<PAGE>
T. Rowe Price
Tax-Free Insured Intermediate Bond Fund
August 31, 1994
Sector Diversification
Percent of
Net Assets
----------
Pre-Refunded Bonds 15%
Dedicated Tax Revenue 12
General Obligation - Local 10
Educational Revenue 10
Water & Sewer Revenue 9
Lease Revenue 8
Air & Sea Transportation Revenue 7
Percent of
Net Assets
----------
Hospital Revenue 7%
Electric Revenue 6
Housing Finance Revenue 4
Solid Waste Revenue 3
Ground Transportation Revenue 3
Nuclear Revenue 3
General Obligation - State 2
Pooled Loan Revenue 1
Portfolio of Investments / August 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Amounts in Thousands
----------------------------
Face Amount Value
----------- ----------
<S> <C> <C>
ALABAMA -- 0.8%
Alabama Municipal Electric Auth., (MBIA Insured), 5.75%, 9/1/01............ $ 500 $ 518
Hoover Board of Ed., Special School Tax, GO, TAW, (AMBAC Insured),
6.20%, 2/1/01 (Escrowed to Maturity)............................... 100 105
6.20%, 2/1/02 (Pre-refunded 2/1/01+)............................... 90 97
- ---------------------------------------------------------------------------------------------------------------------------
ALASKA -- 0.1%
Univ. of Alaska, (AMBAC Insured), 5.90%, 10/1/03........................... 115 120
- ---------------------------------------------------------------------------------------------------------------------------
ARIZONA -- 4.8%
Maricopa County, Mesa Unified School Dist., GO, (FGIC Insured),
5.40%, 7/1/05...................................................... 1,000 993
Mesa, GO, (AMBAC Insured), 6.75%, 7/1/98................................... 300 321
Phoenix, Airport Revenue, (MBIA Insured), 5.25%, 7/1/00.................... 2,000 2,023
Pima County, Water Improvement Dist. Special Assessment, (FGIC Insured),
5.90%, 1/1/04...................................................... 75 78
Tucson Airport Auth., (MBIA Insured), 5.30%, 6/1/03........................ 1,000 998
- ---------------------------------------------------------------------------------------------------------------------------
ARKANSAS -- 1.2%
North Little Rock, Electric System, (MBIA Insured), 6.10%, 7/1/02.......... 1,035 1,098
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Portfolio of Investments
<TABLE>
<CAPTION>
Amounts in Thousands
----------------------------
Face Amount Value
----------- ----------
<S> <C> <C>
CALIFORNIA -- 8.1%
Castaic Lake Water Agency, COP, (MBIA Insured), 5.30%, 8/1/02.............. $ 1,750 $ 1,758
San Jose, Airport Revenue, (MBIA Insured), 4.70%, 3/1/97................... 335 336
Santa Margarita/Dana Point Auth., GO, (MBIA Insured), 5.375%, 8/1/04....... 1,000 1,003
Santa Rosa, Wastewater, (FGIC Insured), 5.875%, 9/1/04..................... 70 73
Univ. of California, (MBIA Insured), 10.00%, 9/1/01........................ 3,370 4,293
- ---------------------------------------------------------------------------------------------------------------------------
COLORADO -- 0.1%
Jefferson County School Dist., GO, (AMBAC Insured), 6.00%, 12/15/06........ 100 104
- ---------------------------------------------------------------------------------------------------------------------------
CONNECTICUT -- 0.4%
South Central Connecticut Regional Water Auth., Water System
(FGIC Insured), 5.10%, 8/1/00...................................... 360 363
- ---------------------------------------------------------------------------------------------------------------------------
DELAWARE -- 0.1%
Wilmington, GO, (MBIA Insured), 6.10%, 7/1/04.............................. 125 130
- ---------------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA -- 1.6%
Washington D.C. Metropolitan Transit Auth., (FGIC Insured), 4.50%, 7/1/01.. 1,500 1,429
- ---------------------------------------------------------------------------------------------------------------------------
FLORIDA -- 16.4%
Boca Raton Community Redev. Agency, Mizner Park Project,
(FGIC Insured), 5.25%, 3/1/01.......................................... 150 152
5.60%, 3/1/04...................................................... 125 127
Dade County School Dist., GO, (MBIA Insured), 6.40%, 8/1/00................ 3,545 3,798
Dade County, Water & Sewer Systems, (FGIC Insured), 5.00%, 10/1/00......... 1,000 1,003
VRDN (Currently 3.10%)............................................. 500 500
Florida Division of Bond Fin. Dept., Dept. Natural Resources Preservation,
(MBIA Insured), 5.80%, 7/1/01........................................... 90 94
6.25%, 7/1/06...................................................... 700 737
Florida Municipal Power Agency, Tri City Project, (AMBAC Insured),
3.70%, 10/1/95..................................................... 175 175
Florida State Municipal Power Agency, Stanton Project, (AMBAC Insured),
6.50%, 10/1/20 (Pre-refunded 10/01/02+)............................ 1,000 1,099
Florida Turnpike Auth., (AMBAC Insured), 7.125%, 7/1/18
(Pre-refunded 7/1/01+)............................................. 1,500 1,695
Hillsborough County, (MBIA Insured), 5.40%, 7/1/03......................... 2,000 2,019
Hillsborough County IDA, PCR, Tampa Electric Co., VRDN (Currently 3.15%)... 200 200
Homestead, Special Insurance Assessment, Hurricane Andrew,
(MBIA Insured), 5.25%, 3/1/03...................................... 1,250 1,252
Jacksonville Electric Auth., Bulk Power Supply, 6.75%, 10/1/21
(Pre-refunded 10/1/00+)............................................ 1,000 1,104
St. Johns River Power Park System, 6.85%, 10/1/00
(Pre-refunded 10/1/95+)............................................ 90 94
Jacksonville HFA, Baptist Medical Center, (MBIA Insured),
VRDN (Currently 3.35%).................................................. 1,000 1,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
----------------------------
Face Amount Value
----------- ----------
<S> <C> <C>
GEORGIA -- 0.3%
Fulton County, Water and Sewer, (FGIC Insured), 5.30%, 1/1/99.............. $ 275 $ 280
- ---------------------------------------------------------------------------------------------------------------------------
HAWAII -- 1.2%
Hawaii, Airport Systems, (MBIA Insured), 6.70%, 7/1/05 *................... 1,000 1,066
- ---------------------------------------------------------------------------------------------------------------------------
ILLINOIS -- 3.4%
Chicago - O'Hare Int'l. Airport, International Terminal,
(MBIA Insured), 7.50%, 1/1/05 *.................................... 1,750 1,934
Illinois, GO, 7.00%, 6/1/99 (Pre-refunded 6/1/97+)......................... 90 97
Illinois HFA, Resurrection Health Care Systems, VRDN (Currently 3.35%)..... 600 600
Metropolitan Pier and Exposition Auth., McCormick Place Expansion,
(AMBAC Insured), Zero Coupon, 12/15/95............................. 490 463
- ---------------------------------------------------------------------------------------------------------------------------
LOUISIANA -- 0.2%
Louisiana PFA, Student Loan, 6.50%, 3/1/02 *............................... 100 105
Louisiana Recovery Dist., (AMBAC Insured), 7.375%, 7/1/96.................. 90 94
- ---------------------------------------------------------------------------------------------------------------------------
MARYLAND -- 11.7%
Maryland HHEFA, Francis Scott Key Medical Center, (FGIC Insured),
4.90%, 7/1/02...................................................... 1,000 981
Sinai Hosp., (AMBAC Insured), 5.40%, 7/1/06............................. 750 737
Maryland Stadium Auth., Convention Center Expansion, 5.375%, 12/15/03...... 1,500 1,506
(AMBAC Insured), 5.375%, 12/15/01.................................. 2,030 2,061
Maryland, GO, 7.00%, 1/1/01 (Pre-refunded 1/1/98+)......................... 1,000 1,080
Montgomery County, Solid Waste System, (AMBAC Insured), 5.30%, 6/1/02 *.... 1,000 999
Northeast Maryland Waste Disposal Auth., Southwest Resource Recovery Fac.,
(MBIA Insured), 7.05%, 1/1/02...................................... 2,000 2,190
Washington Suburban Sanitary Dist., Sewage Disposal, GO,
6.70%, 6/1/04 (Pre-refunded 6/1/01+)............................... 1,050 1,160
- ---------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS -- 7.6%
Commonwealth of Massachusetts, 7.00%, 6/1/02............................... 50 55
(FGIC Insured), 7.375%, 12/1/08 (Pre-refunded 12/1/98+)............ 500 558
Massachusetts Bay Transportation Auth., General Transportation,
(FGIC Insured), 5.20%, 3/1/03..................................... 1,000 993
Massachusetts HEFA, Capital Asset Pool,
(MBIA Insured), VRDN (Currently 3.05%)............................. 800 800
Massachusetts General Hosp., (AMBAC Insured), 5.10%, 7/1/99............. 50 51
Massachusetts Housing Fin. Agency, Insured Rental,
(AMBAC Insured), 5.90%, 1/1/03 *........................................ 3,000 3,013
5.90%, 7/1/03 *.................................................... 500 502
Massachusetts Turnpike Auth., (FGIC Insured), 4.70%, 1/1/03................ 1,000 952
- ---------------------------------------------------------------------------------------------------------------------------
MICHIGAN -- 0.6%
Michigan Hosp. Fin. Auth., Sisters of Mercy, (MBIA Insured), 7.50%, 8/15/07 500 548
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Portfolio of Investments
<TABLE>
<CAPTION>
Amounts in Thousands
----------------------------
Face Amount Value
----------- ----------
<S> <C> <C>
MINNESOTA -- 1.5%
Minneapolis & St. Paul Metropolitan Airports Commission, GO,
6.40%, 1/1/06 *.................................................... $ 1,300 $ 1,357
- ---------------------------------------------------------------------------------------------------------------------------
NEW JERSEY -- 5.8%
Bergen County Utilities Auth., Water PCR, (FGIC Insured), 5.00%, 12/15/99.. 225 228
New Jersey Transportation Trust Fund Auth.,
(AMBAC Insured), 5.40%, 12/15/02................................... 4,500 4,563
New Jersey Turnpike Auth., (AMBAC Insured), 6.40%, 1/1/07.................. 310 325
Ocean County Utilities Auth., Wastewater, (FGIC Insured), 6.70%, 1/1/07.... 175 185
- ---------------------------------------------------------------------------------------------------------------------------
NEW YORK -- 4.0%
Metropolitan Transportation Auth., (AMBAC Insured), 7.00%, 7/1/02.......... 85 95
Municipal Assistance Corp. for the City of New York, 6.875%, 7/1/07........ 600 642
Nassau County, GO, (FGIC Insured), 5.625%, 8/1/05.......................... 2,390 2,418
New York City Municipal Water Fin. Auth., (FGIC Insured), VRDN
(Currently 3.15%).................................................. 200 200
Water & Sewer Systems, (FGIC Insured), VRDN (Currently 3.10%)........... 300 300
- ---------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA -- 4.7%
Concord Utilities System, (MBIA Insured), 5.55%, 12/1/05................... 1,000 1,009
North Carolina Municipal Power Agency, (FGIC Insured),
7.75%, 1/1/15 (Pre-refunded 1/1/96+)............................... 2,000 2,146
(FGIC Insured), 5.20%, 1/1/00...................................... 1,100 1,109
- ---------------------------------------------------------------------------------------------------------------------------
OHIO -- 1.7%
Ohio State Building Auth., State Correctional Fac., (MBIA Insured),
7.35%, 8/1/04 (Pre-refunded 8/1/99+).................................... 900 1,010
Ohio Water Dev. Auth., Pure Water, (MBIA Insured), 5.20%, 12/1/99.......... 550 560
- ---------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA -- 3.0%
Commonwealth of Pennsylvania, (MBIA Insured), 6.00%, 11/1/99............... 500 526
Pennsylvania Intergovernmental Cooperative Auth., (FGIC Insured),
6.00%, 6/15/00..................................................... 1,900 1,988
Pennsylvania Turnpike Commission, (AMBAC Insured), 6.60%, 6/1/05........... 200 214
- ---------------------------------------------------------------------------------------------------------------------------
TEXAS -- 5.2%
Anderson County, Coffield Prison Farm, (AMBAC Insured), 5.40%, 3/15/01..... 1,385 1,406
Austin Utility Systems, (AMBAC Insured), 6.25%, 11/15/03................... 90 97
Fort Bend County, GO, (FGIC Insured), 6.50%, 9/1/01........................ 90 97
Harris County Health Fac. Hosp., Methodist Hosp., VRDN
(Currently 3.15%).................................................. 1,000 1,000
Houston Water and Sewer System, (MBIA Insured), 5.60%, 12/1/02............. 65 67
5.75%, 12/1/03..................................................... 1,100 1,133
San Antonio, Water Revenue, (FGIC Insured), 6.40%, 5/15/05................. 150 160
Univ. of Houston, (MBIA Insured), 7.40%, 2/15/05 (Pre-refunded 2/15/00+)... 700 780
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
----------------------------
Face Amount Value
----------- ----------
<S> <C> <C>
UTAH -- 2.7%
Intermountain Power Agency, 6.60%, 7/1/97.................................. $ 410 $ 430
Utah State Board of Regents, Student Loan, (AMBAC Insured),
5.95%, 11/1/01 *................................................... 2,060 2,094
- ---------------------------------------------------------------------------------------------------------------------------
VERMONT -- 0.3%
Vermont Ed. and Health Buildings Fin. Agency, Medical Center
Hosp. of Vermont, (FGIC Insured), 7.35%, 9/1/13 ........................ 350 350
- ---------------------------------------------------------------------------------------------------------------------------
VIRGINIA -- 2.8%
Augusta County IDA, Augusta Hosp., (AMBAC Insured), 6.45%, 9/1/04.......... 250 269
Virginia Ed. Loan Auth., Student Loan Program, 5.70%, 3/1/04 *............. 1,000 1,002
5.80%, 3/1/05 *.................................................... 1,250 1,252
- ---------------------------------------------------------------------------------------------------------------------------
WASHINGTON -- 6.5%
Tacoma Electric System, (FGIC Insured), 5.60%, 1/1/02...................... 2,000 2,046
5.80%, 1/1/04...................................................... 1,400 1,437
Washington HFA, Empire Health Services, (MBIA Insured), 5.00%, 11/1/99..... 750 753
Washington Public Power Supply System, 4.90%, 7/1/04....................... 1,500 1,400
(FGIC Insured), 7.25%, 7/1/00...................................... 325 359
- ---------------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA -- 3.6%
West Virginia, Parkways, Economic Dev. and Tourism Auth., (FGIC Insured),
7.125%, 7/1/19 (Pre-refunded 7/1/99+).............................. 3,000 3,334
TOTAL INVESTMENTS IN SECURITIES - 100.4% OF NET ASSETS (COST - $91,657)... $92,055
</TABLE>
* - Interest subject to alternative minimum tax
+ - Used in determining portfolio maturity
AMBAC - AMBAC Indemnity Corp.
COP - Certificates of Participation
FGIC - Financial Guaranty Insurance Company
GO - General Obligation
HFA - Health Facility Authority
HHEFA - Health & Higher Educational Facility Authority
IDA - Industrial Development Authority
MBIA - Municipal Bond Investors Assurance Corp.
PCR - Pollution Control Revenue
PFA - Public Facility Authority
TAW - Tax Anticipation Warrant
VRDN - Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Statement of Assets and Liabilities / August 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Amounts in Thousands
------------------------
<S> <C> <C>
ASSETS
Investments in securities at value (Cost - $91,657).......................... $92,055
Receivable for investment securities sold.................................... 5,529
Other assets................................................................. 1,424
-------
Total assets................................................................. $99,008
-------
LIABILITIES
Payable for investment securities purchased.................................. 7,030
Other liabilities............................................................ 303
-------
Total liabilities............................................................ 7,333
-------
NET ASSETS CONSISTING OF:
Accumulated net investment income - net of distributions..................... 14
Accumulated realized gain/losses - net of distributions...................... (1,169)
Net unrealized appreciation of investments................................... 398
Paid-in-capital applicable to 8,846,517 shares of $0.01 par value capital stock
outstanding; 1,000,000,000 shares authorized............................... 92,432
-------
Net Assets .................................................................... $91,675
=======
Net Asset Value Per Share ..................................................... $10.36
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Statement of Operations / Six Months Ended August 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Amounts in Thousands
--------------------
<S> <C> <C>
INVESTMENT INCOME
Interest income............................................................... $ 2,290
Expenses
Investment management fees.................................................. $ 104
Shareholder servicing fees & expenses....................................... 77
Custodian and accounting fees & expenses.................................... 54
Registration fees & expenses................................................ 33
Legal & auditing fees....................................................... 10
Prospectus & shareholder reports............................................ 6
Directors' fees............................................................. 4
Proxy & annual meeting...................................................... 1
Miscellaneous............................................................... 10
------
Total expenses.............................................................. 299
------
Net investment income......................................................... 1,991
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss)
Securities.................................................................. (1,266)
Futures..................................................................... 131
------
Net realized loss............................................................. (1,135)
Change in unrealized appreciation or depreciation............................. (655)
------
Net loss on investments....................................................... (1,790)
------
INCREASE IN NET ASSETS FROM OPERATIONS........................................ $ 201
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Amounts in Thousands
-------------------------------------
Six Months Ended Year Ended
August 31, 1994 February 28, 1994
---------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income................................... $ 1,991 $ 3,473
Net realized gain (loss) on investments................. (1,135) 656
Change in net unrealized appreciation or
depreciation of investments............................. (655) (22)
-------- --------
Increase in net assets from operations.................. 201 4,107
-------- --------
Distributions to shareholders
Net investment income................................... (1,991) (3,473)
Net realized gain on investments........................ (269) (503)
-------- --------
Decrease in net assets from
distributions to shareholders........................... (2,260) (3,976)
-------- --------
Capital share transactions
Sold 1,471 and 8,949 shares............................. 15,163 94,906
Distributions reinvested of 166 and 282 shares.......... 1,708 3,002
Redeemed 2,160 and 3,459 shares......................... (22,299) (36,837)
-------- --------
Increase (decrease) in net assets from capital share
transactions........................................... (5,428) 61,071
-------- --------
Total increase (decrease)................................. (7,487) 61,202
NET ASSETS
Beginning of period..................................... 99,162 37,960
-------- --------
End of period........................................... $ 91,675 $ 99,162
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Notes to Financial Statements / August 31, 1994 (Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Tax-Free Insured Intermediate Bond Fund (the Fund) is
registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company.
A) Security valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining maturities
of one year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity,
and type, as well as prices quoted by dealers who make markets in such
securities. Securities with remaining maturities less than one year are
stated at fair value which is determined by using a matrix system that
establishes a value for each security based on money market yields.
Financial futures contracts are valued at closing settlement prices.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by, or under the supervision of, the
officers of the Fund, as authorized by the Board of Directors.
B) Premiums and Discounts - Premiums on municipal securities are amortized
for both financial and tax reporting purposes. Discounts, other than
original issue, are not amortized for financial reporting purposes.
C) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on an identified cost basis. Distributions to shareholders are
recorded by the Fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
Payments ("variation margin") made or received by the Fund, dependent on the
daily fluctuations in the value of the futures contracts, are recorded as
unrealized gains or losses until the contracts are closed.
NOTE 2 - PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $74,303,000 and $75,367,000, respectively, for the six
months ended August 31, 1994.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its income.
At August 31, 1994, the aggregate cost of investments for federal
income tax and financial reporting purposes was $91,657,000 and net
unrealized appreciation aggregated $398,000, of which $693,000 related to
appreciated investments and $295,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the Fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management
fee, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.05% of average daily net assets and a Group Fee. The Group Fee is
based on the combined assets of certain mutual funds sponsored by the Manager
or Rowe Price-Fleming International, Inc. (the Group). The Group Fee rate
ranges from 0.48% for the first $1 billion of assets to 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at August 31,
1994, and for the six months then ended was 0.34%. The Fund pays a pro rata
portion of the Group Fee based on the ratio of the Fund's net assets to those
of the Group.
Under the terms of the investment agreement, the Manager is required
to bear any expenses through February 29, 1996, which
9
<PAGE>
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Notes to Financial Statements
would cause the Fund's ratio of expenses to average net assets to exceed 0.65%.
Thereafter, the Fund is required to reimburse the Manager for these expenses,
provided that average net assets have grown or expenses have declined
sufficiently so as to cause the Fund's ratio of expenses to average net assets
not to exceed 0.65% in any month, and that no such reimbursement shall be made
to the Manager after February 28, 1998. Pursuant to this agreement, $77,000 of
management fees were not accrued for the six months ended August 31, 1994.
Additionally, $228,000 of unaccrued management fees from the prior period are
subject to reimbursement through February 29, 1996.
T. Rowe Price Services, Inc. (TRPS) is a wholly owned subsidiary of
the Manager. TRPS provides transfer and dividend disbursing agent functions
and shareholder services for all accounts. The Manager, under a separate
agreement, calculates the daily share price and maintains the financial
records of the Fund. For the six months ended August 31, 1994, the Fund
incurred fees totalling approximately $89,000 for these services provided by
related parties. At August 31, 1994, investment management and service fees
payable were $43,000.
10
<PAGE>
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
For a share outstanding
throughout each period
-------------------------------------------------------
Six Months Nov. 30, 1992
Ended Year Ended (Commencement of
Aug. 31, Feb. 28, Operations) to
1994 1994 Feb. 28, 1993
-------------- ----------------- -----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............. $ 10.58 $ 10.55 $ 10.00
-------- -------- --------
Investment Activities
Net investment income.......................... 0.23* 0.48* 0.13*
Net realized and unrealized gain (loss)........ (0.19) 0.09 0.55
-------- -------- --------
Total from Investment Activities................. 0.04 0.57 0.68
-------- -------- --------
Distributions
Net investment income.......................... (0.23) (0.48) (0.13)
Net realized gain.............................. (0.03) (0.06) -
-------- -------- --------
Total Distributions.............................. (0.26) (0.54) (0.13)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD................... $ 10.36 $ 10.58 $ 10.55
======== ======== ========
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return..................................... 0.36% 5.49% 6.81%
Ratio of Expenses to Average Net Assets.......... 0.65%+* 0.33%* 0.00%+*
Ratio of Net Investment Income to
Average Net Assets............................. 4.33%+ 4.45% 5.08%+
Portfolio Turnover Rate.......................... 171.5%+ 74.8% 65.3%+
Net Assets, End of Period (in thousands)......... $ 91,675 $ 99,162 $ 37,960
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* The manager agreed to bear all expenses of the Fund through June 30, 1993.
Excludes expenses in excess of a 0.20% voluntary expense limitation in effect
July 1, 1993 through July 31, 1993, a 0.30% voluntary expense limitation in
effect August 1, 1993 through August 31, 1993, a 0.40% voluntary expense
limitation in effect September 1, 1993 through September 30, 1993, a 0.50%
voluntary expense limitation in effect October 1, 1993 through February 28,
1994, and a 0.65% voluntary expense limitation in effect March 1, 1994 through
February 29, 1996.
+ Annualized.
11
<PAGE>
Shareholder Services
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information and services -- at no extra cost.
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE--Shareholder service representatives are available from 8:00 a.m. to
10:00 p.m., Monday - Friday, and weekends from 9:00 a.m. to 5:00 p.m., E.T. Call
1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
IN PERSON--Visit one of our investor center locations to meet with a
representative who will be able to assist you with your accounts. While there,
you can drop off applications or obtain prospectuses and other literature.
AUTOMATED 24-HOUR SERVICES
Tele*Access/(R)/ (1-800-638-2587) provides in-formation such as
account balance, date and amount of your last transaction, latest dividend
payment, and fund prices and yields. Additionally, you have the ability to
request prospectuses, statements, account and tax forms; reorder checks; and
initiate purchase, redemption, and exchange orders for identically registered
accounts.
PC*Access/(R)/ provides the same information as Tele*Access, but on a
personal computer via dial-up modem.
ACCOUNT SERVICES
Checking--Write checks for $500 or more on any money market and bond
fund accounts (except the High Yield Fund).
Automatic Investing--Build your account over time by investing directly
from your bank account or paycheck with Automatic Asset Builder. Additionally,
Automatic Exchange enables you to set up systematic investments from one fund
account into another, such as from a money fund into a stock fund. A low, $50
minimum makes it easy to get started.
Automatic Withdrawal--If you need money from your fund account on a
regular basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options--Reinvest all or some of your
distributions, or take them in cash. We give you maximum flexibility and
convenience.
INVESTMENT INFORMATION
Combined Statement--A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your earnings by tax category, provides total
portfolio value, and lists your investments by type -- stock, bond, and money
market. Detail pages itemize account transactions by fund.
Quarterly Shareholder Reports--Portfolio managers review the performance
of the funds in plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report--A quarterly newsletter with relevant articles
on market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Insights--A library of information that includes reports on mutual fund
tax issues, investment strategies, and financial markets.
Detailed Investment Guides--Our widely ac-claimed Asset Mix Worksheet,
College Planning Kit, Retirees Financial Guide, Retirement Planning Kit (also
available on disk for PC use), and Guide to Risk-Adjusted Performance can help
you determine and reach your investment goals.
DISCOUNT BROKERAGE
You can trade stocks, bonds, options, precious metals, and other securities
at a substantial savings over regular commission rates. Call a shareholder
service representative for more information.
12
<PAGE>
Fellow Shareholders
Solid economic growth continued through the summer despite increases in
interest rates during late winter and spring. Real GDP increased 3.8% in the
second quarter, and payroll employment gains averaged 270,000 per month in
the three months ended August 31. The civilian unemployment rate remained
around 6.1% while the capacity utilization rate stayed at about 84% -- both
measures indicating little slack left in the economy. The Federal Reserve
paused to reassess the health of the economy in July, but continued to
increase rates in August when the strength of the economy became clearer. In
addition, fears of a pickup in inflation became evident.
Short-term interest rates continued to rise during the three months
ended August 31 because of these concerns and the Fed's fifth tightening
move, which raised its target for the federal funds rate another 50 basis
points to 4.75%. Intermediate-term interest rates did not rise as much as
short-term rates, while the yield on the benchmark 30-year Treasury bond was
essentially unchanged during the period. This contrasts with the preceding
quarter, when note and bond yields rose between 75 and 125 basis points in
response to earlier Fed moves.
In the tax-exempt market, short-term yields also rose while
intermediate- and long-term yields were mostly flat. The yield on six-month
notes closed the quarter at 3.65%, 40 basis points higher than at the end of
the May 31 quarter. Intermediate-term bonds with five-year maturities
actually rose slightly in price with yields declining five basis points to
4.75%, while the yield on AAA 30-year General Obligation bonds was up five
basis points to 6.1% during the period. This yield continued to average about
82% of the yield on long-term Treasury bonds, indicating that long-term
municipal bonds would benefit investors in income tax brackets over 18%.
Municipal Bond and Note Yields
[ARTWORK APPEARS HERE]
The disproportionate rise in short-term rates relative to longer-term
rates has led to a "flattening" of the yield curve typical of an economic
expansion. Notwithstanding the sharp rise in long-term rates earlier this
year, bond yields ordinarily do not fluctuate as much as money market yields
over the business cycle since bonds, with their long-term horizons, are less
susceptible to cyclical pressures. As a result, the "slope" of the yield
curve usually flattens in times of prosperity and steepens when the economy
is slowing down.
SUMMARY AND OUTLOOK
We expect the general rise in interest rates to lead to slower economic
growth during the second half of the year--but not to a decisive slowdown.
The Federal Reserve is likely to lift its target for the fed funds rate even
further to ensure that the economy does not continue growing at above-average
rates, spurring inflationary pressures. Further tightening moves will surely
lead to higher yields on money market securities, but the outlook for
intermediate- and long-term interest rates is more complex. To the extent
that economic growth slows, the 200-basis-point increase in long-term rates
over year-ago levels may be enough of a cushion against moderately higher
inflation. If economic growth is above average or if inflation gains
<PAGE>
momentum, however, we would expect intermediate- and long-term rates to trend
higher.
We are a bit more optimistic about the tax-exempt market than the
taxable market since demand for tax-free income remains strong. In addition,
the supply of new issues is down from levels of the past two years--a
situation that we expect to continue for the balance of the year. This
combination of strong demand and reduced supply should help tax-free bonds
outperform their taxable equivalents.
We appreciate the continued confidence that all of our shareholders
have placed in us.
Respectfully submitted,
/s/ William T. Reynolds
William T. Reynolds
Director
Fixed-Income Division
September 23, 1994
A Word About Derivatives
As you are probably aware, derivatives are securities whose returns are
determined by an underlying index, asset, or security. Some derivatives can
be extremely risky and others conservative, actually serving to reduce risk.
We have historically been cautious regarding the use of these instruments.
Over the past quarter, derivative usage other than for hedging principal
volatility represented less than 3% of any municipal bond fund's assets.
While our past use of derivatives has not been significant, we feel
that there are times when certain types of derivatives are appropriate. We
want to assure you that, as with any investment of your money, we will employ
a prudent and professional approach in the use of derivatives.
TAX-EXEMPT MONEY FUND
We began the quarter with expectations that tax-exempt short-term interest
rates would rise sharply because of both fundamental and technical factors.
Our fundamental outlook was validated by the Fed's mid-August tightening
move, but the market's reaction to the heavy seasonal slate of new offerings
was different from past experience. Typically, municipal note yields rise in
late July and August as supply outstrips demand and yields become attractive
relative to taxable securities until the new supply is absorbed.
This year, the move to higher yields from technical considerations
was muted for several reasons, including: an overall reduction in seasonal
borrowings from previous years; an extension in maturities past money market
range; and the restructuring of newly issued notes into variable rate
securities. While these factors alleviated supply pressures, on the demand
side money fund assets were firm throughout the quarter, and the short-term
market received support from long-term investors who held higher-than-normal
cash positions against rising interest rates.
Even though yields on short-term tax-exempt securities remained less
attractive than in the past compared with taxable equivalents, we extended
our weighted average maturity late in the quarter as it became apparent that
we might not see the previously favorable relationships. Our note purchases
were concentrated in the four- to nine-month maturity range. This maturity
range offers higher yields than shorter-term securities while preserving our
flexibility to take advantage of rising rates. Your Fund turned in favorable
performances for the three- and six-month periods, as is shown below.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ---------
<S> <C> <C>
Tax-Exempt Money Fund 0.58% 1.10%
Donoghue's Tax-Free
Money Fund Average* 0.55 1.06
=========================================================
</TABLE>
*Stockbroker and General Purpose Funds.
2
<PAGE>
TAX-FREE SHORT-INTERMEDIATE FUND
Intermediate-term interest rates took a breather after a volatile first
quarter, moving in a narrow range and ending the quarter virtually unchanged.
The contraction in the number of new issues and steady demand for
intermediate-term bonds, which are more defensive than long-term bonds, lent
stability to this part of the market. Issuance of new debt is about 40% below
year-ago levels throughout the country, with certain regional exceptions, and
new issuance of intermediate-term bonds has been particularly light.
We used this stable environment to lower our effective duration and
weighted average maturity slightly to 2.4 and 2.9 years, respectively, from
their levels at the end of the previous fiscal quarter. The weighted average
quality of portfolio securities was virtually unchanged at the AA level. In
line with our defensive posture, we emphasized higher-coupon bonds with
shorter durations rather than bonds with lower coupons, and avoided the
potential tax problem posed by "market discount" bonds, which allows capital
gains to be taxed as ordinary income in certain instances.
With inflationary pressures likely to increase, we expect to keep the
Fund's duration at the short end of our neutral range. Your Fund performed in
line with the average for its peer group during the quarter and outperformed
for the longer period, as shown below.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
---------- --------
<S> <C> <C>
Tax-Free Short-Intermediate
Fund 1.03% 0.90%
Lipper Short Municipal
Debt Fund Average 1.01 0.64
========================================================
</TABLE>
TAX-FREE INSURED INTERMEDIATE BOND FUND
A stable market environment during the quarter, strong demand for tax-free
income, and a reduction in the supply of new issues caused municipal bond
yields in the five- to 10-year range to decline by five basis points. AAA
General Obligation yields in this maturity range closed the quarter 70% to
73%, respectively, of the yields on similar Treasuries--versus 71% and 74% at
the end of May.
Portfolio duration was extended slightly from 5.3 years to 5.4 years
during the quarter. The weighted average maturity was also slightly longer at
7.2 years, compared with 7.0 years in May. We sold securities in the five- to
seven-year area and reinvested the proceeds in both cash and 10-year
securities. This type of maturity structure should set the stage for better
relative performance as the yield curve flattens. Your Fund also emphasized
high coupon bonds that cushion price declines when rates rise and eliminate
the "market discount" problem (which allows capital gains to be taxed as
income in some instances).
Over the past six months this Fund has performed well against its
peers with a somewhat defensive posture. At this point we see little reason
to change course, considering our expectation for higher interest rates. An
even more defensive posture could be warranted if the economy continues to
grow strongly.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ---------
<S> <C> <C>
Tax-Free Insured Intermediate
Bond Fund 1.31% 0.36%
Lipper Intermediate Municipal
Debt Fund Average 1.37 -0.28
=========================================================
</TABLE>
3
<PAGE>
TAX-FREE INCOME FUND
During the last three- and six-month periods we managed the Fund less
aggressively than in prior years, believing that stronger economic growth and
the Federal Reserve's tightening would result in higher interest rates. The
Fund's duration, which measures sensitivity to changing rates, remained in
the 7.5- to 7.7-year range and reflects a neutral posture relative to the
market. The Fund's weighted average maturity of approximately 17 1/2 years is
down significantly from year-ago levels, and the Fund's portfolio contains
less volatile bonds than in the past.
Throughout the first eight months of the year, we have been buying
securities exhibiting relatively low volatility, whose expected returns are
generated primarily by income. Specifically, we have been concentrating on
bonds with higher coupons with maturities in the vicinity of 20 years. In
most instances we preferred high-quality bonds since the yields on
lower-quality securities are not high enough to compensate for the additional
risk.
We chose not to be fully defensive in the last quarter since rates
have already risen substantially and municipal bonds offered good value
compared with other fixed-income securities on an after-tax basis.
A major benefit of the rise in rates so far this year is an increase
in the Fund's dividend yield from 5.57% to 5.74%. Additionally, your Fund
outperformed its peer group in both the three- and six-month periods.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ---------
<S> <C> <C>
Tax-Free Income Fund 1.45% -1.39%
Lipper General Municipal
Debt Fund Average 1.38 -1.83
=========================================================
</TABLE>
TAX-FREE HIGH YIELD FUND
The quarter ended August 31 was favorable for the Fund. We maintained a neutral
posture as our concern about rising interest rates was offset significantly by
favorable market conditions for municipal bonds. We currently define as neutral
a duration between 6.75 and 7.5 years and a weighted average maturity (WAM)
between 20 and 22 years. We maintained an effective duration of 7.5 and a WAM of
around 20 years. The percentage of securities with maturities of 10 years or
longer was unchanged at 85% from the previous quarter. The Fund's weighted
average credit quality held steady at BBB+, and exposure to below-investment-
grade securities was unchanged at 24% of net assets.
The relatively low level of new issues coming to market served as
support for tax-exempt bond prices, as previously discussed. Looking ahead to
the third fiscal quarter, we may adopt a slightly more defensive posture,
particularly if inflationary pressures show signs of building up. The Fund's
three- and six-month results compared favorably with peer group averages
shown below.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ----------
<S> <C> <C>
Tax-Free High Yield Fund 1.73% -1.01%
Lipper High Yield Municipal
Debt Fund Average 1.58 -1.47
=========================================================
</TABLE>
4
<PAGE>
Financial Summary
<TABLE>
<CAPTION>
Net Asset Value Dividend Per Share Dividend Yield*
Per Share 3 Months Ended 3 Months Ended
------------------ ------------------ -------------------
05/31/94 08/31/94 05/31/94 08/31/94 05/31/94 08/31/94
<C> <C> <C> <C> <C> <C>
Tax-Exempt Money $ 1.00 $ 1.00 $ 0.005 $ 0.006 2.38% 2.66%
Tax-Free Short-Intermediate 5.26 5.26 0.053 0.054 4.00 4.08
Tax-Free Insured Intermediate Bond 10.34 10.36 0.111 0.114 4.28 4.41
Tax-Free Income 9.22 9.22 0.129 0.133 5.57 5.74
Tax-Free High Yield 11.71 11.73 0.180 0.181 6.07 6.18
</TABLE>
* Dividends earned and reinvested for the periods indicated are annualized and
divided by the average daily net asset values per share for the same period;
the Tax-Exempt Money Fund reports a 7-day compound yield.
Quality Diversification
<TABLE>
<CAPTION>
Weighted Average
Quality Ratings* Quality*
---------------------------------------------- ---------------------
1 2 3 4 5-10 05/31/94 08/31/94
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money 13% 85% 2% 0% 0% 1.9 1.9
Tax-Free Short-Intermediate 22 54 22 2 - 2.1 2.1
Tax-Free Insured Intermediate Bond 14 74 12 - - 1.9 2.0
Tax-Free Income 10 52 26 11 1 2.4 2.4
Tax-Free High Yield 5 18 16 36 25 3.6 3.6
</TABLE>
* On a T. Rowe Price scale of 1 to 10, with Grade 1 representing highest
quality.
5
Duration and Maturity
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Effective Duration (years) Maturity (years)
-------------------------- ------------------
05/31/94 08/31/94 05/31/94 08/31/94
<S> <C> <C> <C> <C>
Tax-Exempt Money - - 49* 58*
Tax-Free Short-Intermediate 2.6 2.4 3.1 2.9
Tax-Free Insured Intermediate Bond 5.3 5.4 7.0 7.2
Tax-Free Income 7.6 7.7 17.6 17.8
Tax-Free High Yield 7.3 7.5 19.6 20.6
</TABLE>
* Maturity is in days.
5
<PAGE>
Shareholder Services
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information and services -- at no extra cost.
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE--Shareholder service representatives are available from 8:00 a.m. to
10:00 p.m., Monday - Friday, and weekends from 9:00 a.m. to 5:00 p.m., E.T. Call
1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
IN PERSON--Visit one of our investor center locations to meet with a
representative who will be able to assist you with your accounts. While there,
you can drop off applications or obtain prospectuses and other literature.
AUTOMATED 24-HOUR SERVICES
Tele*Access/(R)/ (1-800-638-2587) provides information such as account
balance, date and amount of your last transaction, latest dividend payment, and
fund prices and yields. Additionally, you have the ability to request
prospectuses, statements, account and tax forms; reorder checks; and initiate
purchase, redemption, and exchange orders for identically registered accounts.
PC*Access/(R)/ provides the same information as Tele*Access, but on a
personal computer via dial-up modem.
ACCOUNT SERVICES
Checking--Write checks for $500 or more on any money market and bond
fund accounts (except the High Yield Fund).
Automatic Investing--Build your account over time by investing directly
from your bank account or paycheck with Automatic Asset Builder. Additionally,
Automatic Exchange enables you to set up systematic investments from one fund
account into another, such as from a money fund into a stock fund. A low, $50
minimum makes it easy to get started.
Automatic Withdrawal--If you need money from your fund account on a
regular basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options--Reinvest all or some of your
distributions, or take them in cash. We give you maximum flexibility and
convenience.
INVESTMENT INFORMATION
Combined Statement--A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your earnings by tax category, provides total
portfolio value, and lists your investments by type -- stock, bond, and money
market. Detail pages itemize account transactions by fund.
Quarterly Shareholder Reports--Portfolio managers review the performance
of the funds in plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report--A quarterly newsletter with relevant articles
on market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Insights--A library of information that includes reports on mutual fund
tax issues, investment strategies, and financial markets.
Detailed Investment Guides--Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Retirees Financial Guide, Retirement Planning Kit (also
available on disk for PC use), and Guide to Risk-Adjusted Performance can help
you determine and reach your investment goals.
DISCOUNT BROKERAGE
You can trade stocks, bonds, options, precious metals, and other securities
at a substantial savings over regular commission rates. Call a shareholder
service representative for more information.
6
<PAGE>
T. Rowe Price No-Load Mutual Funds
STABILITY
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money
Market
Tax-Exempt Money
CONSERVATIVE INCOME
Adjustable Rate
U.S. Government
Short-Term Bond
Short-Term Global Income
Summit Limited-Term Bond
U.S. Treasury Intermediate
Florida Insured Intermediate
Tax-Free
Maryland Short-Term
Tax-Free Bond
Summit Municipal
Intermediate
Tax-Free Insured
Intermediate Bond
Tax-Free Short-Intermediate
INCOME
Global Government Bond
GNMA
New Income
Spectrum Income
Summit GNMA
U.S. Treasury Long-Term
California Tax-Free Bond
Georgia Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Tax-Free Income
Virginia Tax-Free Bond
AGGRESSIVE INCOME
High Yield
International Bond
Tax-Free High Yield
CONSERVATIVE GROWTH
Balanced
Capital Appreciation
Dividend Growth
Equity Income
Equity Index
Growth & Income
Spectrum Growth
Value
GROWTH
Blue Chip Growth
European Stock
Growth Stock
International Stock
Japan
Mid-Cap Growth
New Era
Small-Cap Value
AGGRESSIVE GROWTH
International Discovery
Latin America
New America Growth
New Asia
New Horizons
OTC
Science & Technology
PERSONAL STRATEGY FUNDS
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
Call if you want to know about any T. Rowe Price Fund. We'll send you a
prospectus with more complete information, including management fees and other
expenses. Read it carefully before you invest or send money.
7
<PAGE>
SemiAnnual Report
T. Rowe Price
- -------------
Tax-Free Funds
August 31, 1994
[LOGO OF RAM APPEARS HERE]
For yield, price, last transaction
and current balance, 24 hours,
7 days a week, call:
1-800-638-2587 toll free
625-7676 Baltimore area
For assistance with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distri-
bution only to shareholders and to
others who have received a copy of
the prospectus of the T. Rowe Price
Tax-Free Funds.
[LOGO OF T. ROWE PRICE APPEARS HERE]
<PAGE>
Chart for Tax-Free Funds semiannual report (Aug. 31, 1994)
Chart 1. Municipal bond and note yields. Line graphs of 30-year AAA GO bonds,
5-year AAA GO, and 6-month Moody's Investment Grade 1 Note, showing yields from
8/31/93 through 8/31/94.
