PRICE T ROWE STATE TAX FREE INCOME TRUST, 485APOS, 1999-04-28

PRICE T ROWE STATE TAX FREE INCOME TRUST
485APOS, 1999-04-28

Previous: LEVEL 3 COMMUNICATIONS INC, DEF 14A, 1999-04-28

Next: PRICE T ROWE STATE TAX FREE INCOME TRUST, NSAR-B, 1999-04-28

<PAGE>

Registration Nos. 033-06533/811-4521

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/

Post-Effective Amendment No. 34 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/

Amendment No. 29 /X/

T. ROWE PRICE STATE TAX-FREE INCOME TRUST
-----------------------------------------
Exact Name of Registrant as Specified in Charter

100 East Pratt Street, Baltimore, Maryland 21202
------------------------------------------------
Address of Principal Executive Offices

410-345-2000
------------
Registrant's Telephone Number, Including Area Code

Henry H. Hopkins
100 East Pratt Street, Baltimore, Maryland 21202
------------------------------------------------
Name and Address of Agent for Service

Approximate Date of Proposed Public Offering July 1, 1999
------------

It is proposed that this filing will become effective (check
appropriate box):

/ / Immediately upon filing pursuant to paragraph (b)
/ / On (date), pursuant to paragraph (b)

/ / 60 days after filing pursuant to paragraph (a)(1)
/X/ On July 1, 1999, pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485

If appropriate, check the following box:

/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

<PAGE>

PROSPECTUS
July 1, 1999
T. Rowe Price Florida Intermediate Tax-Free Fund

A bond fund seeking income exempt from federal income tax and principal exempt
from the Florida intangibles tax.
The Securities and Exchange Commission has not approved or disapproved of these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
T. ROWE PRICE RAM LOGO
<PAGE>

T. Rowe Price State Tax-Free Income Trust Florida Intermediate Tax-Free Fund
Prospectus

July 1, 1999

<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Objective, Strategy, Risks, and Expenses
-----------------------------------------------
Other Information About the Fund
-----------------------------------------------
Some Basics of Fixed Income Investing
-----------------------------------------------

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

3 MORE ABOUT THE FUND
Organization and Management
-----------------------------------------------
Understanding Performance Information
-----------------------------------------------
Investment Policies and Practices
-----------------------------------------------
Financial Highlights
-----------------------------------------------

4 INVESTING WITH T. ROWE PRICE
Account Requirements
and Transaction Information
-----------------------------------------------
Opening a New Account
-----------------------------------------------
Purchasing Additional Shares
-----------------------------------------------
Exchanging and Redeeming
-----------------------------------------------
Rights Reserved by the Fund
-----------------------------------------------
Information About Your Services
-----------------------------------------------
T. Rowe Price Brokerage
-----------------------------------------------
Investment Information
-----------------------------------------------
</TABLE>

Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc., and its affiliates managed $147.8 billion, including over $7.1 billion in
municipal bond assets, for more than seven million individual and institutional
investor accounts as of March 31, 1999.
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 government agency, and are subject to investment risks, including
possible loss of the principal amount invested.
<PAGE>

ABOUT THE FUND
1
OBJECTIVE, STRATEGY, RISKS, AND EXPENSES
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
reviews its major characteristics.

What is the fund's objective?

The fund seeks to provide, consistent with moderate price fluctuation, a high
level of income exempt from federal income taxes by investing primarily in
Florida municipal bonds. 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.

What is the fund's principal investment strategy?

At least 95% of the bonds purchased by the fund will be rated AAA or AA by at
least one national rating organization. Up to 5% may be rated A at the time
of purchase. The fund may purchase unrated bonds if T. Rowe Price believes
they are of comparable quality. The fund's weighted average maturity is
expected to vary between five and 10 years.

Investment decisions reflect the manager's outlook for interest rates and the
economy as well as the prices and yields of various securities. For example,
if we expect rates to fall, we may buy longer-term securities to provide
higher yield and appreciation potential. And if our economic outlook is
positive, we may invest in lower rated securities with higher yields. The
fund may sell holdings for a variety of reasons, such as to adjust average
maturity or quality or to shift assets into higher-yielding securities.

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 but not
from the Florida intangibles tax. The fund will generally purchase these
securities when they offer a comparably attractive combination of risk and
return.

Due to seasonal variations or shortages in the supply of suitable short-term
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>

T. ROWE PRICE
What are the main risks of investing in the fund?

Any of the following could cause a decline in your fund's price or income.

. Interest rate This risk refers to the decline in bond prices that
accompanies a rise in the overall level of interest rates. (Bond prices and
interest rates move in opposite directions.) Generally, the longer the
maturity of a fund or security, the greater its interest rate risk.

. Credit risk This is 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.

As of June 1, 1999, the state of Florida was rated Aaa by Moody's and AAA by
Standard & Poor's.

The fund may invest a significant portion of assets in securities that are
not general obligations of the state. These may be issued by local
governments or public authorities and are rated according to their particular
creditworthiness, which may vary significantly from 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.

. Geographical risk A fund investing within a single state is, by definition,
less diversified geographically than one investing across many states and
therefore has greater exposure to adverse economic and political changes
within that state.

. 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 securities is
strongly influenced by the value of tax-exempt income to investors. Broadly
lower income tax rates could reduce the advantage of owning municipals. In
addition, if the Florida intangibles tax were lowered, the value of Florida
municipals could be adversely affected.

. Other risks 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 subject to governmental regulation, and private activity
bonds without governmental backing.

The fund's investments in the Commonwealth of Puerto Rico and its public
corporations (as well as the U.S. territories of Guam and the Virgin Islands)
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.

. Derivatives risk To the extent the fund uses these instruments, it may be
exposed to additional volatility and potential losses.
<PAGE>

ABOUT THE FUND
. Year 2000 risk Organizations, governmental entities, and markets in which
the fund invests will be affected by the Year 2000 problem. While at this
time the fund cannot predict the degree of impact, it is possible that fund
returns could be adversely affected as a result.

As with any mutual fund, there can be no guarantee the fund will achieve its
objective.

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

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

Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. The fund can be used to generate income or to
diversify a stock portfolio. The higher your tax bracket, the more likely
tax-exempt securities are appropriate. 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 is inappropriate for tax-deferred accounts, such as IRAs.

. The fund should not represent your complete investment program or be used
for short-term trading purposes.

How has the fund performed in the past?

The bar chart and the average annual total return table indicate risk by
illustrating how much returns can differ from one year to the next. The
fund's past performance is no guarantee of its future returns.

The fund can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns accompanying the following chart. The
returns are only for the years depicted in the chart.
<PAGE>

T. ROWE PRICE
<TABLE>
INSERT BAR
CHART HERE
<CAPTION>
Calendar Year Total Returns
-------------------------------
<S> <C>
1994 -2.65%
1995 13.16
1996 3.67
1997 6.75
1998 5.63
-------------------------------
</TABLE>

Quarter ended Total return

Best quarter 3/31/1995 4.98%

Worst quarter 3/31/1994 -3.72%

<TABLE>
Table 1 Average Annual Total Returns
<CAPTION>
Periods ended December 31, 1998
Since inception
1 year 5 years (3/31/93)
<S> <C> <C> <C> <S>

Florida Intermediate Tax-Free Fund 5.63% 5.19% 5.99%
------------------------------------
Lipper Florida Intermediate Municipal Funds Average 5.28 4.47 5.37
Lehman Brothers 7-Year GO Municipal Bond Index 6.36 5.83 6.34
-----------------------------------------------------------------------------------------------
</TABLE>

These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.

What fees or expenses will I pay?

The fund is 100% no load. There are no fees or charges to buy or sell fund
shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
are no 12b-1 fees.

<TABLE>
Table 2 Fees and Expenses of the Fund
<CAPTION>
Annual fund operating expenses
(expenses that are deducted from fund assets)
-------------------------------------------------------------------------------------
<S> <C>
Management fee 0.37%/a/
Other expenses 0.24%
Total annual fund operating
expenses 0.61%/a/
Fee waiver/reimbursement 0.01%
Net expenses 0.60%
-------------------------------------------------------------------------------------
</TABLE>

/a /To limit the fund's expenses, T. Rowe Price contractually obligated itself
to waive its fees and bear any expenses from March 1, 1997, through February
28, 1999, which would cause the fund's ratio of expenses to average net
assets to exceed 0.60%. Effective March 1, 1999, T. Rowe Price agreed to
extend this expense limitation for a period of two years through February 28,
2001. 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
<PAGE>

ABOUT THE FUND
0.60%; however, no reimbursement will be made after February 28, 2001 (for
the first agreement), or February 28, 2003 (for the second agreement), or if
it would result in the expense ratio exceeding 0.60%. Any amounts reimbursed
have the effect of increasing fees otherwise paid by the fund.

Example. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in
this fund with that of other funds. Although your actual costs may be higher
or lower, the table shows how much you would pay if operating expenses remain
the same, the expense limitation currently in place is not renewed, you
invest $10,000, you earn a 5% annual return, and you hold the investment for
the following periods:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years

$61 $192 $335 $750
----------------------------------------------------
</TABLE>

OTHER INFORMATION ABOUT THE FUND
----------------------------------------------------------

What are the fund's potential rewards?

The regular income dividends you receive from the fund should be exempt from
federal income taxes. Your principal is also expected to be exempt from the
Florida intangibles personal property tax for shareholders who live in
Florida.

How does the portfolio manager try to reduce risk?

Consistent with the fund's objective, the portfolio manager uses various
tools to try to reduce risk and increase total return, including:

. 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.

. Adjustment of fund duration to try to reduce the drop in price when interest
rates rise or to benefit from the rise in price when rates fall. Duration is
a measure of a fund's price sensitivity to interest rate changes.

What is the credit quality of Florida general obligations and other fund
holdings?

As of June 1, 1999, the state was rated ___ by Moody's, ___ by Standard &
Poor's, and ___ 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 growth. However, the demand for governmental services
will continue to grow because of population growth and state demographics and
during a future eco-
<PAGE>

T. ROWE PRICE
nomic slowdown, could strain state finances. Credit ratings and the financial
and economic conditions of the state and its obligations 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 Florida depend principally on
their own revenue sources, they could experience budget shortfalls due to
cutbacks in state aid.

Certain fund holdings do 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.

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.

What is tax-free about municipal bonds and bond funds?

The regular income dividends you receive from the fund should be exempt from
regular federal income taxes. These dividends may also be exempt from your
state's income tax (if any). However, capital gains distributed by the funds
are taxable to you. (See Useful Information on Distributions and Taxes for
details.)

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

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

ABOUT THE FUND
AMT calculation. Relatively few taxpayers are required to pay the tax.
Normally, the fund will not purchase a security if, as a result, more than
20% of the fund's income would be subject to the AMT. The portion of income
subject to the AMT will be reported annually to shareholders. (Please see
Distributions and Taxes - Taxes on Fund Distributions.)

Additionally, under highly unusual circumstances, the IRS may determine that
a bond issued as tax-exempt should in fact be taxable. If a fund were to hold
such a bond, the fund could have to distribute taxable income or reclassify
as taxable income that previously distributed as tax-free.

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.

How can I tell if a tax-free or taxable fund is suitable for me?

The primary factor is your expected federal income tax rate. The higher your
tax bracket, the more likely tax-exempts will be appropriate. If a municipal
fund's tax-exempt yield is higher than the after-tax yield on a taxable bond
or money fund, then your income will be higher in the municipal fund. To find
what a taxable fund would have to yield to equal the yield on a municipal
fund, divide the municipal fund's yield by one minus your tax rate. For quick
reference, the next table shows a range of taxable-equivalent yields.

<TABLE>
Table 3 Taxable-Equivalent Yields
<CAPTION>
If your A tax-free yield of
federal tax 2% 3% 4% 5% 6% 7%
rate is: Equals a taxable yield of:
<S> <C> <C> <C> <C> <C> <C> <S>
28% 2.8% 4.2% 5.6% 6.9% 8.3% 9.7%
------------------------------------------
31% 2.9 4.3 5.8 7.2 8.7 10.1
------------------------------------------
36% 3.1 4.7 6.2 7.8 9.4 10.9
------------------------------------------
39.6% 3.3 5.0 6.6 8.3 9.9 11.6
--------------------------------------------------------------------------------------------------------------------
</TABLE>

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).
<PAGE>

T. ROWE PRICE
. Income Short- and intermediate-term bond funds typically offer more income
than money market funds and less income than longer-term bond funds.

SOME BASICS OF FIXED INCOME INVESTING
----------------------------------------------------------

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.)

Is yield the same as 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 yield?

Credit quality refers to a bond issuer's expected ability to make all
required interest and principal payments on time. 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-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 earlier, 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 that environment, a bond's "effective maturity" is
usually its nearest call date.

A bond mutual fund has no real maturity, but it does have a weighted 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. Some
funds target effective maturities rather than stated maturities when
computing the average. This 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.
<PAGE>

ABOUT THE FUND
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 this
sensitivity 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
expressed in years - 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 share price by multiplying fund duration 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. (T. Rowe Price bond fund shareholder reports
show duration.)

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 rates, as shown in Table 4.

<TABLE>
Table 4 How Interest Rates May Affect Bond Prices
<CAPTION>
Price per $1,000 of a Municipal Bond if Interest Rates:
Rates Rates
Bond maturity Coupon Increase Decrease
-------- 2% -------- 2%
1% 1%
<S> <S> <S> <C> <C> <C> <C> <S>
1 year 2000 3.00% $990 $981 $1,010 $1,020
------------------------------------------------------------
3 years 2002 3.55 972 945 1,029 1,058
------------------------------------------------------------
5 years 2004 3.75 956 914 1,046 1,095
------------------------------------------------------------
10 years 2009 4.10 922 852 1,085 1,180
------------------------------------------------------------
20 years 2019 4.87 883 784 1,138 1,303
------------------------------------------------------------
30 years 2029 4.94 861 749 1,175 1,397
-------------------------------------------------------------------------------------------------
</TABLE>

The table reflects yields on AAA-rated municipals as of May 31, 1999. 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.
<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 funds
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at the close of the New York Stock Exchange, normally 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. Current market values are used to price fund shares.

. 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 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>

ABOUT YOUR ACCOUNT
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 seven calendar days
after we receive your redemption request.

. 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
. 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.

. Dividends are paid on the first business day of each month.

. 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.
<PAGE>

T. ROWE PRICE
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.

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.

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 most new accounts or those opened by
exchange in 1984 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."
<PAGE>

ABOUT YOUR ACCOUNT
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 and long-term gains on securities held more
than 12 months are taxed at a maximum rate of 20%. If you realized a loss on
the sale or exchange of fund shares that you held six months or less, your
short-term loss will be reclassified to a long-term loss to the extent of any
long-term capital gain distribution received 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 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
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 taxable distributions.

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
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. The fund does not accept purchases made by credit card check.

Sale (Redemption) Conditions

Holds on immediate redemptions: 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.)

ABOUT YOUR ACCOUNT
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. 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. To deter such activity, the fund has
adopted an 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.

. 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 Information
About Your 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.

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.
<PAGE>

T. ROWE PRICE
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 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 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. In 1998, the fund changed its name from the Florida
Insured Intermediate Tax-Free Fund to its current name.

. Shareholders benefit from T. Rowe Price's 62 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
instructions on voting by mail or telephone, or on the Internet.
<PAGE>

T. ROWE PRICE
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.

. 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, Konstantine B.
Mallas, Mary J. Miller, Julie A. Salsbery, 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.

The Management Fee
This fee has two parts - an "individual fund fee," which reflects a fund's
particular characteristics, 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> <C>

0.334% First $50 billion/a/
-----------------------------------------
0.305% Next $30 billion
-----------------------------------------
0.300% Next $40 billion
-----------------------------------------
0.295% Thereafter
-----------------------------------------------------------------------------------------------------------------
</TABLE>

/a/ Represents a blended group fee rate containing various break points.

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 $89 billion
at March 31, 1999, the group fee was 0.32%. The individual fund fee is 0.05%.
<PAGE>

MORE ABOUT THE FUND
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 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 total
return figures, which may be compared with various indices, other performance
measures, or other mutual funds.

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 price at
the end of the given period. 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 Securities and Exchange Commission (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.
<PAGE>

T. ROWE PRICE
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.

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
<PAGE>

MORE ABOUT THE FUND
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.

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 fund relies 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, 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. Up to 20% of fund income could be derived
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:

T. ROWE PRICE
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.

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 FUND
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.

. 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
Derivatives and synthetics in which the fund may invest include:

. 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.

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. There is no limit on the amount
that the fund can invest in these securities.

. 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
<PAGE>

T. ROWE PRICE
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 Investment 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. The effect
of taking such a position is that the fund may not achieve its investment
objective.

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 fluc-
<PAGE>

MORE ABOUT THE FUND
tuate 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; as a cash management tool; 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 and other Price funds 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.

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, 1999, 1998, and 1997, were 26.9%, 25.0%, and 75.8%,
respectively.
<PAGE>

T. ROWE PRICE
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 hospital bonds.

Operating policy The fund is limited 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. High-yield bonds, also called "junk"
bonds, are those rated below BBB.

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>
<C> <S> <S> <S> <S> <S> <S> <S> <S> <S>
Moody's Standard &
Investors Poor's Fitch
Service, Inc. Corporation IBCA, 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 IBCA
Short Term MIG1/ VMIG1 Best quality SP1+ Very strong quality F-1+ Exceptionally strong
SP1 Strong grade F-1 quality
Very strong quality
----------------------------------------------------------------------------------------------
MIG2/ VMIG2 High quality SP2 Satisfactory grade F-2 Good credit quality
----------------------------------------------------------------------------------------------
Commercial P-1 Superior A-1+ Extremely strong F-1+ Exceptionally strong
Paper quality A-1 quality F-1 quality
Strong quality Very strong quality
----------------------------------------------------------------------------------------------
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
---------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

MORE ABOUT THE FUND
<TABLE>
Table 6 Explanation of Quality Ratings
<CAPTION>
<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 respect
CCC, CC 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 IBCA, Inc. AAA Highest quality; obligor has
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 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>

T. ROWE PRICE
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 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, governmental entities, and markets in which the T.
Rowe Price funds invest will be affected by the Year 2000 issue, but at this
time the funds cannot predict the degree of impact. For funds that invest in
foreign markets, especially emerging markets, it is possible foreign
companies and markets will not be as prepared for Year 2000 as domestic
companies and markets. To the extent the effect of Year 2000 is negative, a
fund's returns could be reduced.

FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 7, 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 incorporated by reference into the Statement of Additional
Information (available upon request). The total returns in the table
represent the rate that an investor would have earned or lost on an
investment in the fund (assuming reinvestment of all dividends and
distributions). The financial statements in the annual report were audited by
the fund's independent accountants, PricewaterhouseCoopers LLP.
<PAGE>

MORE ABOUT THE FUND
<TABLE>
Table 7 Financial Highlights
<CAPTION>
Year ended February 28
Tax-Exempt Money Fund 1995 1996/a/ 1997 1998 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

Net asset value,
beginning of period $ 10.30 $ 10.14 $ 10.61 $ 10.52 $ 10.75
Income From Investment Operations
Net investment income 0.43/b/ 0.47/b/ 0.46/b/ 0.46/b/ 0.46/b/
--------------------------------------------------------
Net gains or losses on
securities (both realized (0.14) 0.47 (0.07) 0.23 0.11
and unrealized)
--------------------------------------------------------
Total from investment
operations 0.29 0.94 0.39 0.69 0.57
Less Distributions
Dividends (from net (0.43) (0.47) (0.46) (0.46) (0.46)
investment income)
--------------------------------------------------------
Distributions (from capital (0.02) -- (0.02) -- --
gains)
--------------------------------------------------------
Total distributions (0.45) (0.47) (0.48) (0.46) (0.46)
--------------------------------------------------------
Net asset value, $ 10.14 $ 10.61 $ 10.52 $ 10.75 $ 10.86
end of period
--------------------------------------------------------
Total return 3.01%/b/ 9.41%/b/ 3.81%/b/ 6.71%/b/ 5.37%/b/
Ratios/Supplemental Data
Net assets, end of period $51,922 $67,260 $78,783 $90,941 $102,620
(in thousands)
--------------------------------------------------------
Ratio of expenses to average 0.60%/b/ 0.60%/b/ 0.60%/b/ 0.60%/b/ 0.60%/b/
net assets
--------------------------------------------------------
Ratio of net income to 4.38%/b/ 4.47%/b/ 4.39%/b/ 4.35%/b/ 4.23%/b/
average net assets
--------------------------------------------------------
Portfolio turnover rate 140.5% 98.7% 75.8% 25.0% 26.9%
--------------------------------------------------------------------------------------------
</TABLE>

/a/ Period ended February 29.

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

Mail via United States Postal Service
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21297-1300
<PAGE>

MORE ABOUT THE FUND
Mail via private carriers/overnight services
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117-4842

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

Receiving Bank: PNC Bank, N.A. (Pittsburgh) Receiving Bank ABA#: 043000096
Beneficiary: T. Rowe Price [fund name] Beneficiary Account: 1004397951
Originator to Beneficiary Information (OBI): name of owner(s) and account
number

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

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 Information About Your 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 retirement plans, 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.
<PAGE>

T. ROWE PRICE
By Wire
Call Shareholder Services or use the wire address listed in Opening a New
Account.

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.

Mail via United States Postal Service
T. Rowe Price Funds Account Services P.O. Box 17300 Baltimore, MD 21297-1300

/(For //mail via private carriers and overnight services//, 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.)

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

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.
<PAGE>

INVESTING WITH T. ROWE PRICE
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.

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. 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). Please use the appropriate address below:

Mail via United States Postal Service
T. Rowe Price Account Services P.O. Box 17302 Baltimore, MD 21297-1302

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 following rights: (1) to waive or lower
investment minimums; (2) to accept initial purchases by telephone or mailgram;
(3) to refuse any purchase or exchange order; (4) to cancel or rescind any
purchase or exchange order (including, but not limited to, orders deemed to
result in excessive trading, market timing, fraud, or 5% ownership) 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; (5)
to freeze any account and suspend account services when notice has been received
of a dispute
<PAGE>

T. ROWE PRICE
between the registered or beneficial account owners or there is reason to
believe a fraudulent transaction may occur; (6) to otherwise modify the
conditions of purchase and any services at any time; or (7) to act on
instructions believed to be genuine. These actions will be taken when, in the
sole discretion of management, they are deemed to be in the best interest of the
fund.

In an effort to protect the fund from the possible adverse effects of a
substantial redemption in a large account, as a matter of general policy, no
shareholder or group of shareholders controlled by the same person or group of
persons will knowingly be permitted to purchase in excess of 5% of the
outstanding shares of the fund, except upon approval of the fund's management.

INFORMATION ABOUT YOUR SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 Investor Services 1-800-638-5660
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize or request 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 discusses some of the services currently offered. Our
Services Guide, which we mail 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.
<PAGE>

INVESTING WITH T. ROWE PRICE
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 in this section).

Web Address www.troweprice.com
After obtaining proper authorization, account transactions may also be conducted
through our Web site on the Internet. If you subscribe to America Online/(R)/,
you can access our Web site via keyword "T. Rowe Price" and conduct transactions
in your account.

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 back 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.
<PAGE>

T. ROWE PRICE
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.

T. ROWE PRICE BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Investments available through our brokerage service include
stocks, options, bonds, and others 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 orders, 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. You will save 20% on commissions for stock trades and 10% on
option trades when you use Internet-Trader. All trades are subject to a $35
minimum commission 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 and S&P
Market Month newsletter, as well as access to on-line research tools can help
you better evaluate economic trends and investment opportunities.
<PAGE>

INVESTING WITH T. ROWE PRICE
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this free
service.

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

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. Most of this information is also
available on our Web site at www.troweprice.com.

Shareholder Reports
Fund managers' reviews of their strategies and performance. 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, Managing Your Retirement Distribution,
Personal Strategy Planner, Retirees Financial Guide, Retirement Planning Kit,
and Tax Considerations for Investors.

<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
informative reports.
For Mutual Fund or T. Rowe Price Brokerage Information
Investor Services
1-800-638-5660

For Existing Accounts
Shareholder Services
1-800-225-5132

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

Internet Address
www.troweprice.com

Headquarters
100 East Pratt St. Baltimore, MD 21202
Walk-in
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

Warner Center, Plaza 5 21800 Oxnard Street Suite 270 Woodland Hills, CA 91367

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

4410 Arrows West Drive Colorado Springs, CO 80907
A Statement of Additional Information about the fund has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. Further information about the fund's investments, including a review
of market conditions and the manager's recent strategies and their impact on
performance, is available in the annual and semiannual shareholder reports. To
obtain free copies of any of these documents, or for shareholder inquiries, call
1-800-638-5660.

Fund reports and Statements of Additional Information are also available from
the Securities and Exchange Commission by calling 1-800-SEC-0330 or by writing
the SEC's Public Reference Section, Washington, D.C. 20549-6009 (you will be
charged a duplicating fee); by visiting the SEC's public reference room; or by
consulting the SEC's Web site at www.sec.gov.
1940 Act File No. 811-4521
LOGO
F91-040 7/1/99

<PAGE>

PROSPECTUS
July 1, 1999
T. Rowe Price Georgia Tax-Free Bond Fund

A long-term bond fund for investors seeking income exempt from federal and
Georgia state income taxes.
The Securities and Exchange Commission has not approved or disapproved of these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
T. ROWE PRICE RAM LOGO
<PAGE>

T. Rowe Price State Tax-Free Income Trust Georgia Tax-Free Bond Fund
Prospectus

July 1, 1999

What is the fund's objective?

The fund seeks to provide, 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.

What is the fund's principal investment strategy?

We will invest at least 65% of assets in Georgia municipal bonds. The fund's
weighted average maturity is expected to exceed 15 years.

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.

Investment decisions reflect the manager's outlook for interest rates and the
economy as well as the prices and yields of various securities. For example,
if we expect rates to fall, we may buy longer-term securities to provide
higher yield and appreciation potential. And if our economic outlook is
positive, we may take advantage of the fund's 5% "basket" for
noninvestment-grade bonds. The fund may sell holdings for a variety of
reasons, such as to adjust average maturity or quality or to shift assets
into higher-yielding securities.

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.
The fund will generally purchase these securities when they offer a
comparably attractive combination of risk and return.

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 Georgia 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.

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

T. ROWE PRICE
What are the main risks of investing in the fund?

Any of the following could cause a decline in your fund's price or income.

As of June 1, 1999, the state of Georgia was rated Aaa by Moody's and AAA by
Standard & Poor's.

While generally considered to be of medium quality, securities in the BBB
category may be more susceptible to adverse economic or investing conditions,
and some BBB securities have speculative characteristics. The fund may retain
a security whose credit quality is downgraded after purchase.

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

ABOUT THE FUND
. Derivatives risk To the extent the fund uses these instruments, it may be
exposed to additional volatility and potential losses.

. Year 2000 risk Organizations, governmental entities, and markets in which
the fund invests will be affected by the Year 2000 problem. While at this
time the fund cannot predict the degree of impact, it is possible that fund
returns could be adversely affected as a result.

As with any mutual fund, there can be no guarantee the fund will achieve its
objective.

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

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

Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. The fund can be used to generate income or to
diversify a stock portfolio. The higher your tax bracket, the more likely
tax-exempt securities are appropriate. 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.

The fund is inappropriate for tax-deferred accounts, such as IRAs.

. The fund should not represent your complete investment program or be used
for short-term trading purposes.

How has the fund performed in the past?

<TABLE>
INSERT BAR
CHART HERE
<CAPTION>
Calendar Year Total Returns
-------------------------------
<S> <C>
1994 -5.91%
1995 17.80
1996 3.91
1997 9.69
-------------------------------
1998 6.17
-------------------------------
</TABLE>

<PAGE>

T. ROWE PRICE
Quarter ended Total return

Best quarter 3/31/1995 7.04%

Worst quarter 3/31/1994 -6.36%

<TABLE>
Table 1 Average Annual Total Returns
<CAPTION>
Periods ended December 31, 1998
Since inception
1 year 5 years (3/31/93)
<S> <C> <C> <C> <S>

Georgia Tax-Free Bond Fund 6.17% 6.05% 7.00%
------------------------------------
Lipper Georgia Municipal Debt Funds Average 5.37 5.19 6.29
Lehman Brothers Municipal Bond Index 6.48 6.22 6.85
-----------------------------------------------------------------------------------------------
</TABLE>

These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.

What fees or expenses will I pay?

The fund is 100% no load. There are no fees or charges to buy or sell fund
shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
are no 12b-1 fees.

<TABLE>
Table 2 Fees and Expenses of the Fund
<CAPTION>
Annual fund operating expenses
(expenses that are deducted from fund assets)
-------------------------------------------------------------------------------------
<S> <C>
Management fee 0.42%/a/
Other expenses 0.37%
Total annual fund operating
expenses 0.79%/a/
Fee waiver/reimbursement 0.14%
Net expenses 0.65%
-------------------------------------------------------------------------------------
</TABLE>

/a /To limit the fund's expenses, T. Rowe Price has contractually obligated
itself to waive its fees and bear any expenses that would cause the fund's
ratio of expenses to average net assets to exceed 0.65%. The first agreement
was from March 1, 1997, to February 28, 1999, and the second from March 1,
1999, to February 28, 2001. 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, 2001 (for the first agreement), or February
28, 2003 (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.

ABOUT THE FUND
table shows how much you would pay if operating expenses remain the same, the
expense limitation currently in place is not renewed, you invest $10,000, you
earn a 5% annual return, and you hold the investment for the following
periods:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years

$66 $224 $410 $951
----------------------------------------------------
</TABLE>

OTHER INFORMATION ABOUT THE FUND
----------------------------------------------------------

What are the fund's potential rewards?

The regular income dividends you receive from the fund should be exempt from
federal income taxes. They will also be exempt from and Georgia state taxes
for shareholders who live in Georgia.

How does the portfolio manager try to reduce risk?

Consistent with the fund's objective, the portfolio manager uses various
tools to try to reduce risk and increase total return, including:

. 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 and other fund
holdings?

As of June 1, 1999, Georgia was one of only eight states to have been awarded
the top rating by all three rating services. Standard & Poor's 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. Nonetheless, credit ratings and the
financial and economic conditions of the state and its obligations are
subject to change at any time.
<PAGE>

T. ROWE PRICE
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.

As of June 1, 1999, Puerto Rico's general obligations were rated ___ by
Moody's and ___ by Standard & Poor's.

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?

What is tax-free about municipal bonds and bond funds?

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

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

ABOUT THE FUND
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 portion of income subject to
the AMT will be reported annually to shareholders. (Please see Distributions
and Taxes - Taxes on Fund Distributions.)

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

How can I tell if a tax-free or taxable fund is suitable for me?

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.

. Income Short- and intermediate-term bond funds typically offer more income
than money market funds and less income than longer-term bond funds.
<PAGE>

T. ROWE PRICE
SOME BASICS OF FIXED INCOME INVESTING
----------------------------------------------------------

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

Is yield the same as total return?

What is credit quality and how does it affect yield?

What is meant by a bond fund's maturity?

ABOUT THE FUND
What is meant by a bond fund's duration?

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

The table reflects yields on AAA-rated municipals as of May 31, 1999. 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?

How and when shares are priced

. 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 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.

. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to seven calendar days
after we receive your redemption request.

. 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.

. Dividends are paid on the first business day of each month.

T. ROWE PRICE
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.

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

. The fund makes a distribution to your account.

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

T. ROWE PRICE
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
. 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. The fund does not accept purchases made by credit card check.

Sale (Redemption) Conditions

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 boxes that state 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 or computer are
genuine; 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. A confirmation is sent promptly after a
transaction. All telephone conversations are recorded.
<PAGE>

ABOUT YOUR ACCOUNT
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.

Keeping Your Account Open

Small Account Fee

T. ROWE PRICE
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 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?

. Shareholders benefit from T. Rowe Price's 62 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 fund?

T. ROWE PRICE
. 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, 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 as
a trader and has been managing investments since 1997.

<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C> <C>

/a/ Represents a blended group fee rate containing various break points.

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 T. Rowe Price
advertisements; and in the media.
<PAGE>

MORE ABOUT THE FUND
Total Return

Advertisements for a fund may include cumulative or average annual 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

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

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. Up to 20% of fund income
could be derived 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:

T. ROWE PRICE
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.