<PAGE>
- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
TAX-FREE INSURED INTERMEDIATE BOND FUND
August 31, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sector Diversification
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
Pre-refunded Bonds 31%
- --------------------------------------------------------------------------------
Dedicated Tax Revenue 15
- --------------------------------------------------------------------------------
Educational Revenue 6
- --------------------------------------------------------------------------------
Air and Sea Transportation Revenue 6
- --------------------------------------------------------------------------------
Water and Sewer Revenue 6
- --------------------------------------------------------------------------------
Lease Revenue 6
- --------------------------------------------------------------------------------
Ground Transportation Revenue 5
- --------------------------------------------------------------------------------
Electric Revenue 5
- --------------------------------------------------------------------------------
Solid Waste Revenue 5
- --------------------------------------------------------------------------------
General Obligation - State 4
- --------------------------------------------------------------------------------
General Obligation - Local 4
- --------------------------------------------------------------------------------
Nuclear Revenue 2
- --------------------------------------------------------------------------------
Housing Finance Revenue 1
- --------------------------------------------------------------------------------
Hospital Revenue 1
- --------------------------------------------------------------------------------
Other Assets Less Liabilities 3
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Statement of Net Assets
T. Rowe Price Tax-Free Insured Intermediate Bond Fund/August 31, 1995
(Unaudited)
- --------------------------------------------------------------------------------
(amounts in thousands)
<TABLE>
<CAPTION>
Amount Value
--------- -------
<S> <C> <C>
ALABAMA -- 0.1%
Hoover Board of Ed., Special School Tax, GO, TAW, (AMBAC Insured),
6.20%, 2/1/02 (Pre-refunded 2/1/01+)................................... $ 90 $ 99
- --------------------------------------------------------------------------------------------------------------------
ALASKA -- 1.3%
Anchorage, Electric Utility, (MBIA Insured), 7.625%, 12/1/15
(Pre-refunded 6/1/96+).................................................... 1,000 1,047
Univ. of Alaska, (AMBAC Insured), 5.90%, 10/1/03................................ 115 123
- --------------------------------------------------------------------------------------------------------------------
ARIZONA -- 2.5%
Arizona Transportation Board, Maricopa County, Excise Tax,
(AMBAC Insured), 5.60%, 7/1/02............................................ 2,000 2,108
Pima County, Water Improvement Dist., (FGIC Insured), 5.90%, 1/1/04............. 75 80
- --------------------------------------------------------------------------------------------------------------------
ARKANSAS -- 1.3%
North Little Rock, Electric System, (MBIA Insured), 6.10%, 7/1/02............... 1,035 1,119
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Value
--------- -------
<S> <C> <C>
CALIFORNIA -- 9.9%
California Public Works Board, Dept. of Corrections, (MBIA Insured),
6.00%, 11/1/05......................................................... $ 1,550 $ 1,667
Los Angeles County Metropolitan Transportation Auth., Sales Tax,
(MBIA Insured), 6.50%, 7/1/20 (Pre-refunded 7/1/02+)...................... 2,500 2,823
Univ. of California, Multiple Purpose, (MBIA Insured), 10.00%, 9/1/01........... 3,370 4,301
- --------------------------------------------------------------------------------------------------------------------
FLORIDA -- 6.7%
Charlotte County, Utility, (FGIC Insured),
6.875%, 10/1/21 (Pre-refunded 10/1/01+)................................ 1,650 1,877
Dade County, (MBIA Insured), Zero Coupon, 2/1/09................................ 500 234
Indian Trace Community Dev. Dist., Water Management, (MBIA Insured),
5.50%, 5/1/07.......................................................... 1,500 1,527
Jacksonville Electric Auth., St. Johns River Power Park,
6.85%, 10/1/00 (Pre-refunded 10/1/95+)................................. 90 92
Reedy Creek Improvement Dist., Utility, (MBIA Insured),
6.25%, 10/1/11 (Pre-refunded 10/1/01+)................................. 2,000 2,209
- --------------------------------------------------------------------------------------------------------------------
GEORGIA -- 1.3%
Georgia, GO, 7.20%, 3/1/02...................................................... 1,000 1,152
- --------------------------------------------------------------------------------------------------------------------
HAWAII -- 1.8%
Hawaii, Airport Systems, (MBIA Insured), 6.70%, 7/1/05*......................... 1,000 1,085
Maui County, GO, (FGIC Insured), 6.00%, 12/15/05................................ 500 544
- --------------------------------------------------------------------------------------------------------------------
ILLINOIS -- 2.7%
Chicago - O'Hare Int'l. Airport, Int'l. Terminal, (MBIA Insured),
7.50%, 1/1/05*......................................................... 1,750 1,950
Metropolitan Pier & Exposition Auth., McCormick Place Expansion,
(AMBAC Insured), Zero Coupon, 12/15/95.................................... 490 485
- --------------------------------------------------------------------------------------------------------------------
LOUISIANA -- 1.7%
New Orleans Aviation Board, (MBIA Insured), VRDN (Currently 3.50%).............. 1,245 1,245
Plaquemines Parish, The British Petroleum Company, VRDN
(Currently 3.70%)*........................................................ 300 300
- --------------------------------------------------------------------------------------------------------------------
MARYLAND -- 9.2%
Maryland CDA, Single Family, 5.70%, 4/1/06...................................... 1,000 1,022
Maryland DOT, 6.00%, 9/1/00..................................................... 1,750 1,873
Maryland HHEFA, Univ. of Maryland Medical System, (FGIC Insured),
6.50%, 7/1/21 (Pre-refunded 7/1/01+)................................... 1,250 1,374
Northeast Maryland Waste Disposal Auth., Southwest
Resource Recovery Fac., (MBIA Insured), 7.10%, 1/1/03........................ 3,500 3,962
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Value
--------- -------
<S> <C> <C>
MASSACHUSETTS -- 3.2%
Massachusetts, GO, (FGIC Insured), 6.30%, 11/1/05............................... $ 1,250 $ 1,386
Massachusetts Municipal Wholesale Electric Company, (MBIA Insured),
6.375%, 7/1/01......................................................... 1,325 1,437
- --------------------------------------------------------------------------------------------------------------------
MICHIGAN -- 3.1%
Michigan Building Auth., Lease, (AMBAC Insured), 6.25%, 10/1/03................. 2,000 2,192
Michigan Hosp. Fin. Auth., Sisters of Mercy, (MBIA Insured),
7.50%, 8/15/07......................................................... 500 545
- --------------------------------------------------------------------------------------------------------------------
MINNESOTA -- 1.2%
Minneapolis & St. Paul Metropolitan Airports Commission, GO,
6.40%, 1/1/06*......................................................... 1,000 1,061
- --------------------------------------------------------------------------------------------------------------------
NEW JERSEY -- 3.1%
New Jersey Economic Dev. Auth., Market Transition Fac., (MBIA Insured),
5.70%, 7/1/05.......................................................... 1,050 1,105
New Jersey Transportation Trust Fund Auth., (MBIA Insured),
6.25%, 6/15/03......................................................... 1,500 1,650
- --------------------------------------------------------------------------------------------------------------------
NEW YORK -- 7.0%
Metropolitan Transportation Auth., (AMBAC Insured), 7.00%, 7/1/02............... 85 97
(MBIA Insured), 6.25%, 7/1/05............................................. 1,420 1,568
Municipal Assistance Corp. for the City of New York, 6.875%, 7/1/07............. 600 639
New York State Thruway Auth., Highway & Bridge Trust,
(AMBAC Insured), 6.00%, 4/1/00............................................ 1,000 1,066
New York State Urban Dev. Corp., COP, 7.75%, 1/1/14
(Pre-refunded 1/1/00+).................................................... 2,500 2,871
- --------------------------------------------------------------------------------------------------------------------
OHIO -- 5.3%
Cleveland, Waterworks, (AMBAC Insured), 6.50%, 1/1/21
(Pre-refunded 1/1/02+).................................................... 2,150 2,400
Ohio Building Auth., State Correctional Fac., (MBIA Insured),
7.35%, 8/1/04 (Pre-refunded 8/1/99+)................................... 2,065 2,325
- --------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA -- 2.5%
Pennsylvania Intergovernmental Cooperative Auth., (FGIC Insured),
6.00%, 6/15/00......................................................... 1,900 2,018
Pennsylvania Turnpike Commission, (AMBAC Insured), 6.60%, 6/1/05................ 200 219
- --------------------------------------------------------------------------------------------------------------------
PUERTO RICO -- 1.2%
Puerto Rico Commonwealth, GO, (MBIA Insured), 5.50%, 7/1/01..................... 1,000 1,052
- --------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA -- 1.3%
South Carolina Public Service Auth., Santee Cooper, (AMBAC Insured),
6.50%, 7/1/24 (Pre-refunded 7/01/02+).................................. 1,000 1,123
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Value
--------- -------
<S> <C> <C>
TENNESSEE -- 0.7%
Metropolitan Nashville Airport Auth., (FGIC Insured),
7.75%, 7/1/06 (Pre-refunded 7/1/01+)................................... $ 500 $ 588
- --------------------------------------------------------------------------------------------------------------------
TEXAS -- 9.5%
Dallas, 6.125%, 2/15/05 (Pre-refunded 2/15/03+)................................. 1,000 1,088
Dallas-Fort Worth Regional Airport, (FGIC Insured), 7.75%, 11/1/03.............. 1,000 1,188
Harris County, Toll Roads, (AMBAC Insured),
6.50%, 8/15/17 (Pre-refunded 8/15/02+)................................. 1,500 1,687
Houston Water & Sewer System, (AMBAC Insured), 7.00%, 12/1/03................... 2,650 3,049
(MBIA Insured), 5.60%, 12/1/02............................................ 65 69
5.75%, 12/1/03......................................................... 400 427
San Antonio, Water Revenue, (FGIC Insured), 6.40%, 5/15/05...................... 150 164
Univ. of Houston, (MBIA Insured), 7.40%, 2/15/05
(Pre-refunded 2/15/00+)................................................... 700 782
- --------------------------------------------------------------------------------------------------------------------
VERMONT -- 0.4%
Vermont Ed. and Health Buildings Fin. Agency, Medical Center
Hosp. of Vermont, (FGIC Insured), 7.35%, 9/1/13.............................. 350 361
- --------------------------------------------------------------------------------------------------------------------
VIRGINIA -- 14.4%
Chesapeake Bay Bridge & Tunnel Dist., (FGIC Insured), 5.30%, 7/1/03............. 2,835 2,934
Prince William County Service Auth., Water & Sewer, (FGIC Insured),
6.50%, 7/1/21 (Pre-refunded 7/1/01+)................................... 3,250 3,623
Riverside Regional Jail Auth., (MBIA Insured), 5.60%, 7/1/06.................... 1,100 1,144
Upper Occoquan Sewage Auth., (MBIA Insured),
6.50%, 7/1/17 (Pre-refunded 7/1/01+)................................... 1,440 1,605
Virginia Ed. Loan Auth., Student Loan Program, 5.80%, 3/1/05*................... 1,250 1,291
Virginia Transportation Board, 5.80%, 5/15/03................................... 1,425 1,525
5.80%, 5/15/04......................................................... 695 744
- --------------------------------------------------------------------------------------------------------------------
WASHINGTON -- 4.0%
Tacoma Electric Systems, (FGIC Insured), 5.90%, 1/1/05.......................... 1,000 1,067
6.00%, 1/1/06.......................................................... 2,000 2,140
Washington Public Power Supply System, (FGIC Insured), 7.25%, 7/1/00............ 325 361
- --------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA -- 1.9%
Berkeley County Board of Ed., GO, (FGIC Insured), 5.75%, 6/1/03................. 530 563
5.75%, 6/1/04.......................................................... 1,090 1,158
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
-------
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
TOTAL INVESTMENTS IN SECURITIES -- 97.3% OF NET ASSETS
(COST $83,333).................................................................. $86,610
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES................................................... 2,424
-------
<CAPTION>
NET ASSETS CONSIST OF: Value
---------
<S> <C> <C>
Accumulated net investment income - net of distributions........................ $ 25
Accumulated net realized gain/loss - net of distributions....................... (1,747)
Net unrealized gain (loss)...................................................... 3,277
Paid-in-capital applicable to 8,336,714 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares authorized............. 87,479
---------
NET ASSETS...................................................................... $89,034
=======
NET ASSET VALUE PER SHARE....................................................... $10.68
======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* - Interest subject to alternative minimum tax
+ - Used in determining portfolio maturity
AMBAC - AMBAC Indemnity Corp.
CDA - Community Development Administration
COP - Certificates of Participation
DOT - Department of Transportation
FGIC - Financial Guaranty Insurance Company
GO - General Obligation
HHEFA - Health and Higher Educational Facility Authority
MBIA - Municipal Bond Investors Assurance Corp.
TAW - Tax Anticipation Warrant
VRDN - Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free Insured Intermediate Bond Fund/Six Months Ended
August 31, 1995 (Unaudited)
(in thousands)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest income.................................................... $ 2,281
---------
Expenses
Investment management........................................... 138
Shareholder servicing........................................... 56
Custody and accounting.......................................... 50
Registration.................................................... 17
Legal and audit................................................. 8
Prospectus and shareholder reports.............................. 5
Organization.................................................... 5
Directors....................................................... 3
Miscellaneous................................................... 1
---------
Total expenses.................................................. 283
---------
Net investment income.............................................. 1,998
---------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Securities...................................................... 739
Futures......................................................... (10)
---------
Net realized gain (loss)........................................ 729
---------
Change in net unrealized gain or loss on securities................ 1,977
---------
Net realized and unrealized gain (loss)............................ 2,706
---------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS.................. $ 4,704
=========
- -----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free Insured Intermediate Bond Fund (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
Aug. 31, 1995 Feb. 28, 1995
---------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income................................................... $ 1,998 $ 3,978
Net realized gain (loss)................................................ 729 (2,462)
Change in net unrealized gain or loss................................... 1,977 247
---------- ----------
Increase (decrease) in net assets from operations....................... 4,704 1,763
---------- ----------
Distributions to shareholders
Net investment income................................................... (1,998) (3,978)
Net realized gain....................................................... -- (269)
---------- ----------
Decrease in net assets from distributions............................... (1,998) (4,247)
Capital share transactions*
Shares sold............................................................. 11,721 26,081
Distributions reinvested................................................ 1,490 3,170
Shares redeemed......................................................... (10,400) (42,412)
---------- ----------
Increase (decrease) in net assets from capital share transactions....... 2,811 (13,161)
---------- ----------
Increase (decrease) in net assets.......................................... 5,517 (15,645)
NET ASSETS
Beginning of period........................................................ 83,517 99,162
---------- ----------
End of period.............................................................. $ 89,034 $ 83,517
========== ==========
- ------------------------------------------------------------------------------------------------------------------
* Share information
Shares sold............................................................. 1,114 2,547
Distributions reinvested................................................ 141 310
Shares redeemed......................................................... (988) (4,158)
---------- ----------
Increase (decrease) in shares outstanding............................... 267 (1,301)
========== ==========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free Insured Intermediate Bond Fund/August 31, 1995
(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) 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 of 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.
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 and original issue discounts on municipal
securities are amortized for both financial reporting and tax purposes. Market
discounts are recognized upon disposition of the security as gain or loss for
financial reporting purposes and as ordinary income for tax purposes.
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 and may differ from
those determined in accordance with generally accepted accounting principles.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term securities,
aggregated $38,954,000 and $33,572,000, respectively, for the six months ended
August 31, 1995.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
income. The fund has unused realized capital loss carryforwards for federal
income tax purposes of $1,444,000 which expire in 2003. The fund intends to
retain gains realized in future periods that may be offset by available capital
loss carryforwards.
At August 31, 1995, the aggregate cost of investments for federal income
tax and financial reporting purposes was $83,333,000 and net unrealized gain
aggregated $3,277,000, of which $3,279,000 related to appreciated investments
and $2,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management fee,
of which $26,000 was payable at August 31, 1995. The fee is computed daily and
paid monthly, and consists 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. At
August 31, 1995, and for the six months then ended, the effective annual Group
8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fee rate was 0.34%. The fund pays a pro rata share of the Group Fee based on the
ratio of its net assets to those of the Group.
Under the terms of the investment management agreement, the Manager is
required to bear any expenses through February 29, 1996, which would cause the
fund's ratio of expenses to average net assets to exceed 0.65%. Thereafter
through February 28, 1998, the fund is required to reimburse the Manager for
these expenses, provided that average net assets have grown or expenses have
declined sufficiently to allow reimbursement without causing the fund's ratio of
expenses to average net assets to exceed 0.65%. Pursuant to this agreement,
$32,000 of management fees were not accrued by the fund for the six months ended
August 31, 1995, and $140,000 remains unaccrued from the prior period.
Additionally, $228,000 of unaccrued management fees related to a previous
expense limitation are subject to reimbursement through February 29, 1996.
In addition, the fund has entered into agreements with the Manager and a
wholly owned subsidiary of the Manager, pursuant to which the fund receives
certain other services. The Manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc. is the fund's
transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. The fund incurred expenses pursuant to
these related party agreements totaling approximately $77,000 for the six months
ended August 31, 1995, of which $14,000 was payable at period-end.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free Insured Intermediate Bond Fund (Unaudited)
<TABLE>
<CAPTION>
For a share outstanding throughout each period
--------------------------------------------------------------------
November 30, 1992
Six Months Year Ended February 28, (Commencement
Ended ----------------------- of Operations)
August 31, 1995 1995 1994 to February 28, 1993
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $10.35 $10.58 $10.55 $10.00
------ ------ ------ ------
Investment Activities
Net investment income...................... 0.24* 0.46* 0.48* 0.13*
Net realized and unrealized gain (loss).... 0.33 (0.20) 0.09 0.55
------ ------ ------ ------
Total from Investment Activities........... 0.57 0.26 0.57 0.68
------ ------ ------ ------
Distributions
Net investment income...................... (0.24) (0.46) (0.48) (0.13)
Net realized gain.......................... -- (0.03) (0.06) --
------ ------ ------ ------
Total Distributions........................ (0.24) (0.49) (0.54) (0.13)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD................ $10.68 $10.35 $10.58 $10.55
====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return.................................. 5.59% 2.65% 5.49% 6.81%
Ratio of Expenses to Average Net Assets....... 0.65%+* 0.65%* 0.33%* 0.00%+*
Ratio of Net Investment Income
to Average Net Assets...................... 4.59%+ 4.53% 4.45% 5.08%+
Portfolio Turnover Rate....................... 82.4%+ 170.8% 74.8% 65.3%+
Net Assets, End of Period (in thousands)...... $89,034 $83,517 $99,162 $37,960
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* 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.
10
<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 ET. 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 most bond
fund accounts (except the High Yield Fund and Emerging Markets Bond 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.
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.
11
<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
Short-Term Bond
Short-Term Global Income
Short-Term U.S. Government
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
Virginia Short-Term
Tax-Free Bond
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
Emerging Markets Bond
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
Capital Opportunity
Emerging Markets Stock
International Discovery
Latin America
New American 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.
T. Rowe Price Investment
Services, Inc., Distributor.
12
<PAGE>
- --------------------------------------------------------------------------------
Fellow Shareholders
- --------------------------------------------------------------------------------
While stocks have captured most of the headlines so far this year, bonds also
delivered strong returns for investors. Bond prices rose and yields fell
sharply, although long-term tax-exempt issues trailed their taxable equivalents.
Despite the Federal Reserve's ease in July, municipal and taxable bonds gave
back some of their gains after revised economic data indicated the economy was
not slowing to the extent originally believed.
MARKET ENVIRONMENT
Municipals turned in their strongest performance this year in January and
February, when the yield on 30-year AAA general obligation bonds fell to 5.95%
from 6.65%. However, during the six months covered in this report, that yield
declined by only another 10 basis points to 5.85% compared with an 80-basis-
point drop in 30-year Treasury bonds.
The tax-exempt market's lagging performance relative to Treasuries can be
attributed largely to investor concerns about tax reform proposals in Washington
(see sidebar on page 4). One effect of this key issue was the divergence between
intermediate- and long-term tax-exempt bonds. During the six
- --------------------------------------------------------------------------------
Municipal Bond and Note Yield
- --------------------------------------------------------------------------------
[CHART APPEARS HERE]
months ended August 31, bonds maturing in 5 to 10 years provided higher total
returns than long-term bonds. The municipal yield curve steepened significantly
(short-term yields fell and long-term yields were steady), because investors
demonstrated their reluctance to assume the additional risk of buying bonds with
long maturities until tax uncertainties are cleared up.
TAX-EXEMPT MONEY FUND
Short-term municipal yields changed little during the quarter ended August 31,
despite the usual gyrations due to technical factors (large cash flows from July
1 coupon and maturity payments, and high seasonal note issuance). The money
market yield curve is currently rather flat, as the difference between the daily
and one-year security yields averaged a meager one-quarter percentage point
during the quarter. By comparison, the gap averaged nearly three-quarters of a
percentage point during the past 12 months.
Your fund began the quarter with a weighted average maturity 10 days longer
than its peer group average, a posture we believed was appropriate in view of
slower economic growth and the possibility of Fed easing. Early in the quarter,
we allowed maturities to shorten to take advantage of seasonal issuance, which
usually puts upward pressure on yields. Our maturity posture at quarter-end was
once again in neutral territory. We expect to remain neutral to slightly
aggressive going forward because we believe the Fed will maintain a stable
monetary policy near term, new short-term issuance will be lower, and money fund
assets will continue to grow about 10% this year.
Your fund's performance, as shown on the next page, was slightly ahead of
its peer group during the past three- and six-month periods ended August 31.
<PAGE>
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 8/31/95
---------------------
3 Months 6 Months
-------- --------
<S> <C> <C>
Tax-Exempt Money Fund 0.82% 1.73%
IBC/Donoghue Money Fund
Report Average* 0.80 1.70
- --------------------------------------------------------------------------------
*Stockbroker and General Purpose Funds
</TABLE>
TAX-FREE SHORT-INTERMEDIATE FUND
We began the six-month period ended August 31 with a neutral weighted average
maturity, a focus on one- to five-year maturities, and increasing exposure to
states with favorable supply and demand factors. Further along in the period,
evidence of economic slowing prompted us to extend maturities to capture higher
yields as rates fell. However, recent data showing strength in home and
automobile sales triggered a more cautious posture once again. We ended the
fund's most recent fiscal quarter with a weighted average maturity just under
three years, down from 3.42 years on May 31 and 3.15 years at the end of
February.
Our focus on one- to five-year maturities contributed significantly to
performance. Investor demand for these securities, triggered by tax reform
concerns, pushed prices higher and yields lower relative to long-term bonds.
Until there is a clear indication of what type of changes will be made in the
tax code, investors are still likely to position themselves cautiously in
shorter-term bonds.
Our strategy allowed the fund to outperform its peer group average during
both the quarter and the six months ended August 31.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 8/31/95
---------------------
3 Months 6 Months
-------- --------
<S> <C> <C>
Tax-Free Short-Intermediate
Fund 1.50% 3.80%
Lipper Short Municipal
Debt Fund Average 1.46 3.63
- --------------------------------------------------------------------------------
</TABLE>
TAX-FREE INSURED INTERMEDIATE BOND FUND
Our strategy here was similar to that of the Tax-Free Short-Intermediate Fund.
We began the six-month period with a neutral duration, a focus on 5- to 10-year
maturities, and increasing exposure to states with favorable supply and demand
factors. As the economy slowed, we lengthened maturities and then shortened them
again in the second fiscal quarter when economic data suggested renewed
strength. Investors flocked to bonds with maturities shorter than seven years
because of uncertainty surrounding tax-reform discussions. As a result, your
fund's allocation to securities with two- to seven-year maturities helped
performance.
We have also increased our allocation to bonds issued by high-tax states,
such as New York and Maryland. The added tax advantages for local residents
should create stronger demand for these issues, propelling prices higher. We
anticipate that 1995 will see the lowest issuance of municipal bonds since 1990,
helping bonds from these areas outperform bonds issued by states with lower tax
rates.
This strategy resulted in a stronger performance than our peer group
average during the second quarter and the first half of your fund's fiscal year.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 8/31/95
---------------------
3 Months 6 Months
-------- --------
<S> <C> <C>
Tax-Free Insured
Intermediate Bond Fund 1.71% 5.59%
Lipper Intermediate Municipal
Debt Fund Average 1.55 5.05
- --------------------------------------------------------------------------------
</TABLE>
TAX-FREE INCOME FUND
Two opposing forces dominated the long end of the municipal market during the
past six months. On one hand, the slowing economy provided an environment for
declining yields and rising bond prices. On the other hand,
2
<PAGE>
concerns about tax reform suggested that long-term municipal bond yields might
not fall as much as their taxable counterparts.
Uncertainty surrounding the tax reform issue kept us from becoming overly
aggressive on the direction of tax-exempt yields. Throughout most of the first
two fiscal quarters, we maintained the fund's weighted average maturity at about
18 years, and the fund's duration, which measures sensitivity to changes in
interest rates, near 7.75 years.
We were more certain in our outlook on credit quality spreads. Believing
that medium-quality, higher-yielding bonds were undervalued, we took the
opportunity to add securities in this sector to the portfolio. Subsequently,
these bonds rose in price and their yields moved closer to those of higher-
quality bonds, aiding fund performance through both price appreciation and the
higher income we had captured.
By the end of June, the municipal bond market appeared to have overreacted
to talk of tax reform. Yields on long-term municipals approached 90% of the 30-
year Treasury bond yield, and we were able to buy long-term bonds with
attractive yields. Your fund's performance lagged modestly during the quarter
but performed in line with the average for similar funds during the first six
months of the fiscal year.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 8/31/95
---------------------
3 Months 6 Months
-------- --------
<S> <C> <C>
Tax-Free Income Fund 0.45% 4.62%
Lipper General Municipal Debt Fund Average 0.57 4.62
- --------------------------------------------------------------------------------
</TABLE>
TAX-FREE HIGH YIELD FUND
Your fund started the calendar year with a somewhat defensive maturity posture,
which served shareholders well throughout last year's difficult environment.
Going into the fiscal year last March, however, we began to make two adjustments
that worked out well through the quarter ended August 31. First, we shifted
toward a neutral to slightly aggressive position versus the competition. This
entailed keeping the fund's duration in a range of 7.3 to 7.6 years, reducing
cash levels to about 3%, and extending the weighted average maturity to just
beyond 20 years.
The second change was an increased weighting in below-investment-grade
holdings to 30% from 24% of net assets. Yield spreads between high- and lower-
quality bonds had increased significantly in 1994, which provided an opportunity
to bolster the fund's yield. We recently cut back our purchases in this sector
as yield spreads have narrowed once again. This shift in emphasis lowered your
fund's average credit quality only slightly, since a portion of these purchases
were funded by the sale of BBB-rated bonds.
These adjustments helped the fund outperform its peer group average over
the past three- and six-month periods. Going forward, however, we expect to
adopt a more cautious posture since bonds could well have registered most of the
gains we anticipate for 1995.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 8/31/95
---------------------
3 Months 6 Months
-------- --------
<S> <C> <C>
Tax-Free High Yield Fund 1.22% 5.37%
Lipper High Yield Municipal Debt Fund Average 1.05 4.89
- --------------------------------------------------------------------------------
</TABLE>
OUTLOOK
For the past three months, the 30-year Treasury bond yield has hovered in a
range between 6.5% and 7%. While recent economic growth has slowed significantly
from last year's rapid pace, it may not have slowed to the extent the Federal
Reserve believed when it loosened monetary policy in July. Second quarter GDP,
initially reported to have increased by a paltry 0.5% annualized rate, was
subsequently revised to 1.1%. Growth in the third and fourth quarters should be
closer to the long-term trend of 2.5%.
3
<PAGE>
- --------------------------------------------------------------------------------
Municipal Bonds Hindered by Tax Reform Proposals
- --------------------------------------------------------------------------------
In recent months, proposals for tax reform in Washington have trimmed returns on
municipal bonds. Most of these proposals are still in rudimentary form, but they
center on the possibility of a flat tax with a low income tax rate and the
elimination of taxes on the income from taxable securities. As a result,
investors demanded higher yields on long-term tax-exempt issues relative to
Treasuries to compensate for the risk that new legislation might reduce the tax
advantages of municipals. Tax-exempt securities with short maturities have
performed better, because they are less vulnerable to any changes in the tax
laws.
Tax reform discussions could continue to affect the municipal market
adversely, but we believe the likelihood of a genuine flat tax is slim. In our
experience, the market often overreacts to proposed changes in the tax code,
creating periods of market weakness we view as buying opportunities.
Accordingly, we have taken advantage of the demand for short-term tax-exempt
bonds and have purchased long-term bonds when their yields have approached those
of long-term Treasury bonds.
- --------------------------------------------------------------------------------
Until the economy shows clearer signs of veering from moderate to either
slower or more rapid growth, long bond yields are likely to remain close to
current levels. Despite the emerging picture of a rebound in growth, the
combination of benign inflation and the growing sense of fiscal responsibility
in Washington may reassure the bond market.
The municipal market is also likely to trade in its range of the past six
months, with long-term rates fluctuating between 5.5% and 6.0%. Unless tax
reform proposals disappear altogether, we do not expect municipal bonds to
outperform Treasuries, and investors may continue to prefer tax-exempt bonds
with short maturities. Overall, we anticipate that economic developments will
have a greater impact than tax reform proposals on the municipal market.
Respectfully submitted,
/s/ William T. Reynolds
William T. Reynolds
Director
Fixed Income Division
September 20, 1995
4
<PAGE>
- --------------------------------------------------------------------------------
Financial Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEC
Net Asset Value Dividend Per Share Dividend Yield* 30-Day
Per Share 3 Months Ended 3 Months Ended Yield
5/31/95 8/31/95 5/31/95 8/31/95 5/31/95 8/31/95 8/31/95
------------------- ------------------- -------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money $ 1.00 $ 1.00 $ 0.009 $ 0.008 3.56% 3.26% --
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate 5.31 5.33 0.06 0.06 4.44 4.43 3.92%
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Free Insured Intermediate Bond 10.62 10.68 0.12 0.12 4.66 4.54 4.33
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Free Income 9.50 9.41 0.13 0.13 5.60 5.58 5.35
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Free High Yield 11.91 11.87 0.18 0.18 6.25 6.17 5.88
- ------------------------------------------------------------------------------------------------------------------------------
</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.
Money Fund reports seven-day compound yield.
- --------------------------------------------------------------------------------
Quality Diversification
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quality Ratings* Weighted Average Quality*
----------------------------------------- -------------------------
1 2 3 4 5-10 5/31/95 8/31/95
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money 14% 86% -- -- -- 1.9 1.9
- -----------------------------------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate 42 36 18% 4% -- 1.8 1.8
- -----------------------------------------------------------------------------------------------------------------------
Tax-Free Insured Intermediate Bond 30 60 10 -- -- 1.9 1.8
- -----------------------------------------------------------------------------------------------------------------------
Tax-Free Income 11 51 25 10 3% 2.4 2.4
- -----------------------------------------------------------------------------------------------------------------------
Tax-Free High Yield 4 17 18 32 29 3.6 3.7
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* On a T. Rowe Price scale of 1 to 10, with Grade 1 representing highest
quality.
5
<PAGE>
- --------------------------------------------------------------------------------
Duration and Maturity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Effective Duration (years) Maturity (years)
-------------------------- ---------------------
5/31/95 8/31/95 5/31/95 8/31/95
<S> <C> <C> <C> <C>
Tax-Exempt Money -- -- 49* 55*
- -----------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate 2.7 2.5 3.4 3.0
- -----------------------------------------------------------------------------------------------
Tax-Free Insured Intermediate Bond 5.6 5.4 7.6 7.2
- -----------------------------------------------------------------------------------------------
Tax-Free Income 7.6 7.8 18.0 18.1
- -----------------------------------------------------------------------------------------------
Tax-Free High Yield 7.2 7.3 20.1 20.1
- -----------------------------------------------------------------------------------------------
</TABLE>
* Maturity is in days.
- --------------------------------------------------------------------------------
Average Annual Compound Total Return - Calendar Year
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 6/30/95
-----------------------------------------------------------
1 Year 5 Years 10 Years Since Inception
<S> <C> <C> <C> <C> <C>
Tax-Exempt Money 3.14% 3.06% 4.01% 4.70% (4/81)
- --------------------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate 5.85 5.76 5.77 6.09 (12/83)
- --------------------------------------------------------------------------------------------------------
Tax-Free Insured Intermediate Bond 7.72 -- -- 7.27 (11/92)
- --------------------------------------------------------------------------------------------------------
Tax-Free Income 8.66 8.18 8.16 7.20 (10/76)
- --------------------------------------------------------------------------------------------------------
Tax-Free High Yield 8.04 8.40 9.50 9.77 (3/85)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
6
<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 ET. 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 most bond
fund accounts (except the High Yield Fund and Emerging Markets Bond 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
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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.
Shareholder Reports--Portfolio managers review the performance of the funds
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The T. Rowe Price Report--A quarterly newsletter with relevant articles on
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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
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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.
7
<PAGE>
- --------------------------------------------
- --------------------------------------------
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 distribution only to shareholders and to others
who have received a copy of the prospectus of the T. Rowe Price Tax-Free Funds.
Invest With Confidence/(R)/ [LOGO APPEARS HERE]
T. Rowe Price
TFF
- ------------------------------------
SEMIANNUAL REPORT
- ------------------------------------
T. Rowe Price
-------------
TAX-FREE FUNDS
AUGUST 31, 1995
[LOGO APPEARS HERE]
