<PAGE>
- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
Tax-Free Insured Intermediate Bond Fund
February 29, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sector Diversification
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
Prerefunded Bonds 23%
Dedicated Tax Revenue 13
General Obligation Local 9
Educational Revenue 9
Air and Sea Transportation Revenue 9
Water and Sewer Revenue 7
Lease Revenue 6
Electric Revenue 6
General Obligation State 5
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
Ground Transportation Revenue 5%
Solid Waste Revenue 4
Nuclear Revenue 3
Escrowed to Maturity 1
Housing Finance Revenue 1
Industrial and Pollution Control Revenue 1
Hospital Revenue 1
Other Assets Less Liabilities -3
</TABLE>
- --------------------------------------------------------------------------------
Statement of Net Assets
T. Rowe Price Tax-Free Insured Intermediate Bond Fund / February 29, 1996
- --------------------------------------------------------------------------------
(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 (Prerefunded 2/1/01+)................................ $ 90 $ 99
- ------------------------------------------------------------------------------------------
ALASKA -- 0.1%
Univ. of Alaska, (AMBAC Insured), 5.90%, 10/1/03....................... 115 125
- ------------------------------------------------------------------------------------------
ARIZONA -- 4.9%
Arizona Transportation Board, Maricopa County, Excise Tax,
(AMBAC Insured), 5.60%, 7/1/02..................................... 2,000 2,134
Pima County, Water Improvement Dist., (FGIC Insured), 5.90%, 1/1/04.... 75 81
Price Elliott Research Park, Arizona State Univ., (MBIA Insured),
7.00%, 7/1/21 (Prerefunded 7/1/01+)................................ 2,000 2,290
- ------------------------------------------------------------------------------------------
ARKANSAS -- 1.2%
North Little Rock, Electric System, (MBIA Insured), 6.10%, 7/1/02...... 1,035 1,131
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
CALIFORNIA -- 7.2%
California Public Works Board, Dept. of Corrections, (MBIA Insured),
6.00%, 11/1/05........................................................ $1,550 $1,705
Turlock Irrigation Dist., (MBIA Insured), 5.00%, 1/1/03................... 645 666
Univ. of California, Multiple Purpose, (MBIA Insured), 10.00%, 9/1/01..... 3,370 4,286
- ------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA -- 0.6%
Washington D.C. Metropolitan Airport Auth., (MBIA Insured),
6.625%, 10/1/12*...................................................... 500 541
- ------------------------------------------------------------------------------------------------
FLORIDA -- 4.6%
Charlotte County, Utility, (FGIC Insured), 6.875%, 10/1/21
(Prerefunded 10/1/01+)................................................ 1,650 1,888
Dade County, Capital Appreciation, (MBIA Insured), Zero Coupon, 2/1/09.... 500 249
Dade County Seaport, GO, (MBIA Insured), 5.75%, 10/1/03................... 500 543
Indian Trace Community Dev. Dist., Water Management, (MBIA Insured),
5.50%, 5/1/07......................................................... 1,500 1,583
- ------------------------------------------------------------------------------------------------
GEORGIA -- 3.4%
DeKalb Hosp. Auth., Emory Univ., 5.25%, 11/1/02........................... 3,000 3,160
- ------------------------------------------------------------------------------------------------
HAWAII -- 4.2%
Hawaii, Airport Systems, (MBIA Insured), 6.70%, 7/1/05*................... 3,000 3,321
Maui County, GO, (FGIC Insured), 6.00%, 12/15/05.......................... 500 554
- ------------------------------------------------------------------------------------------------
ILLINOIS -- 6.2%
Chicago, GO, (AMBAC Insured), 5.75%, 1/1/05**............................. 3,500 3,746
Chicago - O'Hare Int'l Airport, Int'l.Terminal, (MBIA Insured),
7.50%, 1/1/05*........................................................ 1,750 1,932
- ------------------------------------------------------------------------------------------------
LOUISIANA -- 0.6%
Plaquemines Parish, British Petroleum Co., VRDN (Currently 3.60%)*........ 600 600
- ------------------------------------------------------------------------------------------------
MARYLAND -- 7.0%
Maryland CDA, Single Family, 5.70%, 4/1/06................................ 1,000 1,017
Maryland HHEFA, Univ. of Maryland Medical System, (FGIC Insured),
6.50%, 7/1/21 (Prerefunded 7/1/01+)................................... 1,250 1,382
Northeast Maryland Waste Disposal Auth.,
Southwest Resource Recovery Fac., (MBIA Insured), 7.10%, 1/1/03......... 3,500 4,007
- ------------------------------------------------------------------------------------------------
MASSACHUSETTS -- 3.1%
Massachusetts, GO, (FGIC Insured), 6.30%, 11/1/05......................... 1,250 1,399
Massachusetts Municipal Wholesale Electric Company, (MBIA Insured),
6.375%, 7/1/01........................................................ 1,325 1,452
- ------------------------------------------------------------------------------------------------
MICHIGAN -- 2.4%
Michigan Building Auth., Lease, (AMBAC Insured), 6.25%, 10/1/03........... 2,000 2,223
- ------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
MINNESOTA -- 1.2%
Minneapolis and St. Paul Metropolitan Airports Commission,
GO, 6.40%, 1/1/06*.................................................... $1,000 $1,078
- ------------------------------------------------------------------------------------------------
NEW JERSEY -- 3.0%
New Jersey Economic Dev. Auth., Market Transition Fac., (MBIA Insured),
5.70%, 7/1/05......................................................... 1,050 1,129
New Jersey Transportation Trust Fund Auth., (MBIA Insured),
6.25%, 6/15/03........................................................ 1,500 1,673
- ------------------------------------------------------------------------------------------------
NEW YORK -- 7.2%
Metropolitan Transportation Auth., (AMBAC Insured), 7.00%, 7/1/02......... 85 97
(MBIA Insured), 6.25%, 7/1/05......................................... 1,420 1,594
New York State Thruway Auth., Highway and Bridge Trust, 6.00%, 4/1/05..... 1,000 1,095
(AMBAC Insured), 6.00%, 4/1/00........................................ 1,000 1,070
(MBIA Insured), 6.00%, 4/1/02......................................... 1,500 1,627
New York State Urban Dev. Corp., Correctional Fac., COP,
7.75%, 1/1/14 (Prerefunded 1/1/00+)................................... 1,000 1,146
- ------------------------------------------------------------------------------------------------
NORTH CAROLINA -- 1.7%
Charlotte, Public Improvement, GO, 5.30%, 4/1/03.......................... 1,450 1,538
- ------------------------------------------------------------------------------------------------
OHIO -- 4.0%
Cleveland, Waterworks, (AMBAC Insured), 6.50%, 1/1/21
(Prerefunded 1/1/02+)................................................. 2,150 2,417
Ohio Water Dev. Auth., Pure Water, (MBIA Insured), 5.50%, 6/1/01.......... 1,175 1,242
- ------------------------------------------------------------------------------------------------
OKLAHOMA -- 1.2%
Univ. of Oklahoma, Norman Campus, (MBIA Insured), 4.85%, 7/1/03........... 1,040 1,062
- ------------------------------------------------------------------------------------------------
PENNSYLVANIA -- 2.4%
Pennsylvania Intergovernmental Cooperative Auth., (FGIC Insured),
6.00%, 6/15/00........................................................ 1,900 2,029
Pennsylvania Turnpike Commission, (AMBAC Insured), 6.60%, 6/1/05.......... 200 221
- ------------------------------------------------------------------------------------------------
PUERTO RICO -- 1.2%
Puerto Rico Commonwealth, GO, (MBIA Insured), 5.50%, 7/1/01............... 1,000 1,063
- ------------------------------------------------------------------------------------------------
SOUTH CAROLINA -- 2.4%
South Carolina Public Service Auth., (MBIA Insured), 5.20%, 7/1/04........ 1,000 1,041
Santee Cooper, (AMBAC Insured), 6.50%, 7/1/24 (Prerefunded 7/1/02+)....... 1,000 1,132
- ------------------------------------------------------------------------------------------------
TENNESSEE -- 0.6%
Metropolitan Nashville Airport Auth., (FGIC Insured),
7.75%, 7/1/06 (Prerefunded 7/1/01+)................................... 500 590
- ------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
TEXAS -- 8.8%
Dallas, GO, 6.125%, 2/15/05 (Prerefunded 2/15/03+).......................... $1,000 $1,098
Dallas-Fort Worth Regional Airport, (FGIC Insured), 7.75%, 11/1/03.......... 1,000 1,205
Harris County, Toll Roads, (AMBAC Insured), 6.50%, 8/15/17
(Prerefunded 8/15/02+).................................................. 1,500 1,701
Houston Water and Sewer System, (AMBAC Insured), 7.00%, 12/1/03............. 2,650 3,085
(MBIA Insured), 5.60%, 12/1/02.......................................... 65 70
San Antonio, Water, (FGIC Insured), 6.40%, 5/15/05.......................... 150 166
Univ. of Houston, (MBIA Insured), 7.40%, 2/15/05 (Prerefunded 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............ 350 375
- --------------------------------------------------------------------------------------------------
VIRGINIA -- 15.1%
Chesapeake Bay Bridge and Tunnel Dist., (FGIC Insured), 5.30%, 7/1/03....... 2,335 2,451
Prince William County, Water and Sewer, (FGIC Insured),
6.50%, 7/1/21 (Prerefunded 7/1/01+)..................................... 3,250 3,644
Riverside Regional Jail Auth., (MBIA Insured), 5.60%, 7/1/06................ 1,100 1,176
Upper Occoquan Sewage Auth., (MBIA Insured), 6.50%, 7/1/11
(Prerefunded 7/1/01+)..................................................... 1,500 1,682
6.50%, 7/1/17 (Prerefunded 7/1/01+)..................................... 1,440 1,615
Virginia Ed. Loan Auth., Student Loan Program, 5.80%,
3/1/05 (Escrowed to Maturity)*.......................................... 980 1,052
Virginia Transportation Board, Northern Virginia Transportation Dist.,
5.80%, 5/15/03.......................................................... 1,425 1,545
5.80%, 5/15/04.......................................................... 695 755
- --------------------------------------------------------------------------------------------------
WASHINGTON -- 6.5%
Tacoma Electric Systems, (FGIC Insured), 5.90%, 1/1/05...................... 1,000 1,086
6.00%, 1/1/06........................................................... 2,000 2,181
Washington, GO, 6.00%, 7/1/04............................................... 2,000 2,195
Washington HFA, Fred Hutchinson Cancer Research Center,
VRDN (Currently 3.45%).................................................. 200 200
Washington Public Power Supply System, (FGIC Insured), 7.25%, 7/1/00........ 325 362
- --------------------------------------------------------------------------------------------------
WEST VIRGINIA -- 1.3%
Berkeley County Board of Ed., GO, (FGIC Insured), 5.75%, 6/1/04............. 1,090 1,175
- --------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
-------
<S> <C>
- -----------------------------------------------------------------------------------------------
Total Investments in Securities -- 102.6% of Net Assets (Cost $90,489) $94,559
- -----------------------------------------------------------------------------------------------
Other Assets Less Liabilities........................................... (2,406)
-------
<CAPTION>
Net Assets Consist of: Value
-------
<S> <C> <C>
Accumulated net investment income - net of distributions................ $ 35
Accumulated net realized gain/loss - net of distributions............... (1,196)
Net unrealized gain (loss).............................................. 4,070
Paid-in-capital applicable to 8,500,801 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares authorized.... 89,244
-------
NET ASSETS.............................................................. $92,153
=======
NET ASSET VALUE PER SHARE............................................... $10.84
======
- -----------------------------------------------------------------------------------------------
</TABLE>
* Interest subject to alternative minimum tax
** When-issued security
+ Used in determining portfolio maturity
AMBAC AMBAC Indemnity Corp.
CDA Community Development Administration
COP Certificates of Participation
FGIC Financial Guaranty Insurance Company
GO General Obligation
HFA Health Facility Authority
HHEFA Health & 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 / Year Ended
February 29, 1996
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest income.................................................... $4,577
------
Expenses
Investment management.......................................... 274
Shareholder servicing.......................................... 112
Custody and accounting......................................... 100
Registration................................................... 38
Prospectus and shareholder reports............................. 15
Legal and audit................................................ 15
Organization................................................... 11
Directors...................................................... 6
Miscellaneous.................................................. 4
------
Total expenses................................................. 575
------
Net investment income.............................................. 4,002
------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Securities..................................................... 1,343
Futures........................................................ (63)
------
Net realized gain (loss)....................................... 1,280
Change in net unrealized gain or loss on securities............ 2,770
------
Net realized and unrealized gain (loss)............................ 4,050
------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS.................. $8,052
======
- --------------------------------------------------------------------------------
</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
(in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended
Feb. 29, 1996 Feb. 28, 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income................................................. $ 4,002 $ 3,978
Net realized gain (loss).............................................. 1,280 (2,462)
Change in net unrealized gain or loss................................. 2,770 247
-------- --------
Increase (decrease) in net assets from operations..................... 8,052 1,763
-------- --------
Distributions to shareholders
Net investment income................................................. (4,002) (3,978)
Net realized gain..................................................... -- (269)
-------- --------
Decrease in net assets from distributions............................. (4,002) (4,247)
-------- --------
Capital share transactions*
Shares sold........................................................... 20,792 26,081
Distributions reinvested.............................................. 2,988 3,170
Shares redeemed....................................................... (19,194) (42,412)
-------- --------
Increase (decrease) in net assets from capital
share transactions................................................... 4,586 (13,161)
-------- --------
Increase (decrease) in net assets......................................... 8,636 (15,645)
NET ASSETS
Beginning of period....................................................... 83,517 99,162
-------- --------
End of period............................................................. $ 92,153 $ 83,517
======== ========
- ------------------------------------------------------------------------------------------------------------
*Share information
Shares sold........................................................... 1,955 2,547
Distributions reinvested.............................................. 280 310
Shares redeemed....................................................... (1,803) (4,158)
-------- --------
Increase (decrease) in shares outstanding............................. 432 (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 / February 29, 1996
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 originally issued with 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
maturities when issued 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 the identified cost basis. Distributions to shareholders are
recorded by the fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles.
Note 2 - Investment Transactions
Purchases and sales of portfolio securities, other than short-term securities,
aggregated $68,719,000 and $54,637,000, respectively, for the year ended
February 29, 1996.
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 $1,079,000, which expires in 2003. Capital loss
carryforwards utilized in fiscal 1996 amounted to $365,000. The fund intends to
retain gains realized in future periods that may be offset by available capital
loss carryforwards.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, $10,000 of undistributed
net investment income was reclassified as a decrease to paid-in-capital during
the year ended February 29, 1996. The results of operations and net assets were
not affected by the reclassifications.
At February 29, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $90,489,000 and net unrealized gain
aggregated $4,070,000, of which $4,096,000 related to appreciated investments
and $26,000 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 $21,000 was payable at February 29, 1996. 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
8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 February 29, 1996, and for the year then
ended, the effective annual Group Fee rate was 0.33% and 0.34%, respectively.
The fund pays a pro rata share of the Group Fee based on the ratio of its net
assets to those of the Group.
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,
$69,000 of management fees were not accrued by the fund for the year ended
February 29, 1996. Additionally, $140,000 of unaccrued management fees from the
prior period are subject to reimbursement through February 28, 1998.
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 $154,000 for the year
ended February 29, 1996, of which $15,000 was payable at period-end.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
<TABLE>
<CAPTION>
For a share outstanding throughout each period
----------------------------------------------------------------
Year Ended
------------------------------------ November 30, 1992**
Feb. 29, Feb. 28, Feb. 28, to
1996 1995 1994 Feb. 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...................... 0.48* 0.46* 0.48* 0.13*
Net realized and unrealized gain (loss).... 0.49 (0.20) 0.09 0.55
------- ------- ------- --------
Total from Investment Activities........... 0.97 0.26 0.57 0.68
------- ------- ------- --------
Distributions
Net investment income...................... (0.48) (0.46) (0.48) (0.13)
Net realized gain.......................... -- (0.03) (0.06) --
------- ------- ------- --------
Total Distributions........................ (0.48) (0.49) (0.54) (0.13)
------- ------- ------- --------
NET ASSET VALUE, END OF PERIOD................. $ 10.84 $ 10.35 $ 10.58 $ 10.55
======= ======= ======= ========
- ----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return................................... 9.57% 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...................... 4.52% 4.53% 4.45% 5.08%+
Portfolio Turnover Rate........................ 63.8% 170.8% 74.8% 65.3%+
Net Assets, End of Period (in thousands)....... $ 92,153 $ 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, 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.
** Commencement of operations.
10
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of T. Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc.
We have audited the accompanying statement of net assets of T. Rowe Price
Tax-Free Insured Intermediate Bond Fund, Inc. as of February 29, 1996, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the three years in the period then ended
and for the period November 30, 1992 (commencement of operations) to February
28, 1993. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
February 29, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of T.
Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc. as of February 29,
1996, the results of its operations, the changes in its net assets, and
financial highlights for each of the respective periods stated in the first
paragraph, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 19, 1996
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--Shareholders service representatives are available from 8 a.m. to
10 p.m. Monday-Friday, and weekends from 8:30 a.m. to 5 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.
Shareholders 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.
Performance Update--A quarterly report reviewing recent market developments
and providing comprehensive performance information for every T. Rowe Price
fund.
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.
12
<PAGE>
- --------------------------------------------------------------------------------
Fellow Shareholders
- --------------------------------------------------------------------------------
The fiscal year ended February 29, 1996, was a banner year for bonds and the
funds that invest in them. Prices rose as yields fell through much of the year,
generating good returns for investors in fixed income securities. We were
pleased that all the T. Rowe Price municipal funds discussed here outperformed
their peer group averages over the entire fiscal year.
Market Environment
The economy slowed in 1995, and the rate of inflation remained moderate. After
tightening monetary policy in 1994 and early 1995, the Federal Reserve reversed
course when it became clear that the economy was running out of steam. Since
July, the Fed has lowered the key federal funds rate three times, from 6% to
5.25% at the end of the fiscal year.
Against a background of slower growth, moderate inflation, and apparent
progress on reducing the federal budget deficit, bond yields tumbled. The
30-year Treasury yield, nearly 7.5% a year ago, fell briefly below 6% in late
December. At fiscal year-end, the long bond yield had edged back up to 6.5%, as
efforts to come up with deficit reduction
- --------------------------------------------------------------------------------
Municipal Bond and Note Yields
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
Source: T. Rowe Price Associates
legislation flagged in early 1996. Signs that stronger economic growth might
resume in 1996 also contributed to recent uneasiness in the bond market.
After moving only slightly lower during the first half of the fiscal year
ended February 29, long-term municipal yields fell further in the second half.
Thirty-year prime general obligation (GO) bonds yielded 5.95% on February 28,
1995, and on August 31 were only 10 basis points lower (100 basis points equal
one percent). During the most recent six months, prices rose further as yields
dropped an additional 45 basis points to 5.40%.
Municipal bonds with short maturities followed a different pattern as their
yields fell more in the first half of the year than in the second. After falling
70 basis points to 4.30% on August 31, the yield of five-year prime GO bonds
fell only 10 basis points more by February 29, 1996. The net result was a lower
and steeper yield curve that led to significant price appreciation from 1994's
lows.
New issuance of municipal bonds hit a five-year low in 1995 -- 3% below 1994's
levels. Light supply for the second year in a row would have been more of a
problem if demand had not also been soft due to strong stock market returns and
tax reform discussions. Although new supply declined overall, the use of bond
insurance grew, and insured bonds constituted 43% of newly issued securities.
Bond insurers were willing to insure new issues as well as bonds in the
secondary market at a fairly low cost.
Tax-Exempt Money Fund
Short-term rates fell during the past year, with six-month to one-year yields
declining further than yields on shorter maturities. Compared with year-ago
levels, one- to seven-day yields were 50 to 70 basis points lower, while the
longer yields were 100 to 130 basis points lower. This led to a flattening in
the money
<PAGE>
market yield curve, meaning that longer maturities did not offer significantly
higher yields than short maturities (occasionally, long yields were actually
lower).
In this environment, we adopted a "barbell" strategy, concentrating
investments at both ends of the money market maturity range. The longer
maturities enabled us to lock in yields that we believed would move lower as the
Federal Reserve continued to reduce interest rates, while the short-maturity
holdings provided a high level of income considering their low level of risk.
Another indication of the remarkable shift in the yield curve was the average
spread between overnight and one-year yields -- a meager 13 basis points over
the past 12 months versus 121 basis points during the preceding 12-month period.
The yields on short-term tax-exempt issues remained relatively low compared
with the yields on their taxable counterparts, making them attractive only to
those in the highest tax brackets. Nevertheless, assets in all tax-exempt money
funds grew a robust 16% to $134 billion over the year.
Our barbell strategy, plus our lengthening weighted average maturity in recent
months, enabled your fund to outperform its peer group average during the 6- and
12-month periods ended February 29.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Exempt Money Fund 1.62% 3.38%
IBC/Donoghue Money Fund
Report Average* 1.58 3.31
- ------------------------------------------------------------------------------
</TABLE>
*Stockholder and General Purpose Funds
Tax-Free Short-Intermediate Fund
For most of the past six months, your fund sought to maintain an aggressive
posture on weighted average maturity. The combination of a weak economic
environment and prospects for federal deficit reduction enhanced the possibility
that the Federal Reserve would loosen monetary policy by lowering the fed funds
rate.
In an effort to benefit from this anticipated move, we gradually lengthened
the fund's weighted average maturity from 3.0 years at the beginning of
September to as long as 3.8 years in January. As yields fell to extremely low
levels in January and budget negotiations stalled in Washington, we began to
shorten maturities. By fiscal year-end, the weighted average maturity declined
to 3.6 years.
This strategy allowed the fund to provide solid returns and outperform its
peer group average during both the 6- and 12-month periods ended February 29.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free Short-Intermediate
Fund 2.95% 6.87%
Lipper Short-Intermediate
Debt Funds Average 2.67 6.79
- ------------------------------------------------------------------------------
</TABLE>
Tax-Free Insured Intermediate Bond Fund
Our strategy was similar to that of the Tax-Free Short-Intermediate Fund for the
reasons outlined there. We began the six-month period with a shorter duration (a
measure of a bond fund's price sensitivity to changes in interest rates) than
our more aggressive posture at the end of May. As we moved through the final
months of 1995, we reversed course and began to lengthen from 5.4 years at the
end of August to a high of 5.7 years in January.
Another component of our strategy entailed taking advantage of supply and
demand imbalances. Relative values in the municipal market are dictated to a
great extent by the supply of new issues. Bond values rise in states with low
supply and decline in states where supply is abundant. We adopted a strategy of
rotating out of low supply states into high supply states to take advantage of
the lower prices. For example, during the last six months, we sold bonds issued
in Florida and California and replaced them with New York
2
<PAGE>
and Georgia securities, which allowed us to increase the fund's return without
assuming additional interest rate risk.
This overall strategy resulted in strong returns that surpassed our peer group
average for both periods shown below.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free Insured
Intermediate Bond Fund 3.77% 9.57%
Lipper Intermediate Municipal
Debt Funds Average 3.72 8.97
- ------------------------------------------------------------------------------
</TABLE>
Tax-Free Income Fund
Given the sluggish economic environment that persisted over most of the last 12
months, we maintained a modestly aggressive posture throughout the year. Our
relatively long market profile was reflected by a duration of 7.5 years or
higher and a weighted average maturity in the range of 18 to 19 years. We also
focused on buying individual bonds with the potential for significant price
appreciation. Our sizable positions in noncallable and discount bonds, typically
the best performing structures in falling rate environments, contributed to our
aggressive posture.
From the credit perspective, our strategy focused on minimizing exposure to
areas our analysts perceived as vulnerable. For example, we identified the
electric utility sector as one that would be susceptible to proposed legislative
and regulatory changes. This proved to be the case, as many credits were
downgraded by the rating agencies. Insured bonds also played an important role
in our portfolio last year. The heavy issuance of insured bonds, discussed
earlier, provided an opportunity to pick up additional safety at relatively low
cost.
The fund provided excellent returns over the last six months and the fiscal
year, outperforming the average for similar funds by about the same margin in
each period.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free Income Fund 5.44% 10.31%
Lipper General Municipal
Debt Funds Average 4.99 9.87
- ------------------------------------------------------------------------------
</TABLE>
The fund is still positioned somewhat aggressively, but we are looking for
opportunities to reduce its duration and weighted average maturity. A more
positive outlook on the economy and continued prospects of anemic cash flows to
bond funds merit a neutral to slightly defensive posture. Additionally, we plan
to sell some of the noncallable and discount bonds that performed so well last
year and replace them with bonds whose income we expect to be the dominant
component of returns.
Tax-Free High Yield Fund
The municipal high yield market enjoyed a solid comeback last year, recovering
nicely from the beating it took in 1994. Your fund began the year with a neutral
market stance and a relatively low concentration in below investment-grade
securities. Over the following months, and particularly in the first half of the
year, we lengthened duration slightly. For much of calendar 1995, the fund
maintained a duration of 7.2 to 7.5 years and a weighted average maturity of
about 20 years. Cash reserves averaged between 4% and 6% of assets. Late in the
year, duration drifted to a more neutral stance of 7.0 to 7.2 years, ending the
fiscal year at 7.2 years.
Additionally, the bond market decline of 1994 increased the yield spread
between higher- and lower-quality securities, providing us with an opportunity
to increase your fund's below investment-grade holdings from 24% to 27% of net
assets. Much of this move occurred during the first half of the year. We believe
this worked out well for three reasons. First, it provided the opportunity to
lock in attractive yields while taking reasonable credit risk.
3
<PAGE>
Second, credit quality spreads narrowed significantly as the market rallied
through the year. This meant that, on average, lower-quality bonds enjoyed
larger relative price gains. Third, the move entailed only a slight diminution
of your fund's overall credit quality. As always, we sought to maximize
diversification when buying lower-quality bonds.
Your fund outperformed its peer group over the fiscal year and slightly lagged
it during the most recent six-month period. The fund has exceeded the average
performance of other tax-free high yield funds, measured by the benchmark shown
below, for the past eight fiscal years and for nine of its 11 complete fiscal
years.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free High Yield Fund 4.98% 10.62%
Lipper High Yield Municipal
Debt Funds Average 5.15 10.18
- ------------------------------------------------------------------------------
</TABLE>
At this time we have adopted a more cautious stance for the fund amid signs
that economic growth could be picking up. We scaled back our purchases of
lower-quality bonds, as mentioned. Credit quality spreads have narrowed
significantly, particularly during the second half of 1995, due to modest
issuance and continued strong demand. At present, the fund's average credit
quality stands at BBB+ with no material change currently anticipated.
Outlook
The municipal market paid substantial attention to the topic of tax reform last
year. Concerns that proposed revisions to the tax code would be detrimental to
municipal bonds kept municipal securities from performing quite as well as
taxable alternatives. As we anticipated, these fears have lessened somewhat as
tax reform discussions have faded from prominence. Municipals have already
recaptured some of the ground lost to taxable bonds, which we attribute to
reduced worries about the impact of tax reform.
The unusually fierce weather this winter, as well as the partial government
shutdowns, tended to delay and distort many recent economic statistics, but it
looks as though the economy is on track for a year of moderate growth. This
should be enough to keep the unemployment rate in its current zone without
significantly exacerbating inflationary pressures. This March the economic
upturn completed its fifth year, making it one of the longest peacetime
expansions on record, but still without signs of an impending recession.
Further easing by the Federal Reserve may be slow in coming, since the Fed is
concerned about the risk of fueling inflationary pressures when the economy has
only limited margins of excess capacity. The prospects for sharp deficit
reduction and the moderate inflation outlook that gave the bond market
confidence last year are not as compelling so far in 1996. Consequently, we
expect the bulk of returns this year to come from coupon income rather than
capital appreciation.
Respectfully submitted,
/s/ William T. Reynolds
William T. Reynolds
Director
Fixed Income Division
/s/ Mary J. Miller
Mary J. Miller
Director
Municipal Bond Department
March 20, 1996
4
<PAGE>
- --------------------------------------------------------------------------------
Financial Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value Dividend Per Share* Dividend Yield**
Per Share 6 Months Ended 6 Months Ended
8/31/95 2/29/96 8/31/95 2/29/96 8/31/95 2/29/96
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money $ 1.00 $ 1.00 $0.017 $0.016 3.26% 2.95%
Tax-Free Short-Intermediate 5.33 5.37 0.12 0.11 4.46 4.38
Tax-Free Insured Intermediate Bond 10.68 10.84 0.24 0.24 4.62 4.48
Tax-Free Income 9.41 9.66 0.26 0.26 5.63 5.45
Tax-Free High Yield 11.87 12.10 0.36 0.36 6.26 6.00
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Taxability of dividends: 100% of the dividends paid for the 12 months ended
2/29/96 were exempt from federal income tax.
** 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.
Tax-Exempt Money reports a seven-day compound yield.
- --------------------------------------------------------------------------------
Quality Diversification
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quality Ratings* Weighted Average Quality*
1 2 3 4 5-10 8/31/95 2/29/96
--------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money 13% 87% -- -- -- 1.9 1.9
Tax-Free Short-Intermediate 41 35 20% 4% -- 1.8 1.9
Tax-Free Insured Intermediate Bond 21 66 13 -- -- 1.8 1.9
Tax-Free Income 10 50 25 12 3% 2.4 2.4
Tax-Free High Yield 4 21 16 32 27 3.7 3.6
- ---------------------------------------------------------------------------------------------------
</TABLE>
* On a T. Rowe Price scale of 1 to 10, with Grade 1 representing highest
quality.
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Exempt Money Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Exempt Money Fund $14,659
Lipper Tax-Exempt Money $14,593
Market Funds Average
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Duration and Maturity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Effective Duration (years) Maturity (years)
8/31/95 2/29/96 8/31/95 2/29/96
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money -- -- 55* 65*
Tax-Free Short-Intermediate 2.5 3.0 3.0 3.6
Tax-Free Insured Intermediate Bond 5.4 5.5 7.2 7.2
Tax-Free Income 7.8 8.3 18.1 18.1
Tax-Free High Yield 7.3 7.2 20.1 20.0
- ----------------------------------------------------------------------------------------------
</TABLE>
* Maturity is in days.
- --------------------------------------------------------------------------------
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
1 Year 5 Years 10 Years or Since Inception
--------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money 3.38% 2.82% 3.90%
Tax-Free Short-Intermediate 6.87 5.52 5.27
Tax-Free Insured Intermediate Bond 9.57 -- -- 7.57% (11/92)
Tax-Free Income 10.31 8.46 7.21
Tax-Free High Yield 10.62 8.69 8.46
- -----------------------------------------------------------------------------------------
</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.
- ------------------------------------------
Performance Comparison --
Tax-Free Insured Intermediate Bond Fund
- ------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free Insured $12,672
Intermediate Bond Fund
Lehman 7-Year GO $12,460
Bond Index
</TABLE>
Note: The index return does not reflect
expenses, which have been deducted from
the fund's return.
- ------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Free Short-Intermediate Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free Short-Intermediate Fund $17,193
Lehman 3-Year GO Bond Index $18,355
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Free Income Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free Income Fund $20,054
Lehman Municipal Bond Index $22,001
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Free High Yield Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free High Yield Fund $22,562
Lehman Revenue Bond Index $23,188
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
Annual Report
- --------------------------------------------------------------------------------
For yield, price, last transaction, T. Rowe Price
and current balance, 24 hours, -------------
7 days a week, call:
1-800-638-2587 toll free Tax-Free Funds
625-7676 Baltimore area
For assistance with your existing
fund account, call:
Shareholder Service Center February 29, 1996
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.
[LOGO OF T. ROWE PRICE APPEARS HERE]
TFF RPTTFF 2/29/96
