expressed at annual rates, by the share price. Since both
income and share price will fluctuate, a fund's yield will also vary.
(Although money fund prices are stable, income is variable.)
<PAGE>

T. ROWE PRICE 12
Is a fund's "yield" the same thing as the "total return"?

Not for bond funds. The total return reported for a fund is the result of
reinvested distributions (income and capital gains) and the change in share
price for a given time period. Income is always a positive contributor to
total return and can enhance a rise in share price or serve as an offset to a
drop in share price. Since money funds are managed to maintain a stable share
price, their yield and total return should be the same.

What is "credit quality" and how does it affect a fund's yield?

Credit quality refers to a bond issuer's expected ability to make all
required interest and principal payments in a timely manner. Because highly
rated issuers represent less risk, they can borrow at lower interest rates
than less creditworthy issuers. Therefore, a fund investing in high-quality
securities should have a lower yield than an otherwise comparable fund
investing in lower-credit-quality securities.

What is meant by a bond fund's "maturity"?

Every bond has a stated maturity date when the issuer must repay the bond's
entire principal value to the investor. However, many bonds are "callable,"
meaning their principal can be repaid before their stated maturity dates on
(or after) specified call dates. Bonds are most likely to be called when
interest rates are falling because the issuer can refinance at a lower rate,
just as a homeowner refinances a mortgage. In such an environment, a bond's
"effective maturity" is calculated using its nearest call date. For example,
the effective maturity of mortgage-backed bonds is determined by the rate at
which homeowners pay down the principal on the underlying mortgages.

A bond mutual fund has no maturity in the strict sense of the word, but it
does have an average maturity and an average effective maturity. This number
is an average of the stated or effective maturities of the underlying bonds,
with each bond's maturity "weighted" by the percentage of fund assets it
represents. Funds that target effective maturities would use the effective
(rather than stated) maturities of the underlying instruments when computing
the average. Targeting effective maturity provides additional flexibility in
portfolio management but, all else being equal, could result in higher
volatility than a fund targeting a stated maturity or maturity range.

What is meant by a bond fund's "duration"?

ABOUT THE FUNDS 13
multiplied by the number of years they will be received to produce a value
that is expressed in years, i.e., the duration. Effective duration takes into
account call features and sinking fund payments that may shorten a bond's
life.

Since duration can also be computed for bond funds, you can estimate the
effect of interest rates on a fund's share price. Simply multiply the fund's
duration (available for T. Rowe Price bond funds in our shareholder reports)
by an expected change in interest rates. For example, the price of a bond
fund with a duration of five years would be expected to fall approximately 5%
if rates rose by one percentage point.

How is a municipal's price affected by changes in interest rates?

When interest rates rise, a bond's price usually falls, and vice versa. In
general, the longer a bond's maturity, the greater the price increase or
decrease in response to a given change in interest rates, as shown in Table
6.

<TABLE>
Table 6 How Interest Rates Affect Bond Prices
<CAPTION>
Price per $1,000 of a Municipal Bond if Interest Rates:
Bond Maturity Coupon Increase Decrease
1% 2% 1% 2%
<S> <S> <S> <C> <C> <C> <C> <S>
1 year 1999 3.70% $990 $981 $1,010 $1,020
------------------------------------------------------------
3 years 2001 3.95 972 946 1,029 1,058
------------------------------------------------------------
5 years 2003 4.10 956 915 1,046 1,094
------------------------------------------------------------
10 years 2008 4.40 924 854 1,084 1,177
------------------------------------------------------------
20 years 2018 5.00 884 786 1,137 1,299
------------------------------------------------------------
30 years 2028 5.05 862 752 1,173 1,391
-----------------------------------------------------------------------------------------------
</TABLE>

Coupons reflect yields on AAA-rated municipals as of May 31, 1998. This is an
illustration and does not represent expected yields or share price changes of
any T. Rowe Price fund.

Do money market securities react to changes in interest rates?

Yes. As interest rates change, the prices of money market securities
fluctuate, but changes are usually small because of their very short
maturities. Investments are typically held until maturity in a money fund to
help the fund maintain a $1.00 share price.

How can I decide which California fund is most appropriate for me?

Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. Use Table 5, which summarizes each fund's main
characteristics, to help choose a fund (or funds) for your particular needs.
For example, only the money fund is designed to provide principal stability,
which makes it a good choice for money you may need for near-term or
unexpected
<PAGE>

T. ROWE PRICE 14
expenses. However, if you are investing for the highest possible income and
can tolerate some price fluctuation, you should consider a longer-term bond
fund.

. The fund or funds you select should not represent your complete investment
program nor be used for short-term trading purposes.

Is there other information I need to review before making a decision?

Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the funds may
purchase as well as the types of management practices that the funds may use.
<PAGE>

ABOUT YOUR ACCOUNT
2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
fund.

How and when shares are priced

Bond and money funds
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding. Amortized cost is used to value money fund
securities.

. The various ways you can buy, sell, and exchange shares are explained at the
end of this prospectus and on the New Account Form. These procedures and the
and the information you receive about them may differ for institutional
accounts.

How your purchase, sale, or exchange price is determined

If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.

We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.

Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.

Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.

How you can receive the proceeds from a sale

. When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.

If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your
<PAGE>

T. ROWE PRICE 16
financial institution account. The ACH system is supported by over 20,000
banks, savings banks, and credit unions. Proceeds sent by bank wire should be
credited to your account the next business day.

. Exception: Under certain circumstances and when deemed to be in each fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.

. If for some reason we cannot accept your request to sell shares, we will
contact you.

USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
. All net investment income and realized capital gains are distributed to
shareholders.

Dividends and Other Distributions

Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.

Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the fund reserves the right to
reinvest your distribution check in your account at the NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.

Income dividends

. Money funds declare income dividends daily to shareholders of record as of
12 noon ET on that day. Wire purchase orders received before 12 noon ET
receive the dividend for that day. Other purchase orders receive the dividend
on the next business day after payment has been received.

. Bond funds declare income dividends daily at 4 p.m. ET to shareholders of
record at that time provided payment has been received on the previous
business day.

. Bond and money funds pay dividends on the first business day of each month.

<PAGE>

ABOUT YOUR ACCOUNT 17

. Bond and money fund shares will earn dividends through the date of
redemption; also, shares redeemed on a Friday or prior to a holiday will
continue to earn dividends until the next business day. Generally, if you
redeem all of your shares at any time during the month, you will also receive
all dividends earned through the date of redemption in the same check. When
you redeem only a portion of your shares, all dividends accrued on those
shares will be reinvested, or paid in cash, on the next dividend payment
date.

Capital gains
. Since money funds are managed to maintain a constant share price, they are
not expected to make capital gain distributions.

. A capital gain or loss is the difference between the purchase and sale price
of a security.

. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.

Tax Information

. You will be sent timely information for your tax filing needs.

Although the regular monthly income dividends you receive from each fund are
expected to be exempt from federal and state and local (if any) income taxes,
you need to be aware of the possible tax consequences when:

. You sell fund shares, including an exchange from one fund to another.

. The fund makes a distribution to your account.

Note: You must report your total tax-exempt income on IRS Form 1040. The IRS
uses this information to help determine the tax status of any Social Security
payments you may have received during the year. For shareholders who receive
Social Security benefits, the receipt of tax-exempt interest may increase the
portion of benefits that are subject to tax.

If a fund invests in certain "private activity" bonds, shareholders who are
subject to the alternative minimum tax (AMT) must include income generated by
these bonds in their AMT computation. The portion of your fund's income that
should be included in your AMT calculation, if any, will be reported to you
in January.

Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes. If you realize a
loss on the sale or exchange of fund shares held six months or less, your
capital loss is reduced by the tax-exempt dividends received on those shares.
<PAGE>

T. ROWE PRICE 18

In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."

To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.

Taxes on fund distributions

In January, you will be sent Form 1099-DIV indicating the tax status of any
capital gain distributions made to you. This information will also be
reported to the IRS. A fund's capital gain distributions are generally
taxable to you for the year in which they were paid. Dividends are expected
to be tax-exempt.

The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realized a loss on the sale
or exchange of fund shares which you held six months or less, your short-term
loss will be reclassified to a long-term loss to the extent you received a
long-term capital gain distribution during the period you held the shares.

A portion of the capital gains realized on the sale of market discount bonds
with maturities beyond one year may be treated as ordinary income and cannot
be offset by other capital losses. Therefore, to the extent each fund invests
in these securities, the likelihood of a taxable gain distribution will be
increased.

. Distributions are taxable whether reinvested in additional shares or
received in cash.

Tax effect of buying shares before a capital gain distribution

If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
<PAGE>

ABOUT YOUR ACCOUNT 19
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
. Following these procedures helps assure timely and accurate transactions.

Purchase Conditions

Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by each fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. Each fund and its agents have the right to
reject or cancel any purchase, exchange, or redemption due to nonpayment.

U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.

Sale (Redemption) Conditions

10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the funds will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. If, during the
clearing period, we receive a check drawn against your bond or money market
account, it will be returned marked "uncollected." (The 10-day hold does not
apply to the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)

Telephone, Tele*Access/(R)/, and personal computer transactions

Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
they are not liable for acting on these instructions. If these procedures are
not followed, it is the opinion of certain regulatory agencies that the funds
and their agents may be liable for any losses that may result from acting on
the instructions given. A confirmation is sent promptly after a transaction.
All telephone conversations are recorded.
<PAGE>

T. ROWE PRICE 20
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.

Excessive Trading

. T. Rowe Price may bar excessive traders from purchasing shares.

Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.

. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.

Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a nonmoney fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).

. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.

. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.

Keeping Your Account Open

Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.

Small Account Fee

ABOUT YOUR ACCOUNT 21
will be deducted from accounts with balances below $2,000, except for UGMA/
UTMA accounts, for which the limit is $500. The fee will be waived for any
investor whose aggregate T. Rowe Price mutual fund investments total $25,000
or more. Accounts employing automatic investing (e.g., payroll deduction,
automatic purchase from a bank account, etc.) are also exempt from the
charge. The fee will not apply to IRAs and other retirement plan accounts. (A
separate custodial fee may apply to IRAs and other retirement plan accounts.)

Signature Guarantees

. A signature guarantee is designed to protect you and the T. Rowe Price funds
from fraud by verifying your signature.

You may need to have your signature guaranteed in certain situations, such
as:

. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.

. Remitting redemption proceeds to any person, address, or bank account not on
record.

. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.

. Establishing certain services after the account is opened.

You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>

MORE ABOUT THE FUNDS
3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------

How are the funds organized?

The T. Rowe Price California Tax-Free Income Trust (the "Trust") was
organized in 1986 as a Massachusetts business trust and is a "diversified,
open-end investment company," or mutual fund. Both California funds were
organized in 1986. Mutual funds pool money received from shareholders and
invest it to try to achieve specified objectives.

. Shareholders benefit from T. Rowe Price's 61 years of investment
management experience.

What is meant by "shares"?

As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.

Each share and fractional share entitles the shareholder to:

. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund trustees, changes in fundamental policies, or approval of changes in the
fund's management contract.

Do T. Rowe Price funds have annual shareholder meetings?

The funds are not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, do not intend to do so except when certain
matters, such as a change in a fund's fundamental policies, must be decided.
In addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.

Who runs the funds?
General Oversight

The Trust is governed by a Board of Trustees that elects the Trust's officers
and meets regularly to review the funds' investments, performance, expenses,
and other business affairs. The policy of the Trust is that a majority of
Board members are independent of T. Rowe Price.
<PAGE>

ABOUT YOUR ACCOUNT 23
. All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by each fund's portfolio managers.

Portfolio Management
Each fund has an Investment Advisory Committee whose chairman has day-to-day
responsibility for managing the portfolio and works with the committee in
developing and executing each fund's investment program. The Investment
Advisory Committees comprise the following members:

Money Fund Patrice L. Berchtenbreiter Ely, Chairman, Jeremy N. Baker,
Patricia S. Deford, Joseph K. Lynagh, and Mary J. Miller. Ms. Berchtenbreiter
Ely has been chairman of the fund's committee since 1992. She joined T. Rowe
Price in 1972 and has been managing investments since 1987.

Bond Fund Mary J. Miller, Chairman, Jeremy N. Baker, Patricia S. Deford,
Patrice L. Berchtenbreiter Ely, Joseph K. Lynagh, Konstantine B. Mallas, and
Arthur S. Varnado. Ms. Miller has been chairman of the fund's committee since
1990. She joined T. Rowe Price in 1983 and has been managing investments
since 1987.

Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of these and all other T. Rowe Price funds.

Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as each
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. The address for each is 100 East Pratt St.,
Baltimore, MD 21202.

How are fund expenses determined?

The management agreement spells out the expenses to be paid by each fund. In
addition to the management fee, the funds pay for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.

The funds paid the expenses shown in Table 7 for the fiscal year ended
February 28, 1998.

<TABLE>
Table 7 Services Fees Paid to T. Rowe Price Service
Companies
<CAPTION>
<S> <S> <C> <C> <S>
Fund Transfer Agent Accounting
Money $ 60,000 $ 67,000
----------------------------------------
Bond 89,000 73,000
-----------------------------------------------------------------
</TABLE>

<PAGE>

T. ROWE PRICE 24
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.

<TABLE>
Group Fee Schedule
<CAPTION>
<S> <S> <S> <S>
0.334% First $50 billion/a/
---------------------------------------------------------------------
0.305% Next $30 billion
---------------------------------------------------------------------
0.300% Thereafter
- ------------------------------------------------------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break
points.
</TABLE>

Each fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $85 billion
at March 31, 1998, the group fee was 0.32%.

UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.

Total Return

This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.

Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
<PAGE>

MORE ABOUT THE FUNDS 25
Cumulative Total Return

This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.

Average Annual Total Return

This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.

Yield

The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the net asset
value. For example, a fund providing $5 of annual income per share and a
price of $50 has a current yield of 10%. Yields can be calculated for any
time period.

The money fund may advertise a "current" yield, reflecting the latest
seven-day income annualized, or an "effective" yield, which assumes the
income has been reinvested in the fund.

For the bond fund, the advertised or "SEC" yield is found by determining the
net income per share (as defined by the SEC) earned by a fund during a 30-day
base period and dividing this amount by the per share price on the last day
of the base period. The SEC yield may differ from the dividend yield.

INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
funds may hold in their portfolios and the various kinds of investment
practices that may be used in day-to-day portfolio management. Each fund's
investment program is subject to further restrictions and risks described in
the Statement of Additional Information.

T. ROWE PRICE 26
investment restrictions and policies at the time it makes an investment. A
later change in circumstances will not require the sale of an investment if
it was proper at the time it was made.

The funds' holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, the bond fund is not permitted to invest more than 10% of total
assets in residual interest bonds. While these restrictions provide a useful
level of detail about the fund's investment programs, investors should not
view them as an accurate gauge of the potential risk of such investments. For
example, in a given period, a 5% investment in residual interest bonds could
have significantly more of an impact on a fund's share price than its
weighting in the portfolio. The net effect of a particular investment depends
on its volatility and the size of its overall return in relation to the
performance of all the funds' other investments.

Changes in the funds' holdings, the funds' performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.

. Fund managers have considerable leeway in choosing investment strategies and
selecting securities they believe will help each fund achieve its objective.

Types of Portfolio Securities

In seeking to meet its investment objective, each fund may invest in any type
of municipal security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with its investment program. The following pages describe the
principal types of portfolio securities and investment management practices
of the funds.

Fundamental policy Each fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer, or if more than 10% of
the outstanding voting securities of the issuer would be held by each fund.
These limitations do not apply to a fund's purchase of securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.

Operating policy (money fund only) Except as permitted by Rule 2a-7 under the
Investment Company Act of 1940, the money fund will not purchase a security
if, as a result, more than 5% of its total assets would be invested in
securities of a single issuer. Under Rule 2a-7, the 5% limit, among other
things, does not apply to purchases of U.S. government securities or
securities subject to certain types of guarantees. Additionally, the fund may
invest up to 25% of its total assets in the first tier securities (as defined
by Rule 2a-7) of a single issuer for a period of up to three business days.

<PAGE>

MORE ABOUT THE FUNDS 27
Municipal Securities
Each fund's assets are invested primarily in various tax-free municipal debt
securities. The issuers have a contractual obligation to pay interest at a
stated rate on specific dates and to repay principal (the bond's face value)
on a specified date or dates. An issuer may have the right to redeem or
"call" a bond before maturity, and the funds may have to reinvest the
proceeds at lower rates.

There are two broad categories of municipal bonds. General obligation bonds
are backed by the issuer's "full faith and credit," that is, its full taxing
and revenue raising power. Revenue bonds usually rely exclusively on a
specific revenue source, such as charges for water and sewer service, to
generate money for debt service.

. In purchasing municipals, the funds rely on the opinion of the issuer's bond
counsel regarding the tax-exempt status of the investment.

Private Activity Bonds and Taxable Securities
While income from most municipals is exempt from federal income taxes, the
income from certain types of so-called private activity bonds (a type of
revenue bond) may be subject to the alternative minimum tax (AMT). However,
only persons subject to the AMT pay this tax. Private activity bonds may be
issued for purposes such as housing or airports or to benefit a private
company. (Being subject to the AMT does not mean the investor necessarily
pays this tax. For further information, please see Distributions and Taxes.)

Fundamental policy Under normal market conditions, each fund will not
purchase any security if, as a result, less than 80% of the fund's income
would be exempt from federal and California state income taxes. The income
included under the 80% test does not include income from securities subject
to the alternative minimum tax.

Operating policy During periods of abnormal market conditions, for temporary
defensive purposes, the funds may invest without limit in high-quality,
short-term securities whose income is subject to federal and California state
income tax.

In addition to general obligation and revenue bonds, the funds' investments
may include, but are not limited to, the following types of securities:

T. ROWE PRICE 28
condition of the borrower, the merits of the project, the level of public
support for the project, and the legislative history of lease financing in
the state. These securities may be less readily marketable than other
municipals. The funds may also purchase unrated lease obligations.

Municipal Warrants (bond fund)
Municipal warrants are essentially call options on municipal bonds. In
exchange for a premium, they give the purchaser the right, but not the
obligation, to purchase a municipal bond in the future. The bond funds might
purchase a warrant to lock in forward supply in an environment where the
current issuance of bonds is sharply reduced. Like options, warrants may
expire worthless and they may have reduced liquidity.

Operating policy The bond fund may invest up to 2% of its total assets in
municipal warrants.

Securities With "Puts" or Other Demand Features

Some longer-term municipals give the investor the right to "put" or sell the
security at par (face value) within a specified number of days following the
investor's request - usually one to seven days. This demand feature enhances
a security's liquidity by shortening its effective maturity and enables it to
trade at a price equal to or very close to par. The money fund typically
purchases a significant number of these securities. If a demand feature
terminates prior to being exercised, the funds may be forced to hold the
longer-term security, which could experience substantially more volatility.

Securities With Credit Enhancements
. Letters of credit Letters of credit are issued by a third party, usually a
bank, to enhance liquidity and ensure repayment of principal and any accrued
interest if the underlying municipal security should default.

. T. Rowe Price periodically reviews the credit quality of the insurer.

. Municipal Bond Insurance This insurance, which is usually purchased by the
bond issuer from a private, nongovernmental insurance company, provides an
unconditional and irrevocable guarantee that the insured bond's principal and
interest will be paid when due. Insurance does not guarantee the price of the
bond or the share price of any fund. The credit rating of an insured bond
reflects the credit rating of the insurer, based on its claims-paying
ability.

MORE ABOUT THE FUNDS 29
rate could strain the insurer's loss reserves and adversely affect its
ability to pay claims to bondholders, such as the funds. The number of
municipal bond insurers is relatively small, and not all of them have the
highest rating.

. Standby Purchase Agreements A Standby Bond Purchase Agreement (SBPA) is a
liquidity facility provided to pay the purchase price of bonds that cannot be
remarketed. The obligation of the liquidity provider (usually a bank) is only
to advance funds to purchase tendered bonds that cannot be remarketed and
does not cover principal or interest under any other circumstances. The
liquidity provider's obligations under the SBPA are usually subject to
numerous conditions, including the continued creditworthiness of the
underlying borrower.

Synthetic or Derivative Securities
These securities are created from existing municipal bonds:

. Residual Interest Bonds (bond fund) (These are a type of potentially
high-risk derivative.) The income stream provided by an underlying bond is
divided to create two securities, one short term and one long term. The
interest rate on the short-term component is reset by an index or auction
process normally every seven to 35 days. After income is paid on the
short-term securities at current rates, the residual income goes to the
long-term securities. Therefore, rising short-term interest rates result in
lower income for the longer-term portion, and vice versa. The longer-term
bonds can be very volatile and may be less liquid than other municipals of
comparable maturity. The funds will invest only in securities deemed
tax-exempt by a nationally recognized bond counsel, but there is no guarantee
the interest will be exempt because the IRS has not issued a definitive
ruling on the matter.

Operating policy The bond fund may invest up to 10% of its total assets in
residual interest bonds.

. Participation Interests This term covers various types of securities created
by converting fixed rate bonds into short-term, variable rate certificates.
These securities have been developed in the secondary market to meet the
demand for short-term, tax-exempt securities. The funds will invest only in
securities deemed tax-exempt by a nationally recognized bond counsel, but
there is no guarantee the interest will be exempt because the IRS has not
issued a definitive ruling on the matter.

T. ROWE PRICE 30
short-term rates remain below the fixed interest rate swap rate. If
short-term rates rise above the fixed income swap rate, the bondholder's
income is reduced. At the end of the interest rate swap term, the bond
reverts to a single fixed coupon payment.

Both instruments may be volatile and of limited liquidity, and their use may
adversely affect a fund's total return.

Operating policy The bond fund may invest up to 10% of its total assets in
embedded interest rate swaps and caps.

Private Placements
Each fund may seek to enhance its yield through the purchase of private
placements. These securities are sold through private negotiations, usually
to institutions or mutual funds, and may have resale restrictions. Their
yields are usually higher than comparable public securities to compensate the
investor for their limited marketability.

Operating policy The bond fund may invest up to 15% (10% for the money fund)
of its net assets in illiquid securities, including unmarketable private
placements.

Types of Management Practices

Reserve Position (bond fund)
The fund will hold a portion of its assets in short-term, tax-exempt money
market securities maturing in one year or less. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments; can help in structuring the fund's weighted average maturity;
and serves as a short-term defense during periods of unusual market
volatility. The fund's reserve position can consist of shares of one or more
T. Rowe Price internal money market funds as well as short-term,
investment-grade securities, including tax-exempt commercial paper, municipal
notes, and short-term maturity bonds. Some of these securities may have
adjustable, variable, or floating rates. For temporary, defensive purposes,
the fund may invest without limitation in money market reserves.

MORE ABOUT THE FUNDS 31
value to its commitment for these securities. Each fund does not earn
interest on when-issued and forward securities until settlement, and the
value of the securities may fluctuate between purchase and settlement.
Municipal "forwards" typically carry a substantial yield premium to
compensate the buyer for their greater interest rate, credit, and liquidity
risks.

Interest Rate Futures (bond fund)
Futures (a type of potentially high-risk derivative) are often used to manage
risk because they enable the investor to buy or sell an asset in the future
at an agreed-upon price. Specifically, the funds may use futures (and options
on futures) for any number of reasons, including: to hedge against a
potentially unfavorable change in interest rates and to adjust their exposure
to the municipal bond market; to protect portfolio value; in an effort to
enhance income; and to adjust portfolio duration. The use of futures for
hedging and non-hedging purposes may not always be successful. Their prices
can be highly volatile, using them could lower a fund's total return, and the
potential loss from their use could exceed a fund's initial exposure to such
contracts.

Operating policy Initial margin deposits on futures and premiums on options
used for non-hedging purposes may equal up to 5% of a bond fund's net asset
value.

Borrowing Money and Transferring Assets
Each fund can borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with each fund's investment objective and program. Such borrowings may be
collateralized with fund assets, subject to restrictions.

Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.

Operating policy Each fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
fund's total assets. Each fund may not purchase additional securities when
borrowings exceed 5% of total assets.

Portfolio Turnover (bond fund)

The fund generally purchases securities with the intention of holding them
for investment; however, when market conditions or other circumstances
warrant, securities may be purchased and sold without regard to the length of
time held. Due to the nature of the fund's investment program, the fund's
portfolio turnover rate may exceed 100%. Although the fund does not expect to
generate any taxable income, a high turnover rate may increase transaction
costs and may affect taxes paid by shareholders to the extent short-term
gains are distributed. The bond fund's portfolio turnover rates for the
fiscal years ending February 28, 1998, 1997, and 1996, were 35.0%, 47.3%, and
61.9%, respectively.
<PAGE>

T. ROWE PRICE 32
Sector Concentration
It is possible that each fund could have a considerable amount of assets (25%
or more) in securities that would tend to respond similarly to particular
economic or political developments. An example would be securities of issuers
related to a single industry, such as health care or nuclear energy.

Operating policy Each fund may invest up to 25% of total assets in industrial
development bonds of projects in the same industry (such as solid waste,
nuclear utility, or airlines). Bonds which are refunded with escrowed U.S.
government securities are not subject to the 25% limitation.

Credit-Quality Considerations

The credit quality of most bond issues is evaluated by rating agencies such
as Moody's and Standard & Poor's on the basis of the issuer's ability to meet
all required interest and principal payments. The highest ratings are
assigned to issuers perceived to be the best credit risks. T. Rowe Price
research analysts also evaluate all portfolio holdings of each fund,
including those rated by outside agencies. Other things being equal,
lower-rated bonds have higher yields due to greater risk.

Table 8 shows the rating scale used by the major rating agencies, and Table 9
provides an explanation of quality ratings. T. Rowe Price considers publicly
available ratings but emphasizes its own credit analysis when selecting
investments.

<TABLE>
Table 8 Ratings of Municipal Debt Securities
<CAPTION>
<S> <S> <S> <S> <S> <S> <S> <S> <S> <S> <S> <S> <S>
Moody's Standard & Fitch
Investors Poor's Investors
Service, Inc. Corporation Service, Inc. Definition
Long Term Aaa AAA AAA Highest quality
----------------------------------------------------------------------------------------------------------
Aa AA AA High quality
----------------------------------------------------------------------------------------------------------
A A A Upper medium grade
----------------------------------------------------------------------------------------------------------
Baa BBB BBB Medium grade
Moody's S&P Fitch
Short Term MIG1/VMIG1 Best quality SP1+ Very strong quality F-1+ Exceptionally strong quality
SP1 Strong grade F-1 Very strong quality
----------------------------------------------------------------------------------------------------------
MIG2/VMIG2 High quality SP2 Satisfactory grade F-2 Good credit quality
----------------------------------------------------------------------------------------------------------
Commercial P-1 Superior quality A-1+ Extremely strong quality F-1+ Exceptionally strong quality
Paper A-1 Strong quality F-1 Very strong quality
----------------------------------------------------------------------------------------------------------
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

MORE ABOUT THE FUNDS 33
<TABLE>
Table 9 Explanation of Quality Ratings
<CAPTION>
<S> <C> <S> <S> <S>
Bond
Rating Explanation
Moody's Investors Aaa Highest quality, smallest degree of
Service, Inc. investment risk.
------------------------------------------------
Aa High quality; together with Aaa
bonds, they compose the high-grade
bond group.
------------------------------------------------
A Upper-medium-grade obligations; many
favorable investment attributes.
------------------------------------------------
Baa Medium-grade obligations; neither
highly protected nor poorly secured.
Interest and principal appear
adequate for the present, but certain
protective elements may be lacking or
may be unreliable over any great
length of time.
------------------------------------------------
Ba More uncertain with speculative
elements. Protection of interest and
principal payments not well
safeguarded in good and bad times.
------------------------------------------------
B Lack characteristics of desirable
investment; potentially low assurance
of timely interest and principal
payments or maintenance of other
contract terms over time.
------------------------------------------------
Caa Poor standing, may be in default;
elements of danger with respect to
principal or interest payments.
------------------------------------------------
Ca Speculative in high degree; could be
in default or have other marked
shortcomings.
------------------------------------------------
C Lowest rated. Extremely poor
prospects of ever attaining
investment standing.
------------------------------------------------
Standard & Poor's AAA Highest rating; extremely strong
Corporation capacity to pay principal and
interest.
------------------------------------------------
AA High quality; very strong capacity to
pay principal and interest.
------------------------------------------------
A Strong capacity to pay principal and
interest; somewhat more susceptible
to the adverse effects of changing
circumstances and economic
conditions.
------------------------------------------------
BBB Adequate capacity to pay principal
and interest; normally exhibit
adequate protection parameters, but
adverse economic conditions or
changing circumstances more likely to
lead to weakened capacity to pay
principal and interest than for
higher-rated bonds.
------------------------------------------------
BB, B, Predominantly speculative with
CCC, CC respect to the issuer's capacity to
meet required interest and principal
payments. BB - lowest degree of
speculation;
CC - the highest degree of
speculation. Quality and protective
characteristics outweighed by large
uncertainties or major risk exposure
to adverse conditions.
------------------------------------------------
D In default.
------------------------------------------------
Fitch Investors AAA Highest quality; obligor has
Service, Inc. exceptionally strong ability to pay
interest and repay principal, which
is unlikely to be affected by
reasonably foreseeable events.
------------------------------------------------
AA Very high quality; obligor's ability
to pay interest and repay principal
is very strong. Because bonds rated
in the AAA and AA categories are not
significantly vulnerable to
foreseeable future developments,
short-term debt of these issuers is
generally rated F-1+.
------------------------------------------------
A High quality; obligor's ability to
pay interest and repay principal is
considered to be strong, but may be
more vulnerable to adverse changes in
economic conditions and circumstances
than higher-rated bonds.
------------------------------------------------
BBB Satisfactory credit quality;
obligor's ability to pay interest and
repay principal is considered
adequate. Unfavorable changes in
economic conditions and circumstances
are more likely to adversely affect
these bonds and impair timely
payment. The likelihood that the
ratings of these bonds will fall
below investment grade is higher than
for higher-rated bonds.
------------------------------------------------
BB, Not investment grade; predominantly
CCC, speculative with respect to the
CC, C issuer's capacity to repay interest
and repay principal in accordance
with the terms of the obligation for
bond issues not in default. BB is the
least speculative. C is the most
speculative.
------------------------------------------------------------------------------
</TABLE>

<PAGE>

T. ROWE PRICE 34

Year 2000 Processing Issue

Many computer programs use two digits rather than four to identify the year.
These programs, if not adapted, will not correctly handle the change from
"99" to "00" on January 1, 2000, and will not be able to perform necessary
functions. The Year 2000 issue affects virtually all companies and
organizations.

T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.

Companies, organizations, or governmental entities in which T. Rowe Price
funds invest could be affected by the Year 2000 issue, but at this time the
funds cannot predict the degree of impact. To the extent the effect on a
portfolio holding is negative, a fund's returns could be reduced.
<PAGE>

INVESTING WITH T. ROWE PRICE
4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.

Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.

Institutional Accounts
Transaction procedures in the following sections may not apply to institutional
accounts. For institutional account procedures, please call your designated
account manager or service representative.

OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for gifts or transfers to minors
(UGMA/UTMA) accounts

Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)

By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept third-party checks
to open new accounts.

Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
<PAGE>

T. ROWE PRICE 36
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117

By Wire
Call Investor Services for an account number and give the following wire
information to your bank:

PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number

Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.

Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received.

By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Shareholder Services). The new account will have the
same registration as the account from which you are exchanging. Services for the
new account may be carried over by telephone request if preauthorized on the
existing account. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.

In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.

PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for Automatic Asset Builder and gifts or
transfers to minors (UGMA/ UTMA) accounts

By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.

By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
<PAGE>

INVESTING WITH T. ROWE PRICE 37
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).

2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.

3. Remember to provide your account number and the fund name on the memo line of
your check.

Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500

(For mailgrams, express, registered, or certified mail, see previous section.)

By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.

EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------

Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.) Some of the
T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on shares held for
less than six months or one year, as specified in the prospectus. The fee is
paid to the fund.

By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>

T. ROWE PRICE 38
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.

By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address in the next paragraph. T. Rowe Price requires the
signatures of all owners exactly as registered, and possibly a signature
guarantee (see Transaction Procedures and Special Requirements - Signature
Guarantees).

Regular Mail
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220

Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Boulevard Owings Mills, MD 21117

RIGHTS RESERVED BY THE FUND
----------------------------------------------------------

The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
<PAGE>

INVESTING WITH T. ROWE PRICE 39
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308

Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.

Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.

Retirement Plans

We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.

Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers on the next page).

T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.

After obtaining proper authorization, account transactions may also be conducted
on the Internet.
<PAGE>

T. ROWE PRICE 40
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.

Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.

Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.

By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.

Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.

Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:

Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.

Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
<PAGE>

INVESTING WITH T. ROWE PRICE 41
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720

This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:

Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for stock trades when
you trade through Internet-Trader.

Note: Subject to a $35 minimum commission for all trades except stock trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.

Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.

Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.

Discount Brokerage is a division of T. Rowe Price Investment Services, Inc.,
Member NASD/SIPC.
<PAGE>

T. ROWE PRICE 42
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.

Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.

The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.

Performance Update
A 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 T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.

<PAGE>

INVESTING WITH T. ROWE PRICE 43
<PAGE>

T. ROWE PRICE 44
<PAGE>

To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308

For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500

For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days

To Open a Discount Brokerage Account
1-800-638-5660

Investor Centers
101 East Lombard St.
Baltimore, MD 21202

T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117

Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006

ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071

4200 West Cypress St.
10th Floor
Tampa, FL 33607

Internet Address
www.troweprice.com

(LOGO)

C05-040 7/1/98

<PAGE>

PROSPECTUS

July 1, 1998
Florida Insured Intermediate Tax-Free Fund

A bond fund for investors seeking income exempt from federal income taxes and
principal exempt from the Florida intangibles tax.

(T. ROWE PRICE RAM LOGO)
T. Rowe Price
<PAGE>

FACTS AT A GLANCE
Florida Insured Intermediate Tax-Free Fund

Investment Goal

The highest level of income exempt from federal income taxes consistent with
the fund's investment program. An investment in this fund is also expected to
be exempt from Florida's intangibles property tax.

As with all mutual funds, the fund may not meet its goal.

Strategy
Invests primarily in high-quality, insured Florida municipal bonds whose
interest and principal payments are guaranteed by private insurance companies.
The fund's average maturity is expected to be between five and 10 years.

Risk/Reward

Higher income than a short-term municipal bond fund but also greater potential
for share price declines when interest rates rise. Insurance does not guarantee
the value of portfolio holdings, which will rise and fall in response to market
conditions. (See discussion on insurance in the section entitled Investment
Policies and Practices.)

Investor Profile
Florida taxpayers who, because of their tax bracket, can benefit from income
that is exempt from federal income taxes and from investments whose principal
is exempt from the state's intangibles property tax. Not appropriate for
tax-deferred retirement plans, such as IRAs.

Fees and Charges

100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.

Investment Manager

CONTENTS
1
ABOUT THE FUND

Transaction and Fund Expenses 2
Financial Highlights 3
Fund, Market, and Risk Characteristics 4
2
ABOUT YOUR ACCOUNT

Pricing Shares and Receiving Sale Proceeds 12
Distributions and Taxes 13
Transaction Procedures and Special Requirements 16
3
MORE ABOUT THE FUND

Organization and Management 19
Understanding Performance Information 21
Investment Policies and Practices 22
4
INVESTING WITH T. ROWE PRICE

Account Requirements and Transaction Information 32
Opening a New Account 32
Purchasing Additional Shares 33
Exchanging and Redeeming 34
Rights Reserved by the Fund 35
Shareholder Services 36
Discount Brokerage 38
Investment Information 39
T. Rowe Price State Tax-Free Income Trust
Prospectus

July 1, 1998

This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated July 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.

ABOUT THE FUND
1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
. Like all T. Rowe Price funds, this fund is 100% no load.

These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.

Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it would cost to operate the fund for a year, based on 1998 fiscal year
expenses (and any applicable expense limitations). These are costs you pay
indirectly because they are deducted from the fund's total assets before the
daily share price is calculated and before dividends and other distributions
are made. In other words, you will not see these expenses on your account
statement.

<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <S> <S> <C> <S>
Percentage of Fiscal
Shareholder Transaction Annual Fund Expenses 1998
Expenses (after reduction) Average Net Assets
Sales charge "load" None Management fee 0.36%
on purchases /a/
------ ---------------------------
Sales charge "load"
on reinvested None Marketing fees (12b-1) None
distributions
------ ---------------------------
Total other
(shareholder
Redemption fees None servicing, custodial, 0.24%
auditing, etc.)
------ ---------------------------
Exchange fees None Total fund expenses 0.60%
/a/
--------------------------------------------------------------------------------------
</TABLE>

/a
/To limit the fund's expenses, T. Rowe Price agreed to waive its fees and bear
any expenses from March 1, 1995 through February 28, 1997, which would cause
the fund's ratio of expenses to average net assets to exceed 0.60%. Effective
March 1, 1997, T. Rowe Price agreed to extend this expense limitation for a
period of two years through February 28, 1999. Fees waived or expenses paid or
assumed under these agreements are subject to reimbursement to T. Rowe Price
by the fund whenever the fund's expense ratio is below 0.60%; however, no
reimbursement will be made after February 28, 1999 (for the first agreement),
or February 28, 2001 (for the second agreement), or if it would result in the
expense ratio exceeding 0.60%. Any amounts reimbursed will have the effect of
increasing fees otherwise paid by the fund. Without this expense limitation,
it is estimated that the fund's management fee, and total expense ratio would
have been 0.37%, and 0.61%, respectively.

Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).

The main types of expenses, which all mutual funds may charge against fund
assets, are:

. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of February 28, 1998,
and an individual fund fee of 0.05%.
<PAGE>

ABOUT THE FUND 3

. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.

For further details on fund expenses, please see Organization and Management.

<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<S> <S> <S> <S> <S> <S>
1 year 3 years 5 years 10 years
$6 $19 $33 $75
------------------------------------------------------------------
</TABLE>

. Table 2 is just an example; actual expenses can be higher or lower than
those shown.

FINANCIAL HIGHLIGHTS
----------------------------------------------------------

Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are legally regarded as part of the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Coopers & Lybrand L.L.P., the fund's independent
accountants.

1994/a/ $10.00 $0.37/b/ $ 0.31 $0.68 $(0.37) $(0.01) $(0.38) $10.30
--------------------------------------------------------------------------------------------------------------
1995 10.30 0.43/b/ (0.14) 0.29 (0.43) (0.02) (0.45) 10.14
--------------------------------------------------------------------------------------------------------------
1996/d/ 10.14 0.47/b/ 0.47 0.94 (0.47) - (0.47) 10.61
--------------------------------------------------------------------------------------------------------------
1997 10.61 0.46/b/ (0.07) 0.39 (0.46) (0.02) (0.48) 10.52
--------------------------------------------------------------------------------------------------------------
1998 10.52 0.46/b/ 0.23 0.69 (0.46) - (0.46) 10.75
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

Footnotes appear on next page. (continued on next page)
<PAGE>

T. ROWE PRICE 4

1994/a/ 6.84%/b/ $37,868 0.60%/bc/ 3.57%/bc/ 70.6%/c/
--------------------------------------------------------------------------------------------------
1995 3.01/b/ 51,922 0.60/b/ 4.38/b/ 140.5
--------------------------------------------------------------------------------------------------
1996/d/ 9.41/b/ 67,260 0.60/b/ 4.47/b/ 98.7
--------------------------------------------------------------------------------------------------
1997 3.81/b/ 78,783 0.60/b/ 4.39/b/ 75.8
--------------------------------------------------------------------------------------------------
1998 6.71/b/ 90,941 0.60/b/ 4.35/b/ 25.0
-----------------------------------------------------------------------------------------------------------------
</TABLE>

/a/For the period March 31, 1993 (commencement of operations) to February 28,
1994.

/b
/Excludes expenses in excess of a 0.60% voluntary expense limitation in effect
through February 28, 1999.

/c/Annualized.

/d/Period ended February 29.

FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.

What is the fund's objective and investment program?

The fund's investment objective is to provide a high level of income exempt
from federal income taxes while minimizing credit risk by investing primarily
in insured Florida municipal bonds. The fund invests primarily in
high-quality, AAA-rated bonds that are insured as to timely interest and
principal payment. The fund's dollar-weighted average maturity is expected to
vary between five and 10 years. An investment in the fund is expected to be
exempt from the Florida intangibles personal property tax. (For a detailed
discussion of this tax and the fund's eligibility for exemption, please see
Useful Information on Distributions and Taxes.)

Due to seasonal variations or shortages in the supply of suitable Florida
securities, and when deemed by T. Rowe Price to be in the fund's best
interest, the fund may invest up to 35% of its net assets in a fiscal year in
municipal securities that are not exempt from the Florida intangibles
property tax. Every effort will be made to minimize such investments.

. It is expected that the fund's income will be exempt from federal income
taxes, and its principal exempt from the state's intangibles property tax.
<PAGE>

ABOUT THE FUND 5
What are the fund's credit-quality guidelines?

At least 65% of total assets will consist of insured Florida municipal bonds
carrying the highest credit rating (AAA) from a national rating organization
(Standard & Poor's Corporation, Moody's Investors Service, Inc., or a similar
service). The fund may invest up to 35% of its assets in high-quality
municipal securities rated AA (Aa) or higher, or, if unrated, believed to be
of a comparable quality. Up to 5% of the fund's assets may be invested in
upper-medium-quality A-rated bonds. The fund will not invest in any bond
rated below A at the time of purchase.

The insured bonds purchased by the fund will, at the time of purchase, carry
the highest credit rating available from a national rating agency. Insurance,
which is provided by private (nongovernmental) insurers, guarantees the
timely payment of principal and interest on the insured bond, not their
market value or the value of the fund's shares.

. At its discretion, the fund may retain a security whose credit quality is
downgraded after purchase.

What are the main risks of investing in municipal bond funds?

The fund's intermediate-term maturity structure should help reduce interest
rate risk because shorter-term bonds are less sensitive to rising interest
rates than long-term bonds. There is, however, no limitation on the maturity
of individual securities in the fund's portfolio. Credit risk should be
reduced by the extra protection provided by municipal bond insurance. (For
more discussion of municipal bond insurance, please see Investment Policies
and Practices.)

The following could cause a decline in a bond fund's price or income:

. Interest rate or market risk The decline in bond prices that accompanies a
rise in the overall level of interest rates (please see Table 4).

. Credit risk The chance that any of a fund's holdings will have its credit
rating downgraded or will default (fail to make scheduled interest or
principal payments), potentially reducing the fund's income level and share
price.

. Geographical risk The chance of price declines resulting from developments
in a single state.
<PAGE>

T. ROWE PRICE 6
. A more detailed discussion of these and other risk considerations is
contained in the fund's Statement of Additional Information.

What are the particular risks associated with single-state funds versus those
that invest nationally?

. Significant political and economic developments within a state may have
direct and indirect repercussions on virtually all municipal bonds issued in
the state.

How does the portfolio manager try to reduce risk?

Consistent with the fund's objective, the portfolio manager actively seeks to
reduce risk and increase total return. Risk management tools include:

. Diversification of assets to reduce the impact of a single holding on the
fund's net asset value.

. Thorough credit research by our own analysts.

What is the credit quality of Florida general obligations?

As of June 1, 1998, the state was rated Aa2 by Moody's, AA+ by Standard &
Poor's, and AA by Fitch. The Florida constitution and statutes mandate that
the state budget be kept in balance. The state's revenue structure is
narrowly based, relying heavily on the sales and use tax. Florida's financial
performance has improved over the last several years, supported by
above-average economic
<PAGE>

ABOUT THE FUND 7
growth. However, the demand for governmental services will continue to grow
because of population growth and state demographics and during a future
economic slowdown, could strain state finances.

. Credit ratings and the financial and economic conditions of the state, local
governments, public authorities, and others in which the fund may invest are
subject to change at any time.

What about the quality of the fund's other holdings?

In addition to the state's general obligations, the fund will invest a
significant portion of assets in bonds that are rated according to the
issuer's individual creditworthiness, such as notes and bonds of local
governments and public authorities. While local governments in Florida depend
principally on their own revenue sources, they could experience budget
shortfalls due to cutbacks in state aid.

The fund may invest in certain sectors with special risks-for example, health
care, which could be affected by federal or state legislation; electric
utilities with exposure to nuclear power plants; and private activity bonds
without governmental backing.

The fund sometimes invests in obligations of the Commonwealth of Puerto Rico
and its public corporations (as well as the U.S. territories of Guam and the
Virgin Islands) that are exempt from federal and Florida income taxes. These
investments require careful assessment of certain risk factors, including
reliance on substantial federal assistance and favorable tax programs that
have recently become subject to phaseout by Congress. As of June 1, 1998,
Puerto Rico's general obligations were rated Baa1 by Moody's and A by
Standard & Poor's.

. The share price and yield of the fund will fluctuate with changing market
conditions and interest rate levels. When you sell your shares, you may lose
money.

What are derivatives and can the fund invest in them?

The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella -from conventional instruments, such as callable
bonds, futures, and options, to more exotic investments, such as stripped
mortgage securities and structured notes. While the term "derivative" only
recently became widely known among the investing public, derivatives have in
fact been employed by investment managers for many years.

T. ROWE PRICE 8
enable the fund to accomplish the following: increase yield; hedge against a
decline in principal value; invest in eligible asset classes with greater
efficiency and lower cost than is possible through direct investment; or
adjust fund duration.

The fund will not invest in any high-risk, highly leveraged derivative
instrument that is expected to cause the price volatility of the portfolio to
be meaningfully different from that of an intermediate-term investment-grade
bond.

The following are some characteristics of municipal securities.

Who issues municipal securities?

State and local governments and governmental authorities sell notes and bonds
(usually called "municipals") to pay for public projects and services.

Who buys municipal securities?

Is interest income from municipal issues always exempt from federal taxes?

No. Since 1986 income from so-called "private activity" municipals has been
subject to the federal alternative minimum tax (AMT). For instance, some
bonds financing airports, stadiums, and student loan programs fall into this
category. Shareholders subject to the AMT must include income derived from
private activity bonds in their AMT calculation. Relatively few taxpayers are
required to pay the tax. Normally, the fund will not purchase any security
if, as a result, more than 20% of the fund's income would be subject to the
AMT. The fund will report annually to shareholders the portion of income, if
any, subject to the AMT. (Please see Distributions and Taxes - Tax
Information.)

. Municipal securities are also called "tax-exempts" because the interest
income they provide is usually exempt from federal income taxes.

Why are yields on municipals usually below those on otherwise comparable
taxable securities?

Since the income provided by most municipals is exempt from federal taxation,
investors are willing to accept lower yields on a municipal bond than on an
otherwise similar taxable bond. In addition, Florida investors may accept a
lower yield on Florida securities because their principal is exempt from the
Florida intangibles personal property tax.
<PAGE>

ABOUT THE FUND 9
Why are yields on Florida bonds often below those of comparable issues from
other states?

Strong demand for Florida securities tends to push their prices up and yields
down.

You may want to review some fundamentals that apply to all fixed income
investments.

Is a fund's yield fixed or will it vary?

Is a fund's "yield" the same thing as the "total return"?

What is "credit quality" and how does it affect a fund's yield?

What is meant by a bond fund's "maturity"?

T. ROWE PRICE 10
effective maturity provides additional flexibility in portfolio management
but, all else being equal, could result in higher volatility than a fund
targeting a stated maturity or maturity range.

What is meant by a bond fund's "duration"?

Duration is a calculation that seeks to measure the price sensitivity of a
bond or a bond fund to changes in interest rates. It measures bond price
sensitivity to interest rate changes more accurately than maturity because it
takes into account the time value of cash flows generated over the bond's
life. Future interest and principal payments are discounted to reflect their
present value and then are multiplied by the number of years they will be
received to produce a value that is expressed in years, i.e., the duration.
Effective duration takes into account call features and sinking fund payments
that may shorten a bond's life.

How is a municipal's price affected by changes in interest rates?

ABOUT THE FUND 11

<TABLE>
Table 4 How Interest Rates Affect Bond Prices
<CAPTION>
Price per $1,000 of a Municipal Bond if Interest Rates:
Bond Maturity Coupon Increase Decrease
1% 2% 1% 2%
<S> <S> <S> <C> <C> <C> <C> <S>
1 year 1999 3.70% $990 $981 $1,010 $1,020
------------------------------------------------------------
3 years 2001 3.95 972 946 1,029 1,058
------------------------------------------------------------
5 years 2003 4.10 956 915 1,046 1,094
------------------------------------------------------------
10 years 2008 4.40 924 854 1,084 1,177
------------------------------------------------------------
20 years 2018 5.00 884 786 1,137 1,299
------------------------------------------------------------
30 years 2028 5.05 862 752 1,173 1,391
-----------------------------------------------------------------------------------------------
</TABLE>

Coupons reflect yields on AAA-rated municipals as of May 31, 1998. This is an
illustration and does not represent expected yields or share price changes of
any T. Rowe Price fund.

How can I decide if the fund is appropriate for me?

Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the possibility of share price
decline in an effort to achieve income exempt from federal income taxes and
principal exempt from the Florida intangibles personal property tax, the fund
could be an appropriate part of your overall investment strategy. If you are
investing for principal stability and liquidity, you should consider a money
market fund.

. The fund should not represent your complete investment program nor be used
for short-term trading purposes.

Is there other information I need to review before making a decision?

Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>

How and when shares are priced

Bond funds
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.

. The various ways you can buy, sell, and exchange shares are explained at the
end of this prospectus and on the New Account Form. These procedures and the
information you receive about them may differ for institutional accounts.

How your purchase, sale, or exchange price is determined

If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.

We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.

How you can receive the proceeds from a sale

. When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.

ABOUT YOUR ACCOUNT 13
financial institution account. The ACH system is supported by over 20,000
banks, savings banks, and credit unions. Proceeds sent by bank wire should be
credited to your account the next business day.

. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.

. If for some reason we cannot accept your request to sell shares, we will
contact you.

USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
. All net investment income and realized capital gains are distributed to
shareholders.

Dividends and Other Distributions

Income dividends
. Bond funds declare income dividends daily at 4 p.m. ET to shareholders of
record at that time provided payment has been received on the previous
business day.

. Bond funds pay dividends on the first business day of each month.

. Bond fund shares will earn dividends through the date of redemption; also,
shares redeemed on a Friday or prior to a holiday will continue to earn
dividends until the next business day. Generally, if you redeem all of your
shares at any time during the month, you will also receive all dividends
earned through the date of redemption in the same check. When you redeem only
a portion of your
<PAGE>

T. ROWE PRICE 14
shares, all dividends accrued on those shares will be reinvested, or paid in
cash, on the next dividend payment date.

Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.

. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.

Tax Information

. You will be sent timely information for your tax filing needs.

Although the regular monthly income dividends you receive from the fund are
expected to be exempt from federal and state and local (if any) income taxes,
you need to be aware of the possible tax consequences when:

. You sell fund shares, including an exchange from one fund to another.

. The fund makes a distribution to your account.

ABOUT YOUR ACCOUNT 15
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.

Taxes on fund distributions

A portion of the capital gains realized on the sale of market discount bonds
with maturities beyond one year may be treated as ordinary income and cannot
be offset by other capital losses. Therefore, to the extent the fund invests
in these securities, the likelihood of a taxable gain distribution will be
increased.

. Distributions are taxable whether reinvested in additional shares or
received in cash.

Tax effect of buying shares before a capital gain distribution

Intangibles Tax
Although Florida does not have a state income tax, it does impose an
intangibles property tax that applies to shares of mutual funds. However, a
fund that is invested solely in Florida municipal obligations, U.S.
government obligations, and certain other designated securities on January 1
is exempt from the intangibles tax. If a fund's portfolio is not 100%
invested in these exempt securities on January 1, the exemption applies only
to the portion of assets (if any) invested in U.S. government obligations.
<PAGE>

T. ROWE PRICE 16
The fund will make every effort to have its portfolio invested exclusively in
exempt securities on January 1 and, therefore, expects that the value of all
fund shares will be exempt from the intangibles tax. Nevertheless, exemption
is not guaranteed, since the fund has the right under certain conditions to
invest in nonexempt securities.

TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
. Following these procedures helps assure timely and accurate transactions.

Purchase Conditions

Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.

U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.

Sale (Redemption) Conditions

10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. If, during the
clearing period, we receive a check drawn against your bond or money market
account, it will be returned marked "uncollected." (The 10-day hold does not
apply to the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)

Telephone, Tele*Access/(R)/, and personal computer transactions

ABOUT YOUR ACCOUNT 17
for acting on these instructions. If these procedures are not followed, it is
the opinion of certain regulatory agencies that the funds and their agents
may be liable for any losses that may result from acting on the instructions
given. A confirmation is sent promptly after a transaction. All telephone
conversations are recorded.

Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.

Excessive Trading

. T. Rowe Price may bar excessive traders from purchasing shares.

Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.

. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.

Keeping Your Account Open

T. ROWE PRICE 18
Small Account Fee

Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)

Signature Guarantees

. A signature guarantee is designed to protect you and the T. Rowe Price funds
from fraud by verifying your signature.

You may need to have your signature guaranteed in certain situations, such
as:

. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.

. Remitting redemption proceeds to any person, address, or bank account not on
record.

. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.

. Establishing certain services after the account is opened.

MORE ABOUT THE FUND
3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------

How is the fund organized?

The T. Rowe Price State Tax-Free Income Trust (the "Trust") was organized in
1986 as a Massachusetts business trust and is a "nondiversified, open-end
investment company," or mutual fund. This fund was organized in 1993. Mutual
funds pool money received from shareholders and invest it to try to achieve
specified objectives.

. Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.

What is meant by "shares"?

As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.

Each share and fractional share entitles the shareholder to:

. Receive a proportional interest in a fund's income and capital gain
distributions.

. Cast one vote per share on certain fund matters, including the election of
fund trustees, changes in fundamental policies, or approval of changes in the
fund's management contract.

Do T. Rowe Price funds have annual shareholder meetings?

The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.

Who runs the fund?
General Oversight

The Trust is governed by a Board of Trustees that elects the Trust's officers
and meets regularly to review the fund's investments, performance, expenses,
and other business affairs. The policy of the Trust is that a majority of
Board members are independent of T. Rowe Price.
<PAGE>

T. ROWE PRICE 20
. All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.

Portfolio Management

The fund has an Investment Advisory Committee with the following members:
Charles B. Hill, Chairman, Jeremy N. Baker, Robert A. Donahue, A. Gene
Caponi, Patricia S. Deford, Konstantine B. Mallas, Mary J. Miller, Julie A.
Salsbery, William F. Snider, and Arthur S. Varnado. The committee chairman
has day-to-day responsibility for managing the portfolio and works with the
committee in developing and executing the fund's investment program. Mr. Hill
was appointed chairman of the fund's committee in 1996. He joined T. Rowe
Price in 1991 and has been managing investments since 1986.

Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.

How are fund expenses determined?

The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.

. For the fiscal year ended February 28, 1998, the fund paid $44,000 to T.
Rowe Price Services, Inc., for transfer and dividend disbursing functions and
shareholder services, and $66,000 to T. Rowe Price for accounting services.

The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<PAGE>

ABOUT YOUR ACCOUNT 21

<TABLE>
Group Fee Schedule
<CAPTION>
<S> <S> <S> <S>
0.334% First $50 billion/a/
----------------------------------------------------------------------
0.305% Next $30 billion
----------------------------------------------------------------------
0.300% Thereafter
- ---------------------------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>

The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $85 billion
at March 31, 1998, the group fee was 0.32%.

Total Return

Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.

Cumulative Total Return

Average Annual Total Return

T. ROWE PRICE 22
Yield

The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the fund's net
asset value. For example, a fund providing $5 of annual income per share and
a price of $50 has a current yield of 10%. Yields can be calculated for any
time period.

For bond funds, the advertised or "SEC" yield is found by determining the net
income per share (as defined by the SEC) earned by a fund during a 30-day
base period and dividing this amount by the per share price on the last day
of the base period. The SEC yield may differ from the dividend yield.

INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
fund may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. The fund's investment
program is subject to further restrictions and risks described in the
Statement of Additional Information.

Shareholder approval is required to substantively change the fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
that can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports. The fund adheres to
applicable investment restrictions and policies at the time it makes an
investment. A later change in circumstances does not cause a violation of the
restriction and will not require the sale of an investment if it was proper
at the time it was made.

The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in the prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in residual interest bonds. While these restrictions provide a useful level
of detail about the fund's investment program, investors should not view them
as an accurate gauge of the potential risk of such investments. For example,
in a given period, a 5% investment in residual interest bonds could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
<PAGE>

MORE ABOUT THE FUND 23
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.

. Fund managers have considerable leeway in choosing investment strategies and
selecting securities they believe will help the fund achieve its objective.

Types of Portfolio Securities

In seeking to meet its investment objective, the fund may invest in any type
of municipal security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with its investment program. The following pages describe the
principal types of portfolio securities and investment management practices
of the fund.

Fundamental policy The fund is registered as a nondiversified mutual fund.
This means that the fund may invest a greater portion of its assets in a
single issuer than a diversified fund, which may subject the fund to greater
risk of price declines. However, because the fund intends to qualify as a
"regulated investment company" under the Internal Revenue Code, it must
invest so that, at the end of each quarter, with respect to 50% of its total
assets, no more than 5% of its assets is invested in the securities of a
single issuer, and with respect to the remaining 50%, no more than 25% of its
assets is invested in a single issuer.

Municipal Securities
The fund's assets are invested primarily in various tax-free municipal debt
securities. The issuers have a contractual obligation to pay interest at a
stated rate on specific dates and to repay principal (the bond's face value)
on a specified date or dates. An issuer may have the right to redeem or
"call" a bond before maturity, and the fund may have to reinvest the proceeds
at lower rates.

. In purchasing municipals, the fund relies on the opinion of the issuer's
bond counsel regarding the tax-exempt status of the investment.

T. ROWE PRICE 24
for purposes such as housing or airports or to benefit a private company.
(Being subject to the AMT does not mean the investor necessarily pays this
tax. For further information, please see Distributions and Taxes.)

Fundamental policy Under normal market conditions, the fund will not purchase
any security if, as a result, less than 80% of the fund's income would be
exempt from federal income taxes. The income included under the 80% test does
not include income from securities subject to the alternative minimum tax.

Operating policy During periods of abnormal market conditions, for temporary
defensive purposes, the fund may invest without limit in high-quality,
short-term securities whose income is subject to federal income taxes.

In addition to general obligation and revenue bonds, the fund's investments
may include, but are not limited to, the following types of securities:

Municipal Lease Obligations
A lease is not a full faith and credit obligation of the issuer and is
usually backed only by the borrowing government's unsecured pledge to make
annual appropriations for lease payments. There have been challenges to the
legality of lease financing in numerous states and, from time to time,
certain municipalities have considered not appropriating money for lease
payments. In deciding whether to purchase a lease obligation, the fund would
assess the financial condition of the borrower, the merits of the project,
the level of public support for the project, and the legislative history of
lease financing in the state. These securities may be less readily marketable
than other municipals. The fund may also purchase unrated lease obligations.

Municipal Warrants
Municipal warrants are essentially call options on municipal bonds. In
exchange for a premium, they give the purchaser the right, but not the
obligation, to purchase a municipal bond in the future. The fund might
purchase a warrant to lock in forward supply in an environment where the
current issuance of bonds is sharply reduced. Like options, warrants may
expire worthless and they may have reduced liquidity.

Operating policy The fund may invest up to 2% of its total assets in
municipal warrants.

Securities With "Puts" or Other Demand Features

Some longer-term municipals give the investor the right to "put" or sell the
security at par (face value) within a specified number of days following the
investor's request - usually one to seven days. This demand feature enhances
a security's liquidity by dramatically shortening its effective maturity and
enables it to trade at a price equal to or very close to par. If a demand
feature terminates prior to being exercised, the fund may be forced to hold
the longer-term security, which could experience substantially more
volatility.
<PAGE>

MORE ABOUT THE FUND 25
Securities With Credit Enhancements
. Letters of credit Letters of credit are issued by a third party, usually a
bank, to enhance liquidity and ensure repayment of principal and any accrued
interest if the underlying municipal security should default.

. T. Rowe Price periodically reviews the credit quality of the insurer.

The obligation of a municipal bond insurance company to pay a claim extends
over the life of each insured bond. Although defaults on insured municipal
bonds have been low to date and municipal bond insurers have met their
claims, there is no assurance this will continue. A higher-than-expected
default rate could strain the insurer's loss reserves and adversely affect
its ability to pay claims to bondholders, such as the fund. The number of
municipal bond insurers is relatively small, and not all of them have the
highest rating.

Synthetic or Derivative Securities
These securities are created from existing municipal bonds:

. Residual Interest Bonds (These are a type of potentially high-risk
derivative.) The income stream provided by an underlying bond is divided to
create two securities, one short term and one long term. The interest rate on
the short-term component is reset by an index or auction process normally
every seven to 35 days. After income is paid on the short-term securities at
current rates, the residual income goes to the long-term securities.
Therefore, rising short-term interest rates result in lower income for the
longer-term portion, and vice versa. The longer-term bonds can be very
volatile and may be less liquid than other municipals of comparable maturity.
The fund will invest only in securities deemed tax-exempt by a nationally
recognized bond counsel, but there is no guarantee the interest will be
exempt because the IRS has not issued a definitive ruling on the matter.
<PAGE>

T. ROWE PRICE 26
Operating policy The fund may invest up to 10% of its total assets in
residual interest bonds.

. Participation Interests This term covers various types of securities created
by converting fixed rate bonds into short-term, variable rate certificates.
These securities have been developed in the secondary market to meet the
demand for short-term, tax-exempt securities. The fund will invest only in
securities deemed tax-exempt by a nationally recognized bond counsel, but
there is no guarantee the interest will be exempt because the IRS has not
issued a definitive ruling on the matter.

. Embedded Interest Rate Swaps and Caps In a fixed rate, long-term municipal
bond with an interest rate swap attached to it, the bondholder usually
receives the bond's fixed coupon payment as well as a variable rate payment
that represents the difference between a fixed rate for the term of the swap
(which is typically shorter than the bond it is attached to) and a variable
rate, short-term municipal index. The bondholder receives excess income when
short-term rates remain below the fixed interest rate swap rate. If
short-term rates rise above the fixed income swap rate, the bondholder's
income is reduced. At the end of the interest rate swap term, the bond
reverts to a single fixed coupon payment.

Both instruments may be volatile and of limited liquidity, and their use may
adversely affect the fund's total return.

Operating policy The fund may invest up to 10% of its total assets in
embedded interest rate swaps and caps.

Private Placements
The fund may seek to enhance its yield through the purchase of private
placements. These securities are sold through private negotiations, usually
to institutions or mutual funds, and may have resale restrictions. Their
yields are usually higher than comparable public securities to compensate the
investor for their limited marketability.

Operating policy The fund may invest up to 15% of its net assets in illiquid
securities, including unmarketable private placements.

Types of Management Practices

MORE ABOUT THE FUND 27
serves as a short-term defense during periods of unusual market volatility.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, investment-grade
securities, including tax-exempt commercial paper, municipal notes, and
short-term maturity bonds. Some of these securities may have adjustable,
variable, or floating rates. For temporary, defensive purposes, the fund may
invest without limitation in money market reserves.

When-Issued Securities and Forwards
New issues of municipals are often sold on a "when-issued" basis, that is,
delivery and payment take place 15 - 45 days after the buyer has agreed to
the purchase. Some bonds, called "forwards," have longer-than-standard
settlement dates, typically six to 24 months. When buying these securities,
the fund will maintain cash or high-grade marketable securities held by its
custodian equal in value to its commitment for these securities. The fund
does not earn interest on when-issued and forward securities until
settlement, and the value of the securities may fluctuate between purchase
and settlement. Municipal "forwards" typically carry a substantial yield
premium to compensate the buyer for their greater interest rate, credit, and
liquidity risks.

Interest Rate Futures
Futures (a type of potentially high-risk derivative) are often used to manage
risk because they enable the investor to buy or sell an asset in the future
at an agreed-upon price. Specifically, the fund may use futures (and options
on futures) for any number of reasons, including: to hedge against a
potentially unfavorable change in interest rates and to adjust its exposure
to the municipal bond market; to protect portfolio value; in an effort to
enhance income; and to adjust portfolio duration. The use of futures for
hedging and non-hedging purposes may not always be successful. Their prices
can be highly volatile, using them could lower the fund's total return, and
the potential loss from their use could exceed the fund's initial exposure to
such contracts.

Operating policy Initial margin deposits on futures and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value.

Borrowing Money and Transferring Assets
The fund can borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with the fund's investment objective and program. Such borrowings may be
collateralized with fund assets, subject to restrictions.

Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.
<PAGE>

T. ROWE PRICE 28
Operating policy The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
fund's total assets. The fund may not purchase additional securities when
borrowings exceed 5% of total assets.

Portfolio Turnover

The fund generally purchases securities with the intention of holding them
for investment; however, when market conditions or other circumstances
warrant, securities may be purchased and sold without regard to the length of
time held. Due to the nature of the fund's investment program, its portfolio
turnover rate may exceed 100%. Although the fund does not expect to generate
any taxable income, a high turnover rate may increase transaction costs and
may affect taxes paid by shareholders to the extent short-term gains are
distributed. The fund's portfolio turnover rates for the fiscal years ending
February 28, 1998, 1997, and 1996, were 25.0%, 75.8%, and 98.7%,
respectively.

Sector Concentration
It is possible that the fund could have a considerable amount of assets (25%
or more) in securities that would tend to respond similarly to particular
economic or political developments. An example would be securities of issuers
related to a single industry, such as health care or nuclear energy.

Operating policy The fund may invest up to 25% of total assets in industrial
development bonds of projects in the same industry (such as solid waste,
nuclear utility, or airlines). Bonds which are refunded with escrowed U.S.
government securities are not subject to the 25% limitation.

Credit-Quality Considerations
The credit quality of most bond issues is evaluated by rating agencies such
as Moody's and Standard & Poor's on the basis of the issuer's ability to meet
all required interest and principal payments. The highest ratings are
assigned to issuers perceived to be the best credit risks. T. Rowe Price
research analysts also evaluate all portfolio holdings of the fund, including
those rated by outside agencies. Other things being equal, lower-rated bonds
have higher yields due to greater risk.
<PAGE>

MORE ABOUT THE FUND 29
Table 5 shows the rating scale used by the major rating agencies, and Table 6
provides an explanation of quality ratings. T. Rowe Price considers publicly
available ratings but emphasizes its own credit analysis when selecting
investments.

<TABLE>
Table 5 Ratings of Municipal Debt Securities
<CAPTION>
<S> <S> <S> <S> <S> <S> <S> <S> <S> <S>
Moody's Standard & Fitch
Investors Poor's Investors
Service, Inc. Corporation Service, Inc. Definition
Long Term Aaa AAA AAA Highest quality
-------------------------------------------------------------------------------------------------------
Aa AA AA High quality
-------------------------------------------------------------------------------------------------------
A A A Upper medium grade
-------------------------------------------------------------------------------------------------------
Baa BBB BBB Medium grade
Moody's S&P Fitch
Short Term MIG1/VMIG1 Best quality SP1+ Very strong quality F-1+ Exceptionally strong quality
SP1 Strong grade F-1 Very strong quality
-------------------------------------------------------------------------------------------------------
MIG2/VMIG2 High quality SP2 Satisfactory grade F-2 Good credit quality
-------------------------------------------------------------------------------------------------------
Commercial P-1 Superior quality A-1+ Extremely strong quality F-1+ Exceptionally strong quality
Paper A-1 Strong quality F-1 Very strong quality
-------------------------------------------------------------------------------------------------------
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

T. ROWE PRICE 30
<TABLE>
Table 6 Explanation of Quality Ratings
<CAPTION>
<S> <S> <S> <S> <S>
Bond
Rating Explanation
Moody's Investors Aaa Highest quality, smallest degree of
Service, Inc. investment risk.
------------------------------------------------
Aa High quality; together with Aaa
bonds, they compose the high-grade
bond group.
------------------------------------------------
A Upper-medium-grade obligations; many
favorable investment attributes.
------------------------------------------------
Baa Medium-grade obligations; neither
highly protected nor poorly secured.
Interest and principal appear
adequate for the present, but certain
protective elements may be lacking or
may be unreliable over any great
length of time.
------------------------------------------------
Ba More uncertain with speculative
elements. Protection of interest and
principal payments not well
safeguarded in good and bad times.
------------------------------------------------
B Lack characteristics of desirable
investment; potentially low assurance
of timely interest and principal
payments or maintenance of other
contract terms over time.
------------------------------------------------
Caa Poor standing, may be in default;
elements of danger with respect to
principal or interest payments.
------------------------------------------------
Ca Speculative in high degree; could be
in default or have other marked
shortcomings.
------------------------------------------------
C Lowest rated. Extremely poor
prospects of ever attaining
investment standing.
------------------------------------------------
Standard & Poor's AAA Highest rating; extremely strong
Corporation capacity to pay principal and
interest.
------------------------------------------------
AA High quality; very strong capacity to
pay principal and interest.
------------------------------------------------
A Strong capacity to pay principal and
interest; somewhat more susceptible
to the adverse effects of changing
circumstances and economic
conditions.
------------------------------------------------
BBB Adequate capacity to pay principal
and interest; normally exhibit
adequate protection parameters, but
adverse economic conditions or
changing circumstances more likely to
lead to weakened capacity to pay
principal and interest than for
higher-rated bonds.
------------------------------------------------
BB, B, Predominantly speculative with
CCC, CC respect to the issuer's capacity to
meet required interest and principal
payments. BB - lowest degree of
speculation;
CC - the highest degree of
speculation. Quality and protective
characteristics outweighed by large
uncertainties or major risk exposure
to adverse conditions.
------------------------------------------------
D In default.
------------------------------------------------
Fitch Investors AAA Highest quality; obligor has
Service, Inc. exceptionally strong ability to pay
interest and repay principal, which
is unlikely to be affected by
reasonably foreseeable events.
------------------------------------------------
AA Very high quality; obligor's ability
to pay interest and repay principal
is very strong. Because bonds rated
in the AAA and AA categories are not
significantly vulnerable to
foreseeable future developments,
short-term debt of these issuers is
generally rated F-1+.
------------------------------------------------
A High quality; obligor's ability to
pay interest and repay principal is
considered to be strong, but may be
more vulnerable to adverse changes in
economic conditions and circumstances
than higher-rated bonds.
------------------------------------------------
BBB Satisfactory credit quality;
obligor's ability to pay interest and
repay principal is considered
adequate. Unfavorable changes in
economic conditions and circumstances
are more likely to adversely affect
these bonds and impair timely
payment. The likelihood that the
ratings of these bonds will fall
below investment grade is higher than
for higher-rated bonds.
------------------------------------------------
BB, Not investment grade; predominantly
CCC, speculative with respect to the
CC, C issuer's capacity to repay interest
and repay principal in accordance
with the terms of the obligation for
bond issues not in default. BB is the
least speculative. C is the most
speculative.
------------------------------------------------------------------------------
</TABLE>

<PAGE>

MORE ABOUT THE FUND 31

Year 2000 Processing Issue

Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.

OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for gifts or transfers to minors
(UGMA/UTMA) accounts

Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
<PAGE>

MORE ABOUT THE FUND 33
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117

By Wire
Call Investor Services for an account number and give the following wire
information to your bank:

PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number

Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.

Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received.

In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.

By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.

By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
<PAGE>

T. ROWE PRICE 34
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).

2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.

3. Remember to provide your account number and the fund name on the memo line of
your check.

Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500

(For mailgrams, express, registered, or certified mail, see previous section.)

By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.

EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------

INVESTING WITH T. ROWE PRICE 35
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.

Regular Mail
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220

Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Boulevard Owings Mills, MD 21117

RIGHTS RESERVED BY THE FUND
----------------------------------------------------------

T. ROWE PRICE 36
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308

Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.

Retirement Plans

T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.

After obtaining proper authorization, account transactions may also be conducted
on the Internet.
<PAGE>

INVESTING WITH T. ROWE PRICE 37
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.

Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.

Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:

Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.

Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
<PAGE>

T. ROWE PRICE 38
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720

Note: Subject to a $35 minimum commission for all trades except stock trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.

Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.

Discount Brokerage is a division of T. Rowe Price Investment Services, Inc.,
Member NASD/SIPC.
<PAGE>

INVESTING WITH T. ROWE PRICE 39
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.

The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.

Performance Update
A quarterly review of all T. Rowe Price fund results.

Insights
Educational reports on investment strategies and financial markets.

Investment Guides

<PAGE>

For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500

For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days

To Open a Discount Brokerage Account
1-800-638-5660

Investor Centers
101 East Lombard St.
Baltimore, MD 21202

T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117

Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006

ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071

4200 West Cypress St.
10th Floor
Tampa, FL 33607

Internet Address
www.troweprice.com

(LOGO)

F91-040 7/1/98

<PAGE>

PROSPECTUS

July 1, 1998
Georgia Tax-Free Bond Fund

A long-term bond fund for investors seeking income that is exempt from federal
and Georgia state income taxes.

T. Rowe Price
RAM LOGO
<PAGE>

FACTS AT A GLANCE
Georgia Tax-Free Bond Fund

Investment Goal
The highest level of income exempt from federal and Georgia state income taxes
consistent with the fund's investment program.

As with all mutual funds, this fund may not meet its goal.

Strategy
Invests primarily in investment-grade Georgia municipal bonds. The fund's
average maturity is expected to exceed 15 years.

Risk/Reward
Higher income but also greater potential price fluctuation than shorter-term
municipal bond funds.

Investor Profile
Georgia taxpayers who, because of their tax bracket, can benefit from income
that is exempt from federal and Georgia state income taxes. Not appropriate for
tax-deferred retirement plans, such as IRAs.

Fees and Charges

100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.

Investment Manager

<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 4
---------------------------------------------
Fund, Market, and Risk Characteristics 5
---------------------------------------------

2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 12
Sale Proceeds
---------------------------------------------
Distributions and Taxes 13
---------------------------------------------
Transaction Procedures and 16
Special Requirements
---------------------------------------------

3 MORE ABOUT THE FUND
Organization and Management 19
---------------------------------------------
Understanding Performance Information 21
---------------------------------------------
Investment Policies and Practices 22
---------------------------------------------

4 INVESTING WITH T. ROWE PRICE
Account Requirements 32
and Transaction Information
---------------------------------------------
Opening a New Account 32
---------------------------------------------
Purchasing Additional Shares 33
---------------------------------------------
Exchanging and Redeeming 34
---------------------------------------------
Rights Reserved by the Fund 35
---------------------------------------------
Shareholder Services 36
---------------------------------------------
Discount Brokerage 38
---------------------------------------------
Investment Information 39
---------------------------------------------
</TABLE>

T. Rowe Price State Tax-Free Income Trust
Prospectus

July 1, 1998

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>

ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------

o Like all T. Rowe Price funds, this fund is 100% no load.

These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.

<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C>
Shareholder Transaction Annual Fund Expenses Percentage of Fiscal 1998
Expenses (after reduction) Average Net Assets

Sales charge "load" on purchases None Management fee 0.24%/a/
------ ---------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
------ ---------------------------
Redemption fees None Total other (shareholder servic 0.41%
ing, custodial, auditing, etc.)
------ ---------------------------
Exchange fees None Total fund expenses 0.65%/a/
------------------------------------------------------------------------------------------------------------
</TABLE>

/a /To limit the fund's expenses, T. Rowe Price agreed to waive its fees and
bear any expenses from March 1, 1995, through February 28, 1997, which would
cause the fund's ratio of expenses to average net assets to exceed 0.65%.
Effective March 1, 1997, T. Rowe Price agreed to extend this expense
limitation for a period of two years through February 28, 1999. Fees waived
or expenses paid or assumed under these agreements are subject to
reimbursement to T. Rowe Price by the fund whenever the fund's expense ratio
is below 0.65%; however, no reimbursement will be made after February 28,
1999 (for the first agreement), or February 28, 2001 (for the second
agreement), or if it would result in the expense ratio exceeding 0.65%. Any
amounts reimbursed have the effect of increasing fees otherwise paid by
the fund. Without this expense limitation, it is estimated that the fund's
management fee and total expense ratio would have been 0.42% and 0.83%,
respectively.

Note:A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts when applicable
(see Small Account Fee under Transaction Procedures and Special Requirements).
<PAGE>

The main types of expenses, which all mutual funds may charge against fund
assets, are:

. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of February 28, 1998,
and an individual fund fee of 0.10%.

. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.

For further details on fund expenses, please see Organization and Management.

<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years

--------------------------------------------------------
$7 $21 $36 $81
--------------------------------------------------------
</TABLE>

o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
<PAGE>

FINANCIAL HIGHLIGHTS
----------------------------------------------------------

<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Net Asset Net Net Realized
Value, Investment and Unrealized Total From Net Net Net Asset
Period Beginning Income Gain (Loss) Investment Investment Realized Total Value,
Ended of Period (Loss) on Investments Activities Income Gain Distributions End of Period
---------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994/a/ $10.00 $0.43/b/ $ 0.41 $0.84 $(0.43) $(0.04) $(0.47) $10.37
---------------------------------------------------------------------------------------------------------
1995 10.37 0.51/b/ (0.39) 0.12 (0.51) (0.05) (0.56) 9.93
---------------------------------------------------------------------------------------------------------
1996/d/ 9.93 0.52/b/ (0.51) 1.03 (0.52) - (0.52) 10.44
---------------------------------------------------------------------------------------------------------
1997 10.44 0.52/b/ - 0.52 (0.52) - (0.52) 10.44
---------------------------------------------------------------------------------------------------------
1998 10.44 0.51/b/ 0.48 0.99 (0.51) - (0.51) 10.92
------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Total Return Ratio of Ratio of
Period (Includes Reinvested Net Assets Expenses to Net Investment Income to Portfolio
Ended Distributions) ($ Thousands) Average Net Assets Average Net Assets Turnover Rate
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

1994/a/ 8.45%/b/ $22,614 0.65%/bc/ 4.48%/b//c/ 154.8%/c/
----------------------------------------------------------------------------------------------------
1995 1.42/b/ 23,338 0.65/b/ 5.26/b/ 170.2
----------------------------------------------------------------------------------------------------
1996/d/ 10.62/b/ 32,500 0.65/b/ 5.09/b/ 71.5
----------------------------------------------------------------------------------------------------
1997 5.15/b/ 38,726 0.65/b/ 5.01/b/ 71.1
----------------------------------------------------------------------------------------------------
1998 9.70/b/ 49,455 0.65/b/ 4.79/b/ 49.0
-------------------------------------------------------------------------------------------------------------------
</TABLE>

a For the period March 31, 1993 (commencement of operations) to February 28,
1994.

b Excludes expenses in excess of a 0.65% voluntary expense limitation in effect
through February 28, 1999.

c Annualized.

d Year ended February 29.

What is the fund's objective and investment program?

The fund's investment objective is, consistent with prudent portfolio
management, the highest level of income exempt from federal and Georgia state
income taxes by investing primarily in investment-grade Georgia municipal
bonds.

The fund will invest at least 65% of its total assets in Georgia municipal
bonds. The fund's dollar-weighted average maturity is expected to exceed 15
years. Due to seasonal variations or shortages in the supply of suitable
short-term Georgia securities, the fund may invest in municipals whose
interest is exempt from federal but not state income taxes. Every effort will
be made to minimize such investments, but they could compose up to 10% of the
fund's annual income.

o Income from Georgia municipal securities is exempt from federal and Georgia
state income taxes.

What are the fund's credit-quality guidelines?

The fund will generally purchase investment-grade securities, which means
their ratings are within the four highest credit categories (AAA, AA, A, BBB)
as determined by a national rating organization or, if unrated, by T. Rowe
Price. The fund may occasionally purchase below investment-grade securities
(including those with the lowest or no rating), but no such purchase will be
made if it would cause the fund's noninvestment-grade bonds to exceed 5% of
its net assets. Unrated bonds may be less liquid than rated bonds.

o At its discretion, the fund may retain a security whose credit quality is
downgraded after purchase.

What are the main risks of investing in municipal bond funds?

The following could cause a decline in a bond fund's price or income:
<PAGE>

. Interest rate or market risk The decline in bond prices that accompanies a
rise in the overall level of interest rates (please see Table 4).

. Geographical risk The chance of price declines resulting from developments
in a single state.

o A more detailed discussion of these and other risk considerations is
contained in the fund's Statement of Additional Information.

What are the particular risks associated with single-state funds versus those
that invest nationally?

o Significant political and economic developments within a state may have
direct and indirect repercussions on virtually all municipal bonds issued
in the state.

How does the portfolio manager try to reduce risk?

Consistent with the fund's objective, the portfolio manager actively seeks to
reduce risk and increase total return. Risk management tools include:
<PAGE>

. Diversification of assets to reduce the impact of a single holding on the
fund's net asset value.

. Thorough credit research by our own analysts.

What is the credit quality of Georgia general obligations?

As of June 1, 1998, Georgia was one of only eight states to have been awarded
the top rating by all three rating services. Standard & Poor upgraded the
state's rating to AAA in July 1997 while the state had already maintained an
Aaa rating from Moody's and AAA from Fitch. Since 1973, Georgia has financed
its capital needs through the issuance of general obligation bonds. The state
constitution and current law limit maximum annual debt service on general
obligation debt to 10% of total revenue receipts of the state treasury. The
state has never defaulted on the payment of principal and interest on its
general obligation bonds and has not issued short-term tax anticipation notes
for its seasonal cash flow requirements.

o Credit ratings and the financial and economic conditions of the state,
local governments, public authorities, and others in which the fund may
invest are subject to change at any time.

What about the quality of the fund's other holdings?

In addition to the state's general obligations, the fund will invest a
significant portion of assets in bonds that are rated according to the
issuer's individual creditworthiness, such as bonds of local governments and
public authorities. While local governments in Georgia depend principally on
their own revenue sources, they could experience budget shortfalls due to
cutbacks in state aid.

The fund may invest in certain sectors with special risks, such as health
care, which could be affected by federal or state legislation; electric
utilities with exposure to nuclear power plants; and private activity bonds
without governmental backing.

The fund sometimes invests in obligations of the Commonwealth of Puerto Rico
and its public corporations (as well as the U.S. territories of Guam and the
Virgin Islands) that are exempt from federal and Georgia state income taxes.
These investments require careful assessment of certain risk factors,
including reliance on substantial federal assistance and favorable tax
programs that have recently become subject to phaseout by Congress. As of
June 1, 1998, Puerto Rico's general obligations were rated Baa1 by Moody's
and A by Standard & Poor's.
<PAGE>

o The share price and yield of the fund will fluctuate with changing market
conditions and interest rate levels. When you sell your shares, you may
lose money.

What are derivatives and can the fund invest in them?

The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella -from conventional instruments, such as callable
bonds, futures, and options, to more exotic investments, such as stripped
mortgage securities and structured notes. While the term "derivative" only
recently became widely known among the investing public, derivatives have in
fact been employed by investment managers for many years.

The fund will invest in derivatives only if the expected risks and rewards
are consistent with its objective, policies, and overall risk profile as
described in this prospectus. The fund limits its use of derivatives to
situations in which they may enable the fund to accomplish the following:
increase yield; hedge against a decline in principal value; invest in
eligible asset classes with greater efficiency and lower cost than is
possible through direct investment; or adjust fund duration.

The following are some characteristics of municipal securities.

Who issues municipal securities?

State and local governments and governmental authorities sell notes and bonds
(usually called "municipals") to pay for public projects and services.

Who buys municipal securities?

Is interest income from municipal issues always exempt from federal taxes?

Shareholders subject to the AMT must include income derived from private
activity bonds in their AMT calculation. Relatively few taxpayers are
required to pay the tax. Normally, the fund will not purchase any security
if, as a result, more than 20% of the fund's income would be subject to the
AMT. The fund will report annually to shareholders the portion of income, if
any, subject to the AMT. (Please see Distributions and Taxes - Tax
Information.)

o Municipal securities are also called "tax-exempts" because the interest
income they provide is usually exempt from federal income taxes.

Why are yields on municipals usually below those on otherwise comparable
taxable securities?

Why are yields on Georgia bonds often below those of comparable issues from
other states?

Strong demand for Georgia securities due to a relatively high state income
tax rate and an often limited supply tends to push their prices up and yields
down.

You may want to review some fundamentals that apply to all fixed income
investments.

Is a fund's yield fixed or will it vary?

Is a fund's "yield" the same thing as the "total return"?

What is "credit quality" and how does it affect a fund's yield?

What is meant by a bond fund's "maturity"?

A bond mutual fund has no maturity in the strict sense of the word, but it
does have an average maturity and an average effective matu4lying bonds, with
each bond's maturity "weighted" by the percentage of fund assets it
represents. Funds that target effective maturities would use the effective
(rather than stated) maturities of the underlying instruments when computing
the average. Targeting effective maturity provides additional flexibility in
portfolio management but, all else being equal, could result in higher
volatility than a fund targeting a stated maturity or maturity range.

What is meant by a bond fund's "duration"?

How is a municipal's price affected by changes in interest rates?

<TABLE>
Table 4 How Interest Rates Affect Bond Prices
<CAPTION>
Price per $1,000 of a Municipal Bond if Interest Rates:
Bond Maturity Coupon Increase Decrease
1% 2% 1% 2%
<S> <S> <S> <C> <C> <C> <C>

1 year 1999 3.70% $990 $981 $1,010 $1,020
------------------------------------------------------------
3 years 2001 3.95 972 946 1,029 1,058
------------------------------------------------------------
5 years 2003 4.10 956 915 1,046 1,094
------------------------------------------------------------
10 years 2008 4.40 924 854 1,084 1,177
------------------------------------------------------------
20 years 2018 5.00 884 786 1,137 1,299
------------------------------------------------------------
30 years 2028 5.05 862 752 1,173 1,391
-----------------------------------------------------------------------------------------------
</TABLE>

Coupons reflect yields on AAA-rated municipals as of May 31, 1998. This is an
illustration and does not represent expected yields or share price changes of
any T. Rowe Price fund.

How can I decide if the fund is appropriate for me?

Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the possibility of share price
decline in an effort to achieve income exempt from federal and Georgia state
income taxes, the fund could be an appropriate part of your overall
investment strategy. If you are investing for principal stability and
liquidity, you should consider a money market fund.

o The fund should not represent your complete investment program nor be used
for short-term trading purposes.

Is there other information I need to review before making a decision?

ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
fund.

How and when shares are priced

o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional
accounts.

If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.

We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.

How you can receive the proceeds from a sale

o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.

financial institution account. The ACH system is supported by over 20,000
banks, savings banks, and credit unions. Proceeds sent by bank wire should be
credited to your account the next business day.

o If for some reason we cannot accept your request to sell shares, we will
contact you.

USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------

o All net investment income and realized capital gains are distributed to
shareholders.

Dividends and Other Distributions

Income dividends
. Bond funds declare income dividends daily at 4 p.m. ET to shareholders of
record at that time provided payment has been received on the previous
business day.

. Bond funds pay dividends on the first business day of each month.

the date of redemption in the same check. When you redeem only a portion of
your shares, all dividends accrued on those shares will be reinvested, or
paid in cash, on the next dividend payment date.

Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.

. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.

Tax Information

o You will be sent timely information for your tax filing needs.

. You sell fund shares, including an exchange from one fund to another.

. The fund makes a distribution to your account.

based on the "average cost," single category method. This information is not
reported to the IRS, and you do not have to use it. You may calculate the
cost basis using other methods acceptable to the IRS, such as "specific
identification."

Taxes on fund distributions

A portion of the capital gains realized on the sale of market discount bonds
with maturities beyond one year may be treated as ordinary income and cannot
be offset by other capital losses. Therefore, to the extent the fund invests
in these securities, the likelihood of a taxable gain distribution will be
increased.

o Distributions are taxable whether reinvested in additional shares or
received in cash.

Tax effect of buying shares before a capital gain distribution

TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------

o Following these procedures helps assure timely and accurate transactions.

Purchase Conditions

Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.

U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.

Sale (Redemption) Conditions

Telephone, Tele*Access/(R)/, and personal computer transactions

Redemptions over $250,000

Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.

Excessive Trading

o T. Rowe Price may bar excessive traders from purchasing shares.

Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.

Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).

. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.

Keeping Your Account Open

Small Account Fee

Signature Guarantees

o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.

You may need to have your signature guaranteed in certain situations, such
as:

. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.

. Remitting redemption proceeds to any person, address, or bank account not on
record.

. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.

. Establishing certain services after the account is opened.

MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------

How is the fund organized?

o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.

What is meant by "shares"?

As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.

Each share and fractional share entitles the shareholder to:

. Receive a proportional interest in a fund's income and capital gain
distribution.

. Cast one vote per share on certain fund matters, including the election of
fund trustees, changes in fundamental policies, or approval of changes in the
fund's management contract.

Do T. Rowe Price funds have annual meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.

Who runs the fund?

General Oversight

o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.

Portfolio Management

The fund has an Investment Advisory Committee with the following members:
Hugh D. McGuirk, Chairman, A. Gene Caponi, Patricia S. Deford, Robert A.
Donahue, Konstantine B. Mallas, Mary J. Miller, and Arthur S. Varnado. The
committee chairman has day-to-day responsibility for managing the portfolio
and works with the committee in developing and executing the fund's
investment program. Mr. McGuirk was appointed chairman of the fund's
committee in 1997 and has been a member of the fund's committee since 1994.
He joined T. Rowe Price in 1993 and has been managing investments for the
past four years. Previously, Mr. McGuirk was a municipal underwriter for a
brokerage firm.

Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.

How are fund expenses determined?

o For the fiscal year ended February 28, 1998, the fund paid $37,000 to T.
Rowe Price Services, Inc., for transfer and dividend disbursing functions
and shareholder services, and $66,000 to T. Rowe Price for accounting
services.

mutual funds). The group fee schedule (shown below) is graduated, declining
as the asset total rises, so shareholders benefit from the overall growth in
mutual fund assets.

<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C>
0.334% First $50 billion/a/
----------------------------------------------------------------------
0.305% Next $30 billion
----------------------------------------------------------------------
0.300% Thereafter
- -------------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>

Total Return

Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.

Cumulative Total Return

Average Annual Total Return

Yield

The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the fund's net
asset value. For example, a fund providing $5 of annual income per share and
a price of $50 has a current yield of 10%. Yields can be calculated for any
time period.

INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
fund may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. The fund's investment
program is subject to further restrictions and risks described in the
Statement of Additional Information.

a 5% investment in residual interest bonds could have significantly more of
an impact on the fund's share price than its weighting in the portfolio. The
net effect of a particular investment depends on its volatility and the size
of its overall return in relation to the performance of all the fund's other
investments.

Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.

o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.

Types of Portfolio Securities

o In purchasing municipals, the fund relies on the opinion of the issuer's
bond counsel regarding the tax-exempt status of the investment.
<PAGE>

Fundamental policy Under normal market conditions, the fund will not purchase
any security if, as a result, less than 80% of the fund's income would be
exempt from federal and Georgia state income taxes. The income included under
the 80% test does not include income from securities subject to the
alternative minimum tax.

In addition to general obligation and revenue bonds, the fund's investments
may include, but are not limited to, the following types of securities:

Operating policy The fund may invest up to 2% of its total assets in
municipal warrants.
<PAGE>

Securities With "Puts" or Other Demand Features

Some longer-term municipals give the investor the right to "put" or sell the
security at par (face value) within a specified number of days following the
investor's request - usually one to seven days. This demand feature enhances
a security's liquidity by dramatically shortening its effective maturity and
enables it to trade at a price equal to or very close to par. If a demand
feature terminates prior to being exercised, the fund may be forced to hold
the longer-term security, which could experience substantially more
volatility.

o T. Rowe Price periodically reviews the credit quality of the insurer.

Synthetic or Derivative Securities
These securities are created from existing municipal bonds:

component is reset by an index or auction process normally every seven to 35
days. After income is paid on the short-term securities at current rates, the
residual income goes to the long-term securities. Therefore, rising
short-term interest rates result in lower income for the longer-term portion,
and vice versa. The longer-term bonds can be very volatile and may be less
liquid than other municipals of comparable maturity. The fund will invest
only in securities deemed tax-exempt by a nationally recognized bond counsel,
but there is no guarantee the interest will be exempt because the IRS has not
issued a definitive ruling on the matter.

Operating policy The fund may invest up to 10% of its total assets in
residual interest bonds.

. Participation Interests This term covers various types of securities created
by converting fixed rate bonds into short-term, variable rate certificates.
These securities have been developed in the secondary market to meet the
demand for short-term, tax-exempt securities. The fund will invest only in
securities deemed tax-exempt by a nationally recognized bond counsel, but
there is no guarantee the interest will be exempt because the IRS has not
issued a definitive ruling on the matter.

Both instruments may be volatile and of limited liquidity, and their use may
adversely affect the fund's total return.

Operating policy The fund may invest up to 10% of its total assets in
embedded interest rate swaps and caps.
<PAGE>

Operating policy The fund may invest up to 15% of its net assets in illiquid
securities, including unmarketable private placements.

Types of Management Practices

Reserve Position
The fund will hold a portion of its assets in short-term, tax-exempt money
market securities maturing in one year or less. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments; can help in structuring the fund's weighted average maturity;
and serves as a short-term defense during periods of unusual market
volatility. The fund's reserve position can consist of shares of one or more
T. Rowe Price internal money market funds as well as short-term,
investment-grade securities, including tax-exempt commercial paper, municipal
notes, and short-term maturity bonds. Some of these securities may have
adjustable, variable, or floating rates. For temporary, defensive purposes,
the fund may invest without limitation in money market reserves.

always be successful. Their prices can be highly volatile, using them could
lower the fund's total return, and the potential loss from their use could
exceed the fund's initial exposure to such contracts.

Operating policy Initial margin deposits on futures and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value.

Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.

Operating policy The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
fund's total assets. The fund may not purchase additional securities when
borrowings exceed 5% of total assets.

Portfolio Turnover

The fund generally purchases securities with the intention of holding them
for investment; however, when market conditions or other circumstances
warrant, securities may be purchased and sold without regard to the length of
time held. Due to the nature of the fund's investment program, its portfolio
turnover rate may exceed 100%. Although the fund does not expect to generate
any taxable income, a high turnover rate may increase transaction costs and
may affect taxes paid by shareholders to the extent short-term gains are
distributed. The fund's portfolio turnover rates for the fiscal years ending
February 28, 1998, 1997, and 1996, were 49.0%, 71.1%, and 71.5%,
respectively.

Credit-Quality Considerations

The credit quality of most bond issues is evaluated by rating agencies such
as Moody's and Standard & Poor's on the basis of the issuer's ability to meet
all required interest and principal payments. The highest ratings are
assigned to issuers perceived to be the best credit risks. T. Rowe Price
research analysts also evaluate all portfolio holdings of the fund, including
those rated by outside agencies. Other things being equal, lower-rated bonds
have higher yields due to greater risk.

Table 5 shows the rating scale used by the major rating agencies, and Table 6
provides an explanation of quality ratings. T. Rowe Price considers publicly
available ratings but emphasizes its own credit analysis when selecting
investments.

<TABLE>
Table 5 Ratings of Municipal Debt Securities
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Moody's Standard & Fitch
Investors Poor's Investors
Service, Inc. Corporation Service, Inc. Definition

Long Term Aaa AAA AAA Highest quality
------------------------------------------------------------------------------------------------------------
Aa AA AA High quality
------------------------------------------------------------------------------------------------------------
A A A Upper medium grade
------------------------------------------------------------------------------------------------------------
Baa BBB BBB Medium grade
Moody's S&P Fitch
Short Term MIG1/VMIG1 Best quality SP1+ Very strong quality F-1+ Exceptionally strong quality
SP1 Strong grade F-1 Very strong quality
------------------------------------------------------------------------------------------------------------
MIG2/VMIG2 High quality SP2 Satisfactory grade F-2 Good credit quality
------------------------------------------------------------------------------------------------------------
Commercial P-1 Superior quality A-1+ Extremely strong quality F-1+ Exceptionally strong quality
Paper A-1 Strong quality F-1 Very strong quality
------------------------------------------------------------------------------------------------------------
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
Table 6 Explanation of Quality Ratings
<CAPTION>
<S> <C> <C>
Bond
Rating Explanation

Moody's Investors Aaa Highest quality, smallest degree of
Service, Inc. investment risk.
-----------------------------------------------------
Aa High quality; together with Aaa bonds,
they compose the high-grade bond group.
-----------------------------------------------------
A Upper-medium-grade obligations; many
favorable investment attributes.
-----------------------------------------------------
Baa Medium-grade obligations; neither highly
protected nor poorly secured. Interest and
principal appear adequate for the present,
but certain protective elements may be
lacking or may be unreliable over any
great length of time.
-----------------------------------------------------
Ba More uncertain with speculative elements.
Protection of interest and principal
payments not well safeguarded in good and
bad times.
-----------------------------------------------------
B Lack characteristics of desirable
investment; potentially low assurance of
timely interest and principal payments or
maintenance of other contract terms over
time.
-----------------------------------------------------
Caa Poor standing, may be in default; elements
of danger with respect to principal or
interest payments.
-----------------------------------------------------
Ca Speculative in high degree; could be in
default or have other marked
shortcomings.
-----------------------------------------------------
C Lowest rated. Extremely poor prospects of
ever attaining investment standing.
-----------------------------------------------------
Standard & Poor's AAA Highest rating; extremely strong capacity
Corporation to pay principal and interest.
-----------------------------------------------------
AA High quality; very strong capacity to pay
principal and interest.
-----------------------------------------------------
A Strong capacity to pay principal and
interest; somewhat more susceptible to the
adverse effects of changing circumstances
and economic conditions.
-----------------------------------------------------
BBB Adequate capacity to pay principal and
interest; normally exhibit adequate
protection parameters, but adverse
economic conditions or changing
circumstances more likely to lead to
weakened capacity to pay principal and
interest than for higher-rated bonds.
-----------------------------------------------------
BB, B, Predominantly speculative with respect to
CCC, CC the issuer's capacity to meet required
interest and principal payments. BB -
lowest degree of speculation;
CC - the highest degree of speculation.
Quality and protective characteristics
outweighed by large uncertainties or major
risk exposure to adverse conditions.
-----------------------------------------------------
D In default.
-----------------------------------------------------
Fitch Investors AAA Highest quality; obligor has exceptionally
Service, Inc. strong ability to pay interest and repay
principal, which is unlikely to be
affected by reasonably foreseeable events.
-----------------------------------------------------
AA Very high quality; obligor's ability to
pay interest and repay principal is very
strong. Because bonds rated in the AAA and
AA categories are not significantly
vulnerable to foreseeable future
developments, short-term debt of these
issuers is generally rated F-1+.
-----------------------------------------------------
A High quality; obligor's ability to pay
interest and repay principal is considered
to be strong, but may be more vulnerable
to adverse changes in economic conditions
and circumstances than higher-rated bonds.
-----------------------------------------------------
BBB Satisfactory credit quality; obligor's
ability to pay interest and repay
principal is considered adequate.
Unfavorable changes in economic conditions
and circumstances are more likely to
adversely affect these bonds and impair
timely payment. The likelihood that the
ratings of these bonds will fall below
investment grade is higher than for
higher-rated bonds.
-----------------------------------------------------
BB, Not investment grade; predominantly
CCC, speculative with respect to the issuer's
CC, C capacity to repay interest and repay
principal in accordance with the terms of
the obligation for bond issues not in
default. BB is the least speculative. C is
the most speculative.
------------------------------------------------------------------------------
</TABLE>

<PAGE>

Year 2000 Processing Issue

INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.

Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.

OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for gifts or transfers to minors
(UGMA/UTMA) accounts

Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
<PAGE>

Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117

By Wire
Call Investor Services for an account number and give the following wire
information to your bank:

PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number

Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.

Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received.

In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.

By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.

By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
<PAGE>

By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).

2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.

3. Remember to provide your account number and the fund name on the memo line of
your check.

Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500

(For mailgrams, express, registered, or certified mail, see previous section.)

By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.

EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------
Exchange Service

You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.) Some of the
T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on shares held for
less than six months or one year, as specified in the prospectus. The fee is
paid to the fund.

Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.

Regular Mail
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220

Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Boulevard Owings Mills, MD 21117

RIGHTS RESERVED BY THE FUND
----------------------------------------------------------

SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308

Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.

Retirement Plans

T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.

After obtaining proper authorization, account transactions may also be conducted
on the Internet.
<PAGE>

Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.

Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.

Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:

Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.

Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
<PAGE>

DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720

Note: Subject to a $35 minimum commission for all trades except stock trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.

Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.

Discount Brokerage is a division of T. Rowe Price Investment Services, Inc.,
Member NASD/SIPC.
<PAGE>

INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.

The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.

Performance Update
A quarterly review of all T. Rowe Price fund results.

Insights
Educational reports on investment strategies and financial markets.

Investment Guides

<PAGE>

For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500

For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days

To Open a Discount Brokerage Account
1-800-638-5660

Investor Centers
101 East Lombard St.
Baltimore, MD 21202

T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117

Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006

ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071

4200 West Cypress St.
10th Floor
Tampa, FL 33607

Internet Address
www.troweprice.com

T. Rowe Price
Invest With Confidence
Ram logo
F92-040 7/1/98

<PAGE>

PROSPECTUS
July 1, 1998
Maryland Tax-Free Funds

Short- and long-term bond funds for investors seeking income that is exempt
from federal and Maryland state and local income taxes.

T. Rowe Price
RAM LOGO
<PAGE>

FACTS AT A GLANCE
Maryland Tax-Free Funds

Investment Goal
The highest level of income exempt from federal and Maryland state and local
income taxes consistent with each fund's investment program.

As with all mutual funds, these funds may not meet their goals.

Strategy and Risk/Reward
Maryland Short-Term Tax-Free Bond Fund Invests primarily in short-term,
investment-grade Maryland municipal bonds. The fund's average maturity will not
exceed three years, but there is no maturity limit on individual securities.

Risk/Reward Higher income than a municipal money market fund but with moderate
share price fluctuation.

Maryland Tax-Free Bond Fund Invests primarily in investment-grade Maryland
municipal bonds. The fund's average maturity is expected to exceed 15 years.

Risk/Reward Higher income than the Maryland Short-Term Tax-Free Bond Fund but
also greater potential price fluctuation.

Investor Profile
Maryland taxpayers who, because of their tax bracket, can benefit from income
that is exempt from federal and Maryland state and local income taxes. Not
appropriate for tax-deferred retirement plans, such as IRAs.

Fees and Charges

100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.

Investment Manager

<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUNDS
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 4
---------------------------------------------
Fund, Market, and Risk Characteristics 6
---------------------------------------------

2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 14
Sale Proceeds
---------------------------------------------
Distributions and Taxes 15
---------------------------------------------
Transaction Procedures and 18
Special Requirements
---------------------------------------------

3 MORE ABOUT THE FUNDS
Organization and Management 21
---------------------------------------------
Understanding Performance Information 23
---------------------------------------------
Investment Policies and Practices 24
---------------------------------------------

4 INVESTING WITH T. ROWE PRICE
Account Requirements 34
and Transaction Information
---------------------------------------------
Opening a New Account 34
---------------------------------------------
Purchasing Additional Shares 35
---------------------------------------------
Exchanging and Redeeming 36
---------------------------------------------
Rights Reserved by the Funds 37
---------------------------------------------
Shareholder Services 38
---------------------------------------------
Discount Brokerage 40
---------------------------------------------
Investment Information 41
---------------------------------------------
</TABLE>

T. Rowe Price State Tax-Free Income Trust
Prospectus

July 1, 1998

ABOUT THE FUNDS 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------

o Like all T. Rowe Price funds, these funds are 100% no load.

These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.

<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C>
Short-Term Tax-Free Tax-Free Bond
Bond
------------------------------------------

Sales charge "load" on None None
purchases
------------------------------------------
Sales charge "load" on None None
reinvested distributions
------------------------------------------
Redemption fees None None
------------------------------------------
Exchange fees None None

Percentage of Fiscal 1998 Average Net
Annual Fund Expenses Assets

Short-Term Tax-Free Tax-Free Bond
Bond
(after reduction)
------------------------------------------
Management fee 0.41%/a/ 0.42%
------------------------------------------
Marketing fees (12b-1) None None
------------------------------------------
Total other (shareholder
servicing, custodial, 0.19% 0.09%
auditing, etc.)
------------------------------------------
Total fund expenses 0.60%/a/ 0.51%
------------------------------------------------------------------------------
</TABLE>

/a /The Short-Term Bond Fund's management fee and total expense ratio presented
include 0.04% of management fees repaid from prior years pursuant to the
expense limitation described below. Without this repayment, the fund's
management fee and total expense ratio would have been 0.42% and 0.61%,
respectively. From March 1, 1995 through February 28, 1997, T. Rowe Price
agreed to waive its fees and bear any expenses to the extent that such fees
and expenses would cause the fund's ratio of expenses to average net assets
to exceed 0.65%. Effective March 1, 1997, T. Rowe Price agreed to extend the
expense limitation of 0.65% through the period ended June 30, 1998. Effective
July 1, 1998, the expense ratio was reduced to 0.60% for the period ending
February 28, 1999. Fees waived or expenses paid or assumed under these
agreements are subject to reimbursement to T. Rowe Price by the fund whenever
the fund's expense ratio is below 0.65% (through June 30, 1998); or 0.60%
(for the period July 1, 1998 through February 28, 1999); however, no
reimbursement will be made after February 28, 1999 (for the first
agreement), or February 28, 2001 (for the second agreement), or if it would
result in the expense ratio exceeding 0.65% (through June 30, 1998); or
0.60% (for the period July 1, 1998 through February 28, 1999). Any amounts
reimbursed have the effect of increasing fees otherwise paid by the fund.

Note:A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts, when applicable
(see Small Account Fee under Transaction Procedures and Special Requirements).

<PAGE>

ABOUT THE FUNDS 3
The main types of expenses, which all mutual funds may charge against fund
assets, are:

. A management fee The percent of fund assets paid to the fund's investment
manager. Each fund's fee comprises a group fee, 0.32% as of February 28,
1998, and an individual fund fee of 0.10%.

. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.

For further details on fund expenses, please see Organization and Management.

<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
Fund 1 year 3 years 5 years 10 years
---------------------------------------
<S> <C> <C> <C> <C>

Short-Term Tax-Free Bond $7 $21 $36 $81
---------------------------------------
Tax-Free Bond 5 16 29 64
-----------------------------------------------------------------------
</TABLE>

o Table 2 is just an example; actual expenses can be higher or lower than
those shown.

<PAGE>

T. ROWE PRICE 4
FINANCIAL HIGHLIGHTS
----------------------------------------------------------

Table 3, which provides information about each fund's financial history, is
based on a single share outstanding throughout each fiscal year. Each fund's
section of the table is part of the fund's financial statements, which are
included in its annual report and are legally regarded as part of the
Statement of Additional Information (available upon request). The financial
statements in the annual report were audited by Coopers & Lybrand L.L.P., the
funds' independent accountants.

<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Net Asset Net Realized
Value, Net and Unrealized Total From Net Net Net Asset
Period Beginning Investment Gain (Loss) on Investment Investment Realized Total Value,
Ended of Period Income Investments Activities Income Gain Distributions End of Period
Short-Term Tax-Free Bond
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993/a/ $ 5.00 $0.01/b/ $ 0.07 $0.08 $(0.01) $(0.01) $ 5.07
---------------------------------------------------------------------------------------------------------
1994 5.07 0.15/b/ 0.02 0.17 (0.15) - (0.15) 5.09
---------------------------------------------------------------------------------------------------------
1995 5.09 0.18/b/ (0.05) 0.13 (0.18) - (0.18) 5.04
---------------------------------------------------------------------------------------------------------
1996/d/ 5.04 0.21/b/ 0.11 0.32 (0.21) - (0.21) 5.15
---------------------------------------------------------------------------------------------------------
1997 5.15 0.20/b/ (0.04) 0.16 (0.20) - (0.20) 5.11
---------------------------------------------------------------------------------------------------------
1998 5.11 0.20 0.03 0.23 (0.20) (0.20) 5.14
Tax-Free Bond
1989 $ 9.40 $0.57 $(0.10) $0.47 $(0.57) - $(0.57) $ 9.30
---------------------------------------------------------------------------------------------------------
1990 9.30 0.60 0.18 0.78 (0.60) $(0.03) (0.63) 9.45
---------------------------------------------------------------------------------------------------------
1991 9.45 0.60 0.16 0.76 (0.60) - (0.60) 9.61
---------------------------------------------------------------------------------------------------------
1992/d/ 9.61 0.59 0.26 0.85 (0.59) (0.05) (0.64) 9.82
---------------------------------------------------------------------------------------------------------
1993 9.82 0.57 0.73 1.30 (0.57) (0.05) (0.62) 10.50
---------------------------------------------------------------------------------------------------------
1994 10.50 0.56 0.05 0.61 (0.56) (0.10) (0.66) 10.45
---------------------------------------------------------------------------------------------------------
1995 10.45 0.56 (0.44) 0.12 (0.56) (0.02) (0.58) 9.99
---------------------------------------------------------------------------------------------------------
1996/d/ 9.99 0.57 0.41 0.98 (0.57) - (0.57) 10.40
---------------------------------------------------------------------------------------------------------
1997 10.40 0.56 (0.05) 0.51 (0.56) (0.56) 10.35
---------------------------------------------------------------------------------------------------------
1998 10.35 0.55 0.32 0.87 (0.55) (0.55) 10.67
------------------------------------------------------------------------------------------------------------------------
</TABLE>

Footnotes appear on next page. (continued on next page)
<PAGE>

ABOUT THE FUNDS 5

<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Total Return Ratio of
Period (Includes Reinvested Net Assets Ratio of Expenses Net Investment Income Portfolio
Ended Distributions) ($ Thousands) to Average Net Assets to Average Net Assets Turnover Rate
Short-Term Tax-Free Bond
<S> <C> <C> <C> <C> <C> <C>
1993/a/ 1.67% $ 10,094 0.65%/bc/ 2.96%/c/ 96.9%/c/
---------------------------------------------------------------------------------------------------
1994 3.49 76,049 0.65/b/ 3.09 20.5
---------------------------------------------------------------------------------------------------
1995 2.64 74,808 0.65/b/ 3.59 105.3
1996/d/ 6.49 85,784 0.65/b/ 4.14 39.3
---------------------------------------------------------------------------------------------------
1997 3.26 102,252 0.65/b/ 3.98 21.4
---------------------------------------------------------------------------------------------------
1998 4.56 109,424 0.65/b/ 3.89 60.4
Tax-Free Bond
1989 5.24% $113,528 0.92% 6.23% 63.8%
---------------------------------------------------------------------------------------------------
1990 8.54 193,771 0.85 6.29 57.5
---------------------------------------------------------------------------------------------------
1991 8.37 300,974 0.68 6.38 52.2
---------------------------------------------------------------------------------------------------
1992/d/ 9.13 475,188 0.64 6.04 21.9
---------------------------------------------------------------------------------------------------
1993 13.75 724,469 0.61 5.72 22.3
---------------------------------------------------------------------------------------------------
1994 5.93 821,402 0.57 5.31 24.3
---------------------------------------------------------------------------------------------------
1995 1.43 724,823 0.57 5.73 28.9
---------------------------------------------------------------------------------------------------
1996/d/ 10.00 798,589 0.54 5.53 23.9
---------------------------------------------------------------------------------------------------
1997 5.12 819,981 0.54 5.47 26.2
---------------------------------------------------------------------------------------------------
1998 8.68 926,416 0.51 5.31 19.2
------------------------------------------------------------------------------------------------------------------
</TABLE>

a For the period January 29, 1993 (commencement of operations) to February 28,
1993.

b Excludes expenses in excess of a 0.65% voluntary expense limitation in effect
through February 28, 1999.

c Annualized.

d Year ended February 29.
<PAGE>

T. ROWE PRICE 6
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether these funds are appropriate for you, this section
takes a closer look at their investment objectives and approaches.

<TABLE>
Table 4 Differences Between Funds
<CAPTION>
<S> <C> <C> <C> <C> <C>
Credit-Quality Expected Expected Average
Fund Categories Income Share Maturity
Price Fluctuation
-------------------------------------------------------------------------------

Short-Term Primarily four highest Low to moderate Low to moderate Generally one to
Tax-Free Bond three years
-------------------------------------------------------------------------------
Tax-Free Bond Primarily four highest High High Over 15 years
----------------------------------------------------------------------------------------------------
</TABLE>

What is each fund's objective and investment program?

. The Maryland Short-Term Tax-Free Bond Fund's objective is to provide the
highest level of income exempt from federal and Maryland state and local
income taxes consistent with modest fluctuation in principal value. The fund
will invest primarily (at least 65% of its total assets) in investment-grade
Maryland municipal bonds. While the portfolio's dollar-weighted average
maturity will not exceed three years, there is no maturity limit on
individual securities. The fund is expected to provide a higher level of
after-tax income than a money market fund and less share price volatility
than the Maryland Tax-Free Bond Fund. Unlike a money market fund, the fund's
share price will fluctuate.

. The Maryland Tax-Free Bond Fund's investment objective is to provide,
consistent with prudent portfolio management, the highest level of income
exempt from federal and Maryland state and local income taxes by investing
primarily in investment-grade Maryland municipal bonds. The fund will invest
at least 65% of its total assets in investment-grade Maryland municipal
bonds. The fund's dollar-weighted average maturity is expected to exceed 15
years. The fund is expected to provide higher income and also have greater
share price fluctuation than the Maryland Short-Term Tax-Free Bond Fund.

. Due to seasonal variations or shortages in the supply of suitable short-term
Maryland securities, each fund may invest in municipals whose interest is
exempt from federal but not Maryland state and local income taxes. Every
effort will be made to minimize such investments, but they could compose up
to 10% of each fund's annual income.

o Income from Maryland municipal securities is exempt from federal and
Maryland state and local income taxes.
<PAGE>

ABOUT THE FUNDS 7
What are the funds' credit-quality guidelines?

The funds will generally purchase investment-grade securities, which means
their ratings are within the four highest credit categories (AAA, AA, A, BBB)
as determined by a national rating organization or, if unrated, by T. Rowe
Price. The funds may occasionally purchase below investment-grade securities
(including those with the lowest or no rating), but no such purchase will be
made if it would cause a fund's noninvestment-grade bonds to exceed 5% of its
net assets. Unrated bonds may be less liquid than rated bonds.

o At its discretion, each fund may retain a security whose credit quality is
downgraded after purchase.

What are the main risks of investing in municipal bond funds?

The following could cause a decline in a bond fund's price or income:

. Interest rate or market risk The decline in bond prices that accompanies a
rise in the overall level of interest rates (please see Table 5).

. Geographical risk The chance of price declines resulting from developments
in a single state.

o A more detailed discussion of these and other risk considerations is
contained in the funds' Statement of Additional Information.
<PAGE>

T. ROWE PRICE 8
What are the particular risks associated with single-state funds versus those
that invest nationally?

o Significant political and economic developments within a state may have
direct and indirect repercussions on virtually all municipal bonds issued
in the state.

How does the portfolio manager try to reduce risk?

Consistent with each fund's objective, the portfolio manager actively seeks
to reduce risk and increase total return. Risk management tools include:

. Diversification of assets to reduce the impact of a single holding on the
funds' net asset values.

. Thorough credit research by our own analysts.

What is the credit quality of Maryland general obligations?

The major rating agencies (Moody's, Standard & Poor's, and Fitch) have
assigned a triple-A rating to Maryland general obligations as of June 1,
1998. For more than a century, the state has not issued short-term tax
anticipation notes or other similar short-term debt for its own needs. There
is no general debt limit on general obligation bonds imposed under the state
constitution or public general laws. The constitution imposes a maturity
limit of 15 years on
<PAGE>

ABOUT THE FUNDS 9
state general obligation bonds. The state's Capital Debt Affordability
Committee annually recommends to the State General Assembly a yearly limit on
the issuance of new general obligation bonds.

o Credit ratings and the financial and economic conditions of the state,
local governments, public authorities, and others in which each fund may
invest are subject to change at any time.

What about the quality of the funds' other holdings?

In addition to the state's general obligations, the funds will invest a
significant portion of assets in bonds that are rated according to the
issuer's individual creditworthiness, such as bonds of local governments and
public authorities. While local governments in Maryland depend principally on
their own revenue sources, they could experience budget shortfalls due to
cutbacks in state aid.

The funds may invest in certain sectors with special risks, such as health
care, which could be affected by federal or state legislation; electric
utilities with exposure to nuclear power plants; and private activity bonds
without governmental backing.

Each fund sometimes invests in obligations of the Commonwealth of Puerto Rico
and its public corporations (as well as the U.S. territories of Guam and the
Virgin Islands) that are exempt from federal and Maryland state and local
income taxes. These investments require careful assessment of certain risk
factors, including reliance on substantial federal assistance and favorable
tax programs that have recently become subject to phaseout by Congress. As of
June 1, 1998, Puerto Rico's general obligations were rated Baa1 by Moody's
and A by Standard & Poor's.

o The share price and yield of the funds will fluctuate with changing market
conditions and interest rate levels. When you sell your shares, you may
lose money.

What are derivatives and can the funds invest in them?

The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella -from conventional instruments, such as callable
bonds, futures, and options, to more exotic investments, such as stripped
mortgage securities and structured notes. While the term "derivative" only
recently became widely known among the investing public, derivatives have in
fact been employed by investment managers for many years.
<PAGE>

T. ROWE PRICE 10
Each fund will invest in derivatives only if the expected risks and rewards
are consistent with its objective, policies, and overall risk profile as
described in this prospectus. Each fund limits its use of derivatives to
situations in which they may enable the fund to accomplish the following:
increase yield; hedge against a decline in principal value; invest in
eligible asset classes with greater efficiency and lower cost than is
possible through direct investment; or adjust fund duration.

These funds will not invest in any high-risk, highly leveraged derivative
instrument that is expected to cause the price volatility of the portfolio to
be meaningfully different from that of 1) a three-year investment-grade bond
for the Short-Term Tax-Free Bond Fund; or 2) a long-term investment-grade
bond for the Tax-Free Bond Fund.

The following are some characteristics of municipal securities.

Who issues municipal securities?

State and local governments and governmental authorities sell notes and bonds
(usually called "municipals") to pay for public projects and services.

Who buys municipal securities?

Is interest income from municipal issues always exempt from federal taxes?

o Municipal securities are also called "tax-exempts" because the interest
income they provide is usually exempt from federal income taxes.
<PAGE>

ABOUT THE FUNDS 11
Why are yields on municipals usually below those on otherwise comparable
taxable securities?

Why are yields on Maryland bonds often below those of comparable issues from
other states?

Strong demand for Maryland securities due to a relatively high state income
tax rate and an often limited supply tends to push their prices up and yields
down.

You may want to review some fundamentals that apply to all fixed income
investments.

Is a fund's yield fixed or will it vary?

Is a fund's "yield" the same thing as the "total return"?

What is "credit quality" and how does it affect a fund's yield?

What is meant by a bond fund's "maturity"?

T. ROWE PRICE 12
A bond mutual fund has no maturity in the strict sense of the word, but it
does have an average maturity and an average effective maturity. This number
is an average of the stated or effective maturities of the underlying bonds,
with each bond's maturity "weighted" by the percentage of fund assets it
represents. Funds that target effective maturities would use the effective
(rather than stated) maturities of the underlying instruments when computing
the average. Targeting effective maturity provides additional flexibility in
portfolio management but, all else being equal, could result in higher
volatility than a fund targeting a stated maturity or maturity range.

What is meant by a bond fund's "duration"?

How is a municipal's price affected by changes in interest rates?

Coupons reflect yields on AAA-rated municipals as of May 31, 1998. This is an
illustration and does not represent expected yields or share price changes of
any T. Rowe Price fund.
<PAGE>

ABOUT THE FUNDS 13
How can I decide which fund is most appropriate for me?

Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. Use Table 4, which summarizes each fund's main
characteristics, to help choose a fund (or funds) suitable for your
particular needs. If you will need your principal in a relatively short time,
or want to minimize share price volatility, the Short-Term Tax-Free Bond Fund
may be a good choice. However, if you are investing for higher tax-free
income and can tolerate some price volatility, you should consider the
longer-term bond fund.

o The fund or funds you select should not represent your complete investment
program nor be used for short-term trading purposes.

Is there other information I need to review before making a decision?

ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
fund.

How and when shares are priced

How your purchase, sale, or exchange price is determined

If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.

We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.

How you can receive the proceeds from a sale

o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.

ABOUT THE FUNDS 15
financial institution account. The ACH system is supported by over 20,000
banks, savings banks, and credit unions. Proceeds sent by bank wire should be
credited to your account the next business day.

o If for some reason we cannot accept your request to sell shares, we will
contact you.

USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------

o All net investment income and realized capital gains are distributed to
shareholders.

Dividends and Other Distributions

Income dividends
. Bond funds declare income dividends daily at 4 p.m. ET to shareholders of
record at that time provided payment has been received on the previous
business day.

. Bond funds pay dividends on the first business day of each month.

T. ROWE PRICE 16
the date of redemption in the same check. When you redeem only a portion of
your shares, all dividends accrued on those shares will be reinvested, or
paid in cash, on the next dividend payment date.

Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.

. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.

Tax Information

o You will be sent timely information for your tax filing needs.

. You sell fund shares, including an exchange from one fund to another.

. The fund makes a distribution to your account.

ABOUT THE FUNDS 17
based on the "average cost," single category method. This information is not
reported to the IRS, and you do not have to use it. You may calculate the
cost basis using other methods acceptable to the IRS, such as "specific
identification."

Taxes on fund distributions

o Distributions are taxable whether reinvested in additional shares or
received in cash.

Tax effect of buying shares before a capital gain distribution

T. ROWE PRICE 18
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------

o Following these procedures helps assure timely and accurate transactions.

Purchase Conditions

U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.

Sale (Redemption) Conditions

Telephone, Tele*Access/(R)/, and personal computer transactions

ABOUT THE FUNDS 19
Redemptions over $250,000

Excessive Trading

o T. Rowe Price may bar excessive traders from purchasing shares.

Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.

. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.

Keeping Your Account Open

T. ROWE PRICE 20
Small Account Fee

Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the funds' transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)

Signature Guarantees

o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.

You may need to have your signature guaranteed in certain situations, such
as:

. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.

. Remitting redemption proceeds to any person, address, or bank account not on
record.

. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.

. Establishing certain services after the account is opened.

MORE ABOUT THE FUNDS 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------

How are the funds organized?

The T. Rowe Price State Tax-Free Income Trust (the "Trust") was organized in
1986 as a Massachusetts business trust and is a "nondiversified, open-end
investment company," or mutual fund. The Short-Term Tax-Free Bond Fund was
organized in 1993, and the Tax-Free Bond Fund was organized in 1987. Mutual
funds pool money received from shareholders and invest it to try to achieve
specified objectives.

Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.

What is meant by shares?

As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.

Each share and fractional share entitles the shareholder to:

. Receive a proportional interest in a fund's income and capital gain
distributions.

. Cast one vote per share on certain fund matters, including the election of
fund trustees, changes in fundamental policies, or approval of changes in the
fund's management contract.

Do T. Rowe Price funds have annual shareholder meetings?

Who runs the funds?

General Oversight

T. ROWE PRICE 22
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by each fund's portfolio managers.

. Short-Term Tax-Free Bond Fund Charles B. Hill, Chairman, Patricia S. Deford,
Marcy M. Lash, Joseph K. Lynagh, Hugh D. McGuirk, Mary J. Miller, Julie A.
Salsbery, and Arthur S. Varnado. Mr. Hill was appointed chairman of the
fund's committee in 1996. He joined T. Rowe Price in 1991 and has been
managing investments since 1986.

. Tax-Free Bond Fund Mary J. Miller, Chairman, Patricia S. Deford, Marcy M.
Lash, Konstantine B. Mallas, Hugh D. McGuirk, and Arthur S. Varnado. Mrs.
Miller has been chairman of the fund's committee since its inception in 1993.
She joined T. Rowe Price in 1983 and has been managing investments since
1987.

Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of these and all other T. Rowe Price funds.

How are fund expenses determined?

The funds paid the expenses shown in Table 6 for the fiscal year ended
February 28, 1998.

<TABLE>
Table 6 Services Fees Paid
<CAPTION>
Fund Transfer Agent and Shareholder Services Accounting Services
<S> <C> <C> <C>

Short-Term Tax-Free $ 60,000 $66,000
Bond
-------------------------------------------------------
Tax-Free Bond 391,000 82,000
------------------------------------------------------------------------------
</TABLE>

<PAGE>

ABOUT THE FUNDS 23
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.

<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C>
0.334% First $50 billion/a/
--------------------------------------------------
0.305% Next $30 billion
--------------------------------------------------
0.300% Thereafter
- -------------------------------------------------------------------------------
a Represents a blended group fee rate containing various break points.
</TABLE>

Each fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over$85 billion
at March 31, 1998, the group fee was 0.32%.

Total Return

Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
<PAGE>

T. ROWE PRICE 24
Cumulative Total Return

Average Annual Total Return

Yield

The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the fund's net
asset value. For example, a fund providing $5 of annual income per share and
a price of $50 has a current yield of 10%. Yields can be calculated for any
time period.

INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities each
fund may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. Each fund's investment
program is subject to further restrictions and risks described in the
Statement of Additional Information.

Shareholder approval is required to substantively change each fund's
objective and certain investment restrictions noted in the following section
as "fundamental policies." The managers also follow certain "operating
policies" that can be changed without shareholder approval. However,
significant changes are discussed with shareholders in fund reports. Each
fund adheres to applicable investment restrictions and policies at the time
it makes an investment. A later change in circumstances does not cause a
violation of the restriction and will not require the sale of an investment
if it was proper at the time it was made.
<PAGE>

ABOUT THE FUNDS 25
The funds' holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in the prospectus. For
instance, these funds are not permitted to invest more than 10% of total
assets in residual interest bonds. While these restrictions provide a useful
level of detail about a fund's investment program, investors should not view
them as an accurate gauge of the potential risk of such investments. For
example, in a given period, a 5% investment in residual interest bonds could
have significantly more of an impact on a fund's share price than its
weighting in the portfolio. The net effect of a particular investment depends
on its volatility and the size of its overall return in relation to the
performance of all the funds' other investments.

Changes in the funds' holdings, the funds' performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.

o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help each fund achieve its
objective.

Types of Portfolio Securities

Fundamental policy Each fund is registered as a nondiversified mutual fund.
This means that the fund may invest a greater portion of its assets in a
single issuer than a diversified fund, which may subject the fund to greater
risk of price declines. However, because each fund intends to qualify as a
"regulated investment company" under the Internal Revenue Code, it must
invest so that, at the end of each quarter, with respect to 50% of its total
assets, no more than 5% of its assets is invested in the securities of a
single issuer, and with respect to the remaining 50%, no more than 25% of its
assets is invested in a single issuer.

Municipal Securities
Each fund's assets are invested primarily in various tax-free municipal debt
securities. The issuers have a contractual obligation to pay interest at a
stated rate on specific dates and to repay principal (the bond's face value)
on a specified date or dates. An issuer may have the right to redeem or
"call" a bond before maturity, and the funds may have to reinvest the
proceeds at lower rates.
<PAGE>

T. ROWE PRICE 26
There are two broad categories of municipal bonds. General obligation bonds
are backed by the issuer's "full faith and credit," that is, its full taxing
and revenue raising power. Revenue bonds usually rely exclusively on a
specific revenue source, such as charges for water and sewer service, to
generate money for debt service.

o In purchasing municipals, the funds rely on the opinion of the issuer's
bond counsel regarding the tax-exempt status of the investment.

Fundamental policy Under normal market conditions, each fund will not
purchase any security if, as a result, less than 80% of the fund's income
would be exempt from federal and Maryland state and local income taxes. The
income included under the 80% test does not include income from securities
subject to the alternative minimum tax.

Operating policy During periods of abnormal market conditions, for temporary
defensive purposes, each fund may invest without limit in high-quality,
short-term securities whose income is subject to federal and Maryland state
and local income taxes.

In addition to general obligation and revenue bonds, each fund's investments
may include, but are not limited to, the following types of securities:

Municipal Lease Obligations
A lease is not a full faith and credit obligation of the issuer and is
usually backed only by the borrowing government's unsecured pledge to make
annual appropriations for lease payments. There have been challenges to the
legality of lease financing in numerous states and, from time to time,
certain municipalities have considered not appropriating money for lease
payments. In deciding whether to purchase a lease obligation, the funds would
assess the financial condition of the borrower, the merits of the project,
the level of public support for the project, and the legislative history of
lease financing in the state. These securities may be less readily marketable
than other municipals. The funds may also purchase unrated lease obligations.
<PAGE>

ABOUT THE FUNDS 27
Municipal Warrants
Municipal warrants are essentially call options on municipal bonds. In
exchange for a premium, they give the purchaser the right, but not the
obligation, to purchase a municipal bond in the future. The funds might
purchase a warrant to lock in forward supply in an environment where the
current issuance of bonds is sharply reduced. Like options, warrants may
expire worthless and they may have reduced liquidity.

Operating policy Each fund may invest up to 2% of its total assets in
municipal warrants.

Securities With "Puts" or Other Demand Features

Some longer-term municipals give the investor the right to "put" or sell the
security at par (face value) within a specified number of days following the
investor's request - usually one to seven days. This demand feature enhances
a security's liquidity by dramatically shortening its effective maturity and
enables it to trade at a price equal to or very close to par. If a demand
feature terminates prior to being exercised, the funds may be forced to hold
the longer-term security, which could experience substantially more
volatility.

o T. Rowe Price periodically reviews the credit quality of the insurer.

The obligation of a municipal bond insurance company to pay a claim extends
over the life of each insured bond. Although defaults on insured municipal
bonds have been low to date and municipal bond insurers have met their
claims, there is no assurance this will continue. A higher-than-expected
default rate could strain the insurer's loss reserves and adversely affect
its ability to pay claims to bondholders, such as the funds. The number of
municipal bond insurers is relatively small, and not all of them have the
highest rating.

T. ROWE PRICE 28
not cover principal or interest under any other circumstances. The liquidity
provider's obligations under the SBPA are usually subject to numerous
conditions, including the continued creditworthiness of the underlying
borrower.

Synthetic or Derivative Securities
These securities are created from existing municipal bonds:

. Residual Interest Bonds (These are a type of potentially high-risk
derivative.) The income stream provided by an underlying bond is divided to
create two securities, one short term and one long term. The interest rate on
the short-term component is reset by an index or auction process normally
every seven to 35 days. After income is paid on the short-term securities at
current rates, the residual income goes to the long-term securities.
Therefore, rising short-term interest rates result in lower income for the
longer-term portion, and vice versa. The longer-term bonds can be very
volatile and may be less liquid than other municipals of comparable maturity.
The funds will invest only in securities deemed tax-exempt by a nationally
recognized bond counsel, but there is no guarantee the interest will be
exempt because the IRS has not issued a definitive ruling on the matter.

Operating policy Each fund may invest up to 10% of its total assets in
residual interest bonds.

ABOUT THE FUNDS 29
Both instruments may be volatile and of limited liquidity, and their use may
adversely affect each fund's total return.

Operating policy Each fund may invest up to 10% of its total assets in
embedded interest rate swaps and caps.

Operating policy Each fund may invest up to 15% of its net assets in illiquid
securities, including unmarketable private placements.

Types of Management Practices

Reserve Position
Each fund will hold a portion of its assets in short-term, tax-exempt money
market securities maturing in one year or less. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments; can help in structuring each fund's weighted average maturity;
and serves as a short-term defense during periods of unusual market
volatility. Each fund's reserve position can consist of shares of one or more
T. Rowe Price internal money market funds as well as short-term,
investment-grade securities, including tax-exempt commercial paper, municipal
notes, and short-term maturity bonds. Some of these securities may have
adjustable, variable, or floating rates. For temporary, defensive purposes,
each fund may invest without limitation in money market reserves.

When-Issued Securities and Forwards
New issues of municipals are often sold on a "when-issued" basis, that is,
delivery and payment take place 15 - 45 days after the buyer has agreed to
the purchase. Some bonds, called "forwards," have longer-than-standard
settlement dates, typically six to 24 months. When buying these securities,
each fund will maintain cash or high-grade marketable securities held by its
custodian equal in value to its commitment for these securities. Each fund
does not earn interest on when-issued and forward securities until
settlement, and the value of the securities may fluctuate between purchase
and settlement. Municipal "forwards" typically carry a substantial yield
premium to compensate the buyer for their greater interest rate, credit, and
liquidity risks.
<PAGE>

T. ROWE PRICE 30
Interest Rate Futures
Futures (a type of potentially high-risk derivative) are often used to manage
risk because they enable the investor to buy or sell an asset in the future
at an agreed-upon price. Specifically, the funds may use futures (and options
on futures) for any number of reasons, including: to hedge against a
potentially unfavorable change in interest rates and to adjust their exposure
to the municipal bond market; to protect portfolio value; in an effort to
enhance income; and to adjust portfolio duration. The use of futures for
hedging and non-hedging purposes may not always be successful. Their prices
can be highly volatile, using them could lower a fund's total return, and the
potential loss from their use could exceed a fund's initial exposure to such
contracts.

Operating policy Initial margin deposits on futures and premiums on options
used for non-hedging purposes will not equal more than 5% of each fund's net
asset value.

Fundamental policy Borrowings may not exceed 33 1/3% of total fund
assets.

Operating policy Each fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33 1/3% of the
fund's total assets. Each fund may not purchase additional securities when
borrowings exceed 5% of total assets.

Portfolio Turnover
Each fund generally purchases securities with the intention of holding them
for investment; however, when market conditions or other circumstances
warrant, securities may be purchased and sold without regard to the length of
time held. Due to the nature of each fund's investment program, a fund's
portfolio turnover rate may exceed 100%. Although the funds do not expect to
generate any taxable income, a high turnover rate may increase transaction
costs and may affect taxes paid by shareholders to the extent short-term
gains are distributed. The funds' portfolio turnover rates for the previous
three fiscal years are shown in Table 7.

<TABLE>
Table 7 Portfolio Turnover Rates
<CAPTION>
Fund 1996 1997 1998
<S> <C> <C> <C>

Short-Term Tax-Free Bond 39.3% 21.4% 60.4%
------------------------------
Tax-Free Bond 23.9 26.2 19.2
--------------------------------------------------------------
</TABLE>

<PAGE>

ABOUT THE FUNDS 31
Sector Concentration
It is possible that each fund could have a considerable amount of assets (25%
or more) in securities that would tend to respond similarly to particular
economic or political developments. An example would be securities of issuers
related to a single industry, such as health care or nuclear energy.

Credit-Quality Considerations
The credit quality of most bond issues is evaluated by rating agencies such
as Moody's and Standard & Poor's on the basis of the issuer's ability to meet
all required interest and principal payments. The highest ratings are
assigned to issuers perceived to be the best credit risks. T. Rowe Price
research analysts also evaluate all portfolio holdings of each fund,
including those rated by outside agencies. Other things being equal,
lower-rated bonds have higher yields due to greater risk.

<TABLE>
Table 8 Ratings of Municipal Debt Securities
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Moody's Standard & Fitch
Investors Poor's Investors
Service, Inc. Corporation Service, Inc. Definition

<PAGE>

T. ROWE PRICE 32
<TABLE>
Table 9 Explanation of Quality Ratings
<CAPTION>
<S> <C> <C>
Bond
Rating Explanation

<PAGE>

ABOUT THE FUNDS 33

Year 2000 Processing Issue

INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.

Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.

OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for gifts or transfers to minors
(UGMA/UTMA) accounts

Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
<PAGE>

ABOUT THE FUNDS 35
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117

By Wire
Call Investor Services for an account number and give the following wire
information to your bank:

PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number

Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.

Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received.

In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.

By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.

By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
<PAGE>

T. ROWE PRICE 36
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).

2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.

3. Remember to provide your account number and the fund name on the memo line of
your check.

Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500

(For mailgrams, express, registered, or certified mail, see previous section.)

By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.

EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------

ABOUT THE FUNDS 37
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.

Regular Mail
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220

Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Boulevard Owings Mills, MD 21117

RIGHTS RESERVED BY THE FUND
----------------------------------------------------------

T. ROWE PRICE 38
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308

Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.

Retirement Plans

T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.

After obtaining proper authorization, account transactions may also be conducted
on the Internet.
<PAGE>

ABOUT THE FUNDS 39
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.

Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.

Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:

Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.

Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
<PAGE>

T. ROWE PRICE 40
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720

Note: Subject to a $35 minimum commission for all trades except stock trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.

Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.

Discount Brokerage is a division of T. Rowe Price Investment Services, Inc.,
Member NASD/SIPC.
<PAGE>

ABOUT THE FUNDS 41
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.

The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.

Performance Update
A quarterly review of all T. Rowe Price fund results.

Insights
Educational reports on investment strategies and financial markets.

Investment Guides

<PAGE>

For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500

For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days

To Open a Discount Brokerage Account
1-800-638-5660

Investor Centers
101 East Lombard St.
Baltimore, MD 21202

T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117

Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006

ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071

4200 West Cypress St.
10th Floor
Tampa, FL 33607

Internet Address
www.troweprice.com
C12-040 7/1/98

<PAGE>

PROSPECTUS

July 1, 1998
New Jersey Tax-Free Bond Fund

A long-term bond fund for investors seeking income that is exempt from federal
and New Jersey income taxes.

T. Rowe Price
RAM LOGO
<PAGE>

FACTS AT A GLANCE
New Jersey Tax-Free Bond Fund

Investment Goal
The highest level of income exempt from federal and New Jersey income taxes
consistent with the fund's investment program.

As with all mutual funds, this fund may not meet its goal.

Strategy
Invests primarily in investment-grade New Jersey municipal bonds whose income
is exempt from federal and New Jersey income taxes. The fund's average maturity
is expected to exceed 15 years.

Risk/Reward
Higher income but also greater potential price fluctuation than shorter-term
municipal bond funds.

Investor Profile
New Jersey taxpayers who, because of their tax bracket, can benefit from income
that is exempt from federal and New Jersey income taxes. Not appropriate for
tax-deferred retirement plans, such as IRAs.

Fees and Charges

100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.

Investment Manager

T. Rowe Price State Tax-Free Income Trust
Prospectus

July 1, 1998

ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------

o Like all T. Rowe Price funds, this fund is 100% no load.

These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.

<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C> <C>
Shareholder Transaction Annual Fund Expenses Percentage of Fiscal 1998
Expenses (after reduction) Average Net Assets

Sales charge "load" on purchases None Management fee 0.40%/a/
------ ---------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
------ ---------------------------
Redemption fees None Total other (shareholder 0.25%
servicing, custodial, auditing, etc.)
------ ---------------------------
Exchange fees None Total fund expenses 0.65%/a/
------------------------------------------------------------------------------------------------------------------
</TABLE>

/a /To limit the fund's expenses, T. Rowe Price agreed to waive its fees and
bear any expenses from March 1, 1995, through February 28, 1997, which would
cause the fund's ratio of expenses to average net assets to exceed 0.65%.
Effective March 1, 1997, T. Rowe Price agreed to extend this expense
limitation for a period of two years through February 28, 1999. Fees waived
or expenses paid or assumed under these agreements are subject to
reimbursement to T. Rowe Price by the fund whenever the fund's expense ratio
is below 0.65%; however, no reimbursement will be made after February 28,
1999 (for the first agreement), or February 28, 2001 (for the second
agreement), or if it would result in the expense ratio exceeding 0.65%. Any
amounts reimbursed will have the effect of increasing fees otherwise paid by
the fund. Without this expense limitation, it is estimated that the fund's
management fee and total expense ratio would have been 0.42% and 0.67%,
respectively.