Item 1. Report to Shareholders T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- August 31, 2004 Certified Semiannual Report This report is certified under the Sarbanes-Oxley Act of 2002, which requires that public companies, including mutual funds, affirm that the information provided in their annual and semiannual shareholder reports fully and fairly represents their financial position. T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report Performance Comparison - -------------------------------------------------------------------------------- This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes. [Graphic Omitted] TAX-FREE INCOME FUND - -------------------------------------------------------------------------------- As of 8/31/04 Tax-Free Income Fund $18,182 Lipper General Municipal Debt Funds Average $17,207 Lehman Brothers Muni Bond Index $18,871 Lipper General Lehman Brothers Municipal Debt Tax-Free Muni Bond Index Funds Average Income Fund 8/94 $10,000 $10,000 $10,000 8/95 10,887 10,742 10,810 8/96 11,457 11,264 11,400 8/97 12,516 12,289 12,423 8/98 13,599 13,328 13,525 8/99 13,667 13,104 13,370 8/00 14,592 13,754 14,183 8/01 16,080 15,098 15,695 8/02 17,083 15,765 16,485 8/03 17,619 16,120 16,994 8/04 18,871 17,207 18,182 Note: Performance for the Advisor Class will vary due to the differing fee structure. See returns table below. Average Annual Compound Total Return - -------------------------------------------------------------------------------- Since Inception Periods Ended 8/31/04 1 Year 5 Years 10 Years Inception Date Tax-Free Income Fund 6.99% 6.34% 6.16% -- -- Lipper General Municipal Debt Funds Average 6.44 5.54 5.56 -- -- Tax-Free Income Fund-- Advisor Class 6.53 -- -- 3.67% 9/30/02 Lipper General Municipal Debt Funds Average 6.44 -- -- 3.31 -- Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. Past performance cannot guarantee future results. T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) Fund Profile - -------------------------------------------------------------------------------- Portfolio Characteristics - -------------------------------------------------------------------------------- Periods Ended 8/31/03 8/31/04 - -------------------------------------------------------------------------------- Tax-Free Income Fund Share Price $ 9.79 $ 10.03 Dividends Per Share (12 Months) 0.46 0.43 30-Day Standardized Yield to Maturity 3.66% 3.39% Tax-Free Income Fund--Advisor Class Share Price $ 9.80 $ 10.03 Dividends Per Share (12 Months) -- 0.40 30-Day Standardized Yield to Maturity 3.43% 3.07% Weighted Average Maturity (years) 14.1 14.3 Weighted Average Effective Duration (years) 6.4 5.4 Note: Yields will vary and are not guaranteed. Fund Profile (continued) - -------------------------------------------------------------------------------- Portfolio Diversification - -------------------------------------------------------------------------------- Percent of Percent of Net Assets Net Assets Periods Ended 8/31/03 8/31/04 - -------------------------------------------------------------------------------- Hospital Revenue 13.6% 13.6% Electric Revenue 13.8 11.1 Prerefunded Bonds 10.8 9.9 Dedicated Tax Revenue 8.7 9.4 Lease Revenue 4.1 8.9 General Obligation -- Local 6.6 7.8 Water and Sewer Revenue 7.0 6.5 Escrowed to Maturity 6.7 5.9 General Obligation -- State 5.7 5.6 Educational Revenue 5.7 4.8 Housing Finance Revenue 4.3 3.6 Industrial and Pollution Control Revenue 3.7 3.3 Air and Sea Transportation Revenue 2.6 2.5 Ground Transportation Revenue 2.2 2.2 Life Care/Nursing Home Revenue 2.2 2.0 All Other Sectors 1.9 2.3 Other Assets Less Liabilities 0.4 0.6 - -------------------------------------------------------------------------------- Total 100.0% 100.0% Fund Profile (continued) - -------------------------------------------------------------------------------- Quality Diversification - -------------------------------------------------------------------------------- Percent of Percent of Net Assets Net Assets Periods Ended 8/31/03 8/31/04 - -------------------------------------------------------------------------------- AAA 55.0% 49.7% AA 22.1 22.0 A 9.7 15.4 BBB 8.3 7.7 BB and Below 1.9 2.8 Not Rated 3.0 2.4 - -------------------------------------------------------------------------------- Total 100.0% 100.0% Source: Standard & Poor's; if Standard & Poor's does not rate a security, then Moody's Investors Service is used as a secondary source. T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) Fund Expense Example - -------------------------------------------------------------------------------- As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs such as redemption fees or sales loads and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period. Please note that the fund has two share classes: The original share class ("investor class") charges no distribution and service (12b-1) fee. Advisor Class shares are offered only through brokers and other financial intermediaries and charge a 0.25% 12b-1 fee. Each share class is presented separately in the table. Actual Expenses The first line of the following table ("Actual") provides information about actual account values and expenses based on the fund's actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information on the second line of the table ("Hypothetical") is based on hypothetical account values and expenses derived from the fund's actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund's actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Note: T. Rowe Price charges an annual small-account maintenance fee of $10, generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $25,000 or more, accounts employing automatic investing, and IRAs and other retirement plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although a separate custodial or administrative fee may apply to such accounts). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher. Fund Expense Example (continued) - -------------------------------------------------------------------------------- T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Beginning Ending Expenses Paid Account Value Account Value During Period* 3/1/04 8/31/04 3/1/04 to 8/31/04 - -------------------------------------------------------------------------------- Investor Class Actual $1,000.00 $1,003.90 $2.71 Hypothetical (assumes 5% return before expenses) $1,000.00 $1,022.50 $2.73 - -------------------------------------------------------------------------------- Advisor Class Actual $1,000.00 $1,002.40 $4.22 Hypothetical (assumes 5% return before expenses) $1,000.00 $1,020.99 $4.26 - -------------------------------------------------------------------------------- * Expenses are equal to the fund's annualized expense ratio for the six-month period (0.54%), multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in most recent fiscal half-year (184) by days in the year (365) to reflect the half-year period. Annualized expense ratio of the Advisor Class was (0.84%). T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) Financial Highlights For a share outstanding throughout each period - -------------------------------------------------------------------------------- Investor Class 6 Months Year Ended Ended 8/31/04 2/29/04 2/28/03 2/28/02 2/28/01 2/29/00 NET ASSET VALUE Beginning of period $ 10.21 $ 10.05 $ 9.81 $ 9.72 $ 9.10 $ 9.94 Investment activities Net investment income (loss) 0.24 0.44 0.47 0.48 0.49 0.49 Net realized and unrealized gain (loss) (0.20) 0.16 0.24 0.09 0.62 (0.83) Total from investment activities 0.04 0.60 0.71 0.57 1.11 (0.34) Distributions Net investment income (0.22) (0.44) (0.47) (0.48) (0.49) (0.49) Net realized gain -- -- -- -- -- (0.01) Total distributions (0.22) (0.44) (0.47) (0.48) (0.49) (0.50) NET ASSET VALUE End of period $ 10.03 $ 10.21 $ 10.05 $ 9.81 $ 9.72 $ 9.10 ----------------------------------------------------------- Ratios/Supplemental Data Total return^ 0.39% 6.17% 7.42% 5.99% 12.55% (3.42%) Ratio of total expenses to average net assets 0.54%! 0.54% 0.55% 0.54% 0.54% 0.55% Ratio of net investment income (loss) to average net assets 4.32%! 4.47% 4.78% 4.95% 5.25% 5.24% Portfolio turnover rate 34.3%! 26.9% 24.4% 28.2% 28.6% 44.3% Net assets, end of period (in millions) $ 1,444 $ 1,509 $ 1,501 $ 1,442 $ 1,403 $ 1,311 ^ Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions ! Annualized The accompanying notes are an integral part of these financial statements. T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) Financial Highlights For a share outstanding throughout each period - -------------------------------------------------------------------------------- Advisor Class 6 Months Year 9/30/02 Ended Ended Through 8/31/04 2/29/04 2/28/03 NET ASSET VALUE Beginning of period $ 10.21 $ 10.05 $ 10.13 Investment activities Net investment income 0.22 0.41 0.18* Net realized and unrealized gain (loss) (0.20) 0.16 (0.08)** Total from investment activities 0.02 0.57 0.10 Distributions Net investment income (0.20) (0.41) (0.18) NET ASSET VALUE End of period $ 10.03 $ 10.21 $ 10.05 ------------------------------------------ Ratios/Supplemental Data Total return^ 0.24% 5.82% 1.02%* Ratio of total expenses to average net assets 0.84%! 0.86% 0.90%*! Ratio of net investment income (loss) to average net assets 4.00%! 4.10% 4.48%*! Portfolio turnover rate 34.3%! 26.9% 24.4% Net assets, end of period (in thousands) $ 298,233 $ 165 $ 147 ** The amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange Commission for a share outstanding throughout the period. This amount is inconsistent with the fund's aggregate gains and losses because of the timing of sales and redemptions of fund shares in relation to fluctuating market values for the investment portfolio. ^ Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions. * Excludes expenses in excess of a 0.90% contractual expense limitation in effect through 6/30/06. ! Annualized The accompanying notes are an integral part of these financial statements. T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) August 31, 2004 Portfolio of Investments (1) $ Par Value - -------------------------------------------------------------------------------- (Amounts in 000s) ALABAMA 1.9% Alabama, GO, 5.00%, 9/1/16 5,810 6,267 Alabama Water Pollution Control Auth. 6.75%, 8/15/17 (Prerefunded 8/15/05!) (AMBAC Insured) 2,685 2,819 Baldwin County Eastern Shore Hosp. Auth. Thomas Hosp. 5.75%, 4/1/27 880 838 6.75%, 4/1/21 1,450 1,493 Camden Ind. Dev. Board, IDRB Weyerhaeuser, 6.125%, 12/1/24 2,500 2,672 Jefferson County, Sewer, 1.45%, 2/1/42 (FGIC Insured) 10,000 10,000 Phoenix IDB, PCR, MeadWestvaco, 6.10%, 5/15/30 3,750 3,918 Tuscaloosa County Board of Ed., VRDN (Currently 1.32%) 5,330 5,330 Total Alabama (Cost $32,677) 33,337 ALASKA 0.6% Alaska HFC, Single Family 5.30%, 12/1/17 2,760 2,869 5.85%, 12/1/14 (MBIA Insured) 1,705 1,766 5.875%, 12/1/24 (MBIA Insured) 5,510 5,679 Total Alaska (Cost $9,687) 10,314 ARIZONA 0.8% Arizona School Fac. Board, 5.50%, 7/1/18 5,000 5,632 Maricopa County PCR, 1.875%, 5/1/29 (Tender 3/1/05) 3,000 2,997 Salt River Agricultural Improvement & Power, 5.00%, 1/1/08 2,250 2,441 Scottsdale IDA, Healthcare, 5.80%, 12/1/31 2,000 2,049 Yavapai County IDA, Regional Medical Center 6.00%, 8/1/33 1,100 1,124 Total Arizona (Cost $13,568) 14,243 ARKANSAS 0.4% Little Rock Health Fac. Board, Baptist Health, 6.85%, 11/1/08 2,495 2,857 North Little Rock, 6.50%, 7/1/15 (MBIA Insured) 4,000 4,885 Total Arkansas (Cost $6,479) 7,742 CALIFORNIA 12.7% Anaheim PFA, 5.00%, 10/1/34 (MBIA Insured) 3,380 3,429 California, Economic Recovery 5.00%, 7/1/23 (Tender 7/1/07) 4,000 4,322 5.00%, 7/1/23 (Tender 7/1/08) 5,500 6,016 California, GO 5.00%, 2/1/10 5,520 6,053 5.00%, 2/1/33 3,750 3,775 5.125%, 6/1/31 10,540 10,704 5.25%, 4/1/29 5,000 5,171 5.25%, 4/1/34 5,500 5,670 5.50%, 11/1/33 7,500 7,931 5.65%, 6/1/30 2,500 2,686 California CDA Community Hosp. of Monterey Peninsula 5.25%, 6/1/23 (FSA Insured) 2,000 2,121 Kaiser Permanente, 2.30%, 4/1/34 (Tender 5/1/07) 7,500 7,489 Sutter Health, 5.625%, 8/15/42 3,850 3,986 California Dept. of Water Resources Central Valley Project, 5.00%,12/1/13(FGIC Insured) 8,000 8,830 Power Supply 5.375%, 5/1/21 2,000 2,144 5.75%, 5/1/17 3,000 3,381 California Public Works Board Dept. of Corrections, 5.25%, 6/1/28 14,810 15,179 Mental Health, 5.50%, 6/1/23 3,000 3,183 Capistrano Unified School Dist. No. 90-2, 5.875%, 9/1/23 1,415 1,457 Folsom, Community Fac. Dist. No. 10, 5.875%, 9/1/28 3,000 3,018 Foothill/Eastern Transportation Corridor Agency Zero Coupon, 1/1/15 (Escrowed to Maturity) 5,000 3,247 Zero Coupon, 1/1/17 (Escrowed to Maturity) 18,000 10,473 Golden State Tobacco Securitization Corp. Tobacco Settlement 5.50%, 6/1/33 7,500 7,703 5.625%, 6/1/38 8,500 8,793 Los Angeles, GO, 6.00%, 9/1/14 (Prerefunded 9/1/04!) (MBIA Insured) 5,000 5,100 Los Angeles County, Marina Del Rey, COP, 6.50%, 7/1/08 2,680 2,737 Los Angeles Dept. of Water & Power 5.00%, 7/1/23 (MBIA Insured) 5,000 5,210 5.00%, 7/1/43 (FGIC Insured) 12,170 12,237 Los Angeles Harbor, 7.60%, 10/1/18 (Escrowed to Maturity) 3,440 4,363 Orange County, 10.12%, 7/1/19 (MBIA Insured) 3,000 3,512 Palm Springs Fin. Auth., 5.50%, 11/1/29 (MBIA Insured) 3,100 3,376 San Diego Unified School Dist. 5.50%, 7/1/25 (MBIA Insured) 4,745 5,403 San Francisco Public Utility,5.00%, 11/1/27 (FSA Insured) 8,000 8,149 San Jose Airport, 5.00%, 3/1/28 (MBIA Insured) 3,500 3,558 Southern California Public Power Auth., 6.75%, 7/1/11 4,050 4,827 Union Elementary School Dist., GO Zero Coupon, 9/1/12 (FGIC Insured) 2,945 2,166 Zero Coupon, 9/1/13 (FGIC Insured) 3,520 2,447 Univ. of California Regents 5.125%, 5/15/15 (AMBAC Insured) 6,900 7,615 5.125%, 5/15/17 (AMBAC Insured) 10,000 10,912 West Hollywood Community Dev. East Side Redev., 5.625%, 9/1/28 2,015 2,045 Total California (Cost $207,201) 220,418 COLORADO 0.5% Arapahoe County, Zero Coupon 8/31/26 (Prerefunded 8/31/05!) 5,500 1,131 Colorado HFA Adventist Health, 6.50%, 11/15/31 2,500 2,727 Catholic Health Initiatives, VRDN (Currently 1.36%) 2,955 2,955 Covenant Retirement Communities, 6.125%, 12/1/33 2,000 2,049 Total Colorado (Cost $8,455) 8,862 CONNECTICUT 0.8% Connecticut, 7.125%, 6/1/10 7,350 8,830 Mohegan Tribe Indians 5.25%, 1/1/33 3,000 2,936 6.00%, 1/1/16 2,250 2,444 Total Connecticut (Cost $12,482) 14,210 DISTRICT OF COLUMBIA 2.5% District of Columbia 5.25%, 6/1/27 (Prerefunded 6/1/08!) (MBIA Insured) 1,330 1,477 6.00%, 6/1/14 (Escrowed to Maturity) (MBIA Insured) 2,305 2,760 District of Columbia, GO 5.125%, 6/1/17 (AMBAC Insured) 12,720 13,778 5.25%, 6/1/27 (MBIA Insured) 8,645 8,948 6.00%, 6/1/14 (MBIA Insured) 4,400 5,208 6.00%, 6/1/15 (MBIA Insured) 1,550 1,849 6.00%, 6/1/17 (MBIA Insured) 4,250 5,087 District of Columbia Tobacco Corp., 5.25%, 5/15/09 5,000 5,010 Total District of Columbia (Cost $40,444) 44,117 FLORIDA 2.8% Coral Gables HFA, Baptist Health 5.25%, 8/15/24 (FSA Insured) 5,000 5,335 Dade County, Zero Coupon, 2/1/09 (MBIA Insured) 12,185 10,323 Florida Board of Ed. GO, 5.00%, 6/1/05 1,425 1,462 Lottery, 5.50%, 7/1/14 (AMBAC Insured) 5,470 6,236 Highlands County HFA Adventist Health System/Sunbelt VRDN (Currently 1.32%) 1,400 1,400 5.875%, 11/15/29 7,000 7,420 6.00%, 11/15/31 2,750 2,932 Jacksonville HFA Genesis Rehabilitation Hosp., VRDN (Currently 1.37%) 1,400 1,400 Mayo Foundation, TECP, 1.10%, 9/2/04 6,500 6,500 Orange County HFA, Westminster Community Care 6.75%, 4/1/34 2,500 2,148 Port St. Lucie Utility Zero Coupon, 9/1/16 (Prerefunded 9/1/06!) (FGIC Insured) 5,000 2,705 Zero Coupon, 9/1/26 (Prerefunded 9/1/06!) (FGIC Insured) 5,000 1,420 Total Florida (Cost $47,261) 49,281 GEORGIA 4.9% Atlanta Airport, 5.25%, 1/1/33 (FSA Insured) 5,000 5,250 Atlanta Water & Sewer, VRDN (Currently 1.35%) (FSA Insured) 2,100 2,100 Chatham County Hosp. Auth. Memorial Univ. Medical Center 5.75%, 1/1/29 3,500 3,641 6.125%, 1/1/24 4,000 4,256 Coweta County Residential Care Fac. for the Elderly Wesley Woods of Newnan-Peachtree City 8.20%, 10/1/16 1,350 1,404 8.25%, 10/1/26 1,800 1,873 Forsyth County School Dist., GO, 5.75%, 2/1/18 (Prerefunded 2/1/10!) 2,800 3,179 Fulton-DeKalb Hosp. Auth., Grady Memorial Hosp. 6.80%, 1/1/07 (Escrowed to Maturity) (AMBAC Insured) 5,530 6,137 6.80%, 1/1/08 (Escrowed to Maturity) (AMBAC Insured) 5,905 6,751 6.85%, 1/1/09 (Escrowed to Maturity) (AMBAC Insured) 6,310 7,400 6.85%, 1/1/10 (Escrowed to Maturity) (AMBAC Insured) 6,745 8,062 Georgia Private Colleges & Univ. Auth. Emory Univ., 5.50%, 11/1/24 6,225 6,716 Gwinnett County School Dist., GO, 6.40%, 2/1/11 1,905 2,273 Municipal Electric Auth. of Georgia 5.50%, 1/1/20 3,000 3,391 5.70%, 1/1/19 (FGIC Insured) 5,100 5,953 6.40%, 1/1/07 (AMBAC Insured) 6,655 7,318 6.40%, 1/1/07 (Escrowed to Maturity) (AMBAC Insured) 845 930 7.25%, 1/1/24 (AMBAC Insured) 6,500 8,791 Total Georgia (Cost $75,539) 85,425 HAWAII 0.5% Hawaii Airport, 5.75%, 7/1/21 (FGIC Insured) 4,000 4,474 Hawaii Dept. of Budget & Fin., Hawaii Pacific Health B&F Kapiolani, 6.25%, 7/1/21 4,000 4,150 Total Hawaii (Cost $7,820) 8,624 IDAHO 0.2% Nez Perce County IDRB, PCR, Potlatch, 7.00%, 12/1/14 2,600 2,794 Total Idaho (Cost $2,600) 2,794 ILLINOIS 5.6% Chicago, 6.75%, 1/1/35 (Prerefunded 7/1/10!) (FGIC Insured) 5,000 6,062 Chicago, GO 5.50%, 1/1/14 (FSA Insured) 5,000 5,700 5.50%, 1/1/18 (AMBAC Insured) 3,880 4,464 Chicago Board of Ed., GO, 1.375%, 3/1/14 3,525 3,525 Chicago O'Hare Int'l. Airport, United Airlines, 6.30%, 5/1/16 * 3,555 658 Chicago Wastewater, VRDN (Currently 1.11%) (MBIA Insured) 10,000 10,000 Illinois 5.50%, 6/15/16 2,000 2,236 6.125%, 6/15/16 2,000 2,302 Illinois, GO, 5.25%, 4/1/06 7,000 7,382 Illinois EFA, Northwestern Univ., 5.25%, 11/1/32 (Tender 11/1/14) 4,000 4,425 Illinois Fin. Auth., Northwestern Memorial Hosp. 5.50%, 8/15/43 5,000 5,118 Illinois HFA Central Dupage Health, VRDN (Currently 1.46%) 5,000 5,000 Glen Oaks Medical Center, 7.00%, 11/15/19 (Escrowed to Maturity) 3,300 3,598 Illinois Unemployment Insurance Fund 5.00%, 12/15/06 (FSA Insured) 15,000 16,000 Metropolitan Pier & Expo Auth. Zero Coupon, 6/15/18 (FGIC Insured) 14,160 7,502 Regional Transportation Auth. 6.70%, 11/1/21 (FGIC Insured) 5,000 6,387 7.75%, 6/1/19 (FGIC Insured) 5,350 7,272 Total Illinois (Cost $92,988) 97,631 INDIANA 1.1% Goshen, Greencroft Obligated Group, 5.75%, 8/15/19 3,000 2,950 Indiana HFFA, Clarian Health Partners, 5.50%, 2/15/16 6,705 7,026 Indiana Office Building Commission, 5.50%, 7/1/20 (Prerefunded 7/1/05!) (AMBAC Insured) 4,500 4,739 Indiana Transportation Fin. Auth., 5.375%, 12/1/25 4,000 4,254 Total Indiana (Cost $17,580) 18,969 IOWA 0.6% Iowa Fin. Auth. Single Family, 5.70%, 1/1/27 3,015 3,087 Wesley Retirement Services 6.25%, 2/1/12 (Prerefunded 8/1/05!) 2,400 2,519 Scott County, Ridgecrest Village, 7.25%, 11/15/26 4,000 4,110 Total Iowa (Cost $9,173) 9,716 KANSAS 0.9% Burlington, PCR, Gas & Electric, 5.30%, 6/1/31 (MBIA Insured) 15,000 15,759 Total Kansas (Cost $15,127) 15,759 KENTUCKY 0.0% Breckinridge County, Kentucky Assoc. of Counties Leasing Trust VRDN (Currently 1.35%) 130 130 Total Kentucky (Cost $130) 130 LOUISIANA 0.5% Calcasieu Parish, PCR, Entergy, 5.45%, 7/1/10 1,750 1,789 Sabine River Auth., PCR, Intl. Paper, 6.20%, 2/1/25 2,500 2,633 West Feliciana Parish, PCR, Entergy 5.65%, 9/1/28 (Tender 9/1/04) 5,000 5,000 Total Louisiana (Cost $9,250) 9,422 MAINE 0.1% Maine Housing Auth., Single Family 6.10%, 11/15/15 (AMBAC Insured) 1,120 1,120 Total Maine (Cost $1,120) 1,120 MARYLAND 2.8% Baltimore City, Convention Center 6.00%, 9/1/17 (Prerefunded 9/1/04!) (FGIC Insured) 1,750 1,750 Baltimore County, Quail Ridge Apartments VRDN (Currently 1.38%) 4,450 4,450 Maryland CDA, Single Family, 5.95%, 4/1/16 5,000 5,228 Maryland HHEFA Beth Tfiloh Dahan Community School, VRDN (Currently 1.33%) 3,300 3,300 Johns Hopkins Hosp., Zero Coupon, 7/1/19 7,675 3,749 Mercy Ridge Retirement Community, 6.00%, 4/1/35 2,535 2,567 Sheppard & Enoch Pratt Foundation 1.45%, 7/1/28 (RAA Insured) 9,500 9,500 Univ. of Maryland Medical System 7.00%, 7/1/22 (FGIC Insured) 1,500 1,959 Maryland National Capital Park & Planning Commission, GO Prince Georges County, 1.40%, 5/1/22 6,425 6,425 Prince George's County Hosp., Dimensions Health 5.30%, 7/1/24 6,685 5,127 Univ. of Maryland, Auxiliary Fac. & Tuition 5.75%, 4/1/17 (Prerefunded 4/1/06!) 5,000 5,365 Total Maryland (Cost $47,839) 49,420 MASSACHUSETTS 4.4% Massachusetts 5.25%, 8/1/16 (Prerefunded 8/1/13!) 10,000 11,271 5.75%, 1/1/32 (FGIC Insured) 6,000 6,648 Massachusetts, GO, VRDN (Currently 1.35%) 100 100 Massachusets Bay Transportation Auth., 5.25%, 7/1/30 8,150 8,565 Massachusetts Bay Transportation Auth., GO 7.00%, 3/1/14 3,150 3,921 7.00%, 3/1/21 6,200 7,954 Massachusetts HEFA, Harvard Univ. Harvard Univ. 6.00%, 7/1/35 (Prerefunded 7/1/10!) 3,500 4,108 6.25%, 4/1/20 5,000 6,242 Partners Healthcare, 5.75%, 7/1/32 4,400 4,665 Massachusetts Housing Fin. Agency, Single Family 6.30%, 12/1/14 1,795 1,856 Massachusetts Port Auth., 5.75%, 7/1/29 5,000 5,417 Massachusetts Water Pollution Abatement Trust 5.25%, 8/1/20 3,750 4,103 5.75%, 8/1/29 5,000 5,523 6.00%, 8/1/19 5,000 6,058 Total Massachusetts (Cost $67,759) 76,431 MICHIGAN 1.1% Cornell Township Economic Dev., PCR MeadWestvaco, 5.875%, 5/1/18 2,000 2,080 Michigan Building Auth., 5.50%, 10/15/19 5,000 5,602 Michigan Hosp. Fin. Auth. Ascension Health, 5.25%, 11/15/26 3,570 3,672 Trinity Health, 6.00%, 12/1/20 1,500 1,658 Michigan Strategic Fund Detroit Edison, IDRB, PCR, 5.45%, 9/1/29 5,000 5,129 Ford Motor, 7.10%, 2/1/06 1,180 1,254 Total Michigan (Cost $18,366) 19,395 MINNESOTA 0.6% Minneapolis & St. Paul Metropolitan Airport Commission 5.25%, 1/1/32 (FGIC Insured) 10,000 10,375 Total Minnesota (Cost $9,745) 10,375 MISSISSIPPI 0.5% Mississippi Business Fin., PCR, Entergy Corp., 5.90%, 5/1/22 7,000 7,069 Warren County, PCR, Entergy, 7.00%, 4/1/22 1,500 1,526 Total Mississippi (Cost $8,433) 8,595 MISSOURI 0.2% Good Shepherd Nursing Home Dist., 5.90%, 8/15/23 2,000 1,773 Missouri HEFA, Washington Univ., VRDN (Currently 1.34%) 2,000 2,000 Total Missouri (Cost $4,000) 3,773 NEBRASKA 0.2% Omaha Public Power Dist., 6.20%, 2/1/17 (Escrowed to Maturity) 3,000 3,611 Total Nebraska (Cost $2,991) 3,611 NEVADA 1.9% Clark County, Fuel Tax, 5.125%, 7/1/16 (AMBAC Insured) 10,870 11,883 Clark County Airport, McCarran Int'l. 4.75%, 7/1/22 (MBIA Insured) 2,970 3,004 Clark County IDRB, PCR Nevada Power, 5.30%, 10/1/11 2,000 1,930 Southwest Gas, 5.45%, 3/1/38 (Tender 3/1/13) 5,000 5,304 Clark County School Dist., GO, 7.00%, 6/1/11 (MBIA Insured) 3,500 4,297 Nevada, GO, 7.25%, 11/1/10 (Escrowed to Maturity) 3,050 3,094 Truckee Meadows Water Auth., 5.50%, 7/1/19 (FSA Insured) 2,500 2,791 Total Nevada (Cost $30,025) 32,303 NEW HAMPSHIRE 2.0% New Hampshire Business Fin. Auth., PCR, Public Service 5.45%, 5/1/21 (MBIA Insured) 14,500 15,802 New Hampshire HEFA Covenant Health, 6.00%, 7/1/22 3,400 3,595 Dartmouth-Hitchcock Obligation Group 5.50%, 8/1/27 (FSA Insured) 7,930 8,495 Elliot Hosp., 5.60%, 10/1/22 1,000 1,016 Wentworth-Douglas Hosp., 5.375%, 1/1/15 (MBIA Insured) 5,600 6,203 Total New Hampshire (Cost $32,898) 35,111 NEW JERSEY 2.0% Middlesex County, PCR, Amerada Hess, 6.05%, 9/15/34 2,000 2,067 Middlesex County Improvement Auth. Student Housing Urban Renewal, 5.00%, 8/15/18 1,000 1,037 New Jersey Economic Dev. Auth. Harrogate, 5.875%, 12/1/26 3,500 3,504 Motor Vehicle Surcharge Zero Coupon, 7/1/20 (MBIA Insured) 2,500 1,189 5.25%, 7/1/25 (MBIA Insured) 4,000 4,374 5.25%, 7/1/31 (MBIA Insured) 5,000 5,234 Winchester Gardens at Ward Homestead, 5.75%, 11/1/24 2,000 2,008 New Jersey HFFA, Pascak Valley Hosp. Assoc. 6.50%, 7/1/23 3,000 2,844 6.625%, 7/1/36 3,000 2,768 New Jersey Sports & Exhibition Auth., Monmouth 8.00%, 1/1/25 (Prerefunded 1/1/05!) 4,500 4,688 New Jersey Transportation Trust Fund 5.75%, 6/15/25 (FGIC Insured) 5,000 5,845 Total New Jersey (Cost $34,947) 35,558 NEW MEXICO 0.4% Farmington PCR, El Paso Electric, 6.375%, 6/1/32 (Tender 8/1/05) 2,500 2,569 Jicarilla Apache Nation, 5.50%, 9/1/23 3,890 4,095 Total New Mexico (Cost $6,516) 6,664 NEW YORK 17.5% Dormitory Auth. of the State of New York 5.25%, 5/15/19 3,325 3,713 5.75%, 7/1/13 10,000 11,474 5.75%, 7/1/18 (AMBAC Insured) 5,000 5,928 6.00%, 7/1/14 10,000 11,522 State Univ. Ed. Fac., 5.75%, 5/15/19 (Prerefunded 5/15/10!) (FGIC Insured) 4,945 5,739 State Univ. of New York, 5.25%, 5/15/15 (AMBAC Insured) 3,600 4,065 Metropolitan Transportation Auth. 5.00%, 4/1/29 (Prerefunded 10/1/14!) (FSA Insured) 7,290 8,192 5.125%, 11/15/31 7,000 7,124 5.25%, 11/15/31 2,945 3,026 5.25%, 11/15/32 10,000 10,287 Commuter Fac., 5.75%, 7/1/21 (Prerefunded 1/1/08!) (MBIA Insured) 12,750 14,352 New York City, GO 5.00%, 8/1/06 3,000 3,170 5.00%, 8/1/07 5,000 5,378 5.25%, 8/1/13 5,000 5,543 5.25%, 8/1/15 9,500 10,377 5.25%, 5/15/22 10,000 10,552 5.25%, 8/15/26 5,000 5,200 5.50%, 6/1/21 7,500 8,150 6.00%, 12/1/18 (Escrowed to Maturity) (FSA Insured) 5,000 5,052 6.00%, 12/15/25 (Prerefunded 2/15/05!) 1,990 2,052 6.00%, 10/15/26 1,670 1,810 6.00%, 10/15/26 (Prerefunded 10/15/07!) 280 316 6.00%, 5/15/30 520 571 6.00%, 5/15/30 (Prerefunded 5/15/10!) 2,360 2,770 6.25%, 8/1/09 4,850 5,266 6.25%, 8/1/09 (Prerefunded 8/1/06!) 200 220 New York City Municipal Water Fin. Auth. 5.00%, 6/15/32 10,000 10,091 Water & Sewer 5.50%, 6/15/33 9,000 9,553 6.00%, 6/15/33 (Prerefunded 6/15/10!) 2,220 2,609 New York City Transitional Fin. Auth. 5.75%, 11/15/20 4,990 5,620 5.75%, 11/15/20 (Prerefunded 5/15/10!) 510 592 6.00%, 8/15/17 (Prerefunded 8/15/09!) 4,000 4,659 STEP, 5.25%, 2/1/29 16,640 18,270 New York State Environmental Fac. Corp., PCR 6.90%, 11/15/15 215 222 New York State Environmental Fac. Corp., PCR 6.90%, 11/15/15 (Prerefunded 11/15/04!) 5,145 5,307 New York State Medical Care Fac., 6.50%, 8/15/29 (Prerefunded 2/15/05!) (AMBAC Insured) 4,625 4,824 New York State Mortgage Agency, Single Family 5.70%, 4/1/16 4,090 4,364 New York State Thruway Auth., 5.50%, 3/15/20 3,000 3,340 New York State Urban Dev. Corp. 5.00%, 1/1/27 (Tender 1/1/09) 3,465 3,746 5.50%, 7/1/26 10,000 10,650 Corrections & Youth Fac., 5.25%, 1/1/21 (Tender 1/1/09) 15,600 17,017 Tobacco Settlement Fin. Corp. 5.00%, 6/1/06 3,715 3,896 5.00%, 6/1/08 5,720 6,154 5.25%, 6/1/20 (AMBAC Insured) 6,000 6,471 5.25%, 6/1/21 (AMBAC Insured) 2,500 2,677 Triborough Bridge & Tunnel Auth. 5.25%, 1/1/28 (Prerefunded 1/1/22!) 10,000 11,204 5.50%, 1/1/17 (Escrowed to Maturity) 18,275 21,152 Total New York (Cost $279,194) 304,267 NORTH CAROLINA 1.4% Cumberland County, Civic Center, 6.40%, 12/1/24 (Prerefunded 12/1/04!) (AMBAC Insured) 2,750 2,840 North Carolina, GO, VRDN (Currently 1.36%) 960 960 North Carolina Eastern Municipal Power Agency 5.30%, 1/1/15 1,000 1,069 5.375%, 1/1/16 2,000 2,137 6.70%, 1/1/19 3,965 4,451 7.50%, 1/1/10 4,330 5,156 7.50%, 1/1/10 (Escrowed to Maturity) 4,650 5,698 North Carolina Municipal Power Agency Catawba Electric, 5.50%, 1/1/13 2,250 2,494 Total North Carolina (Cost $21,955) 24,805 NORTH DAKOTA 0.3% Mercer County, PCR, Basin Electric Power Cooperative 6.05%, 1/1/19 (AMBAC Insured) 4,500 4,653 Total North Dakota (Cost $4,530) 4,653 OHIO 1.6% Cuyahoga County Hosp., Cleveland Clinic Obligation Group 6.00%, 1/1/32 5,000 5,353 Montgomery County Hosp., Catholic Health Initiatives 6.00%, 12/1/19 6,500 7,245 Ohio Air Quality Dev. Auth., PCR, FirstEnergy 5.80%, 6/1/16 (Tender 12/1/04) 5,950 5,997 Ohio State Univ., 5.25%, 6/1/17 (Tender 12/1/16) 5,000 5,500 Ohio Water Dev. Auth., PCR, FirstEnergy, 7.70%, 8/1/25 3,950 4,201 Total Ohio (Cost $26,778) 28,296 OKLAHOMA 0.4% Jackson County Memorial Hosp. Auth., 7.30%, 8/1/15 2,000 2,016 Tulsa County Home Fin. Auth., Single Family 6.90%, 8/1/10 (Escrowed to Maturity) (FGIC Insured) 4,250 5,128 Total Oklahoma (Cost $6,051) 7,144 OREGON 0.3% Oregon Housing & Community Services Dept. Single Family, 6.00%, 7/1/20 3,185 3,310 Umatilla County Hosp. Fac. Auth. Catholic Health Initiatives, 5.50%, 3/1/22 2,210 2,339 Total Oregon (Cost $5,377) 5,649 PENNSYLVANIA 2.3% Allegheny County Hosp. Dev. Auth. West Penn Allegheny Health, 9.25%, 11/15/22 3,000 3,411 Beaver County IDA, PCR, FirstEnergy, 7.75%, 7/15/25 3,900 4,154 Chester County HEFA, Jefferson Health, 5.375%, 5/15/27 9,500 9,660 Cumberland County Municipal Auth. Wesley Affiliated Services, 7.125%, 1/1/25 3,000 3,036 Pennsylvania Intergov't. Cooperative Auth., 6.75%, 6/15/21 (Prerefunded 6/15/05!) (FGIC Insured) 4,750 4,946 Pennsylvania Turnpike Commission 5.25%, 12/1/32 (AMBAC Insured) 7,500 7,890 5.50%, 7/15/33 (AMBAC Insured) 3,500 3,760 West Shore Area Auth., Holy Spirit Hosp., 6.20%, 1/1/26 3,250 3,349 Total Pennsylvania (Cost $37,442) 40,206 PUERTO RICO 1.5% Puerto Rico Housing Fin. Auth., 5.00%, 12/1/20 8,725 9,207 Puerto Rico Public Buildings Auth., GO 4.00%, 7/1/26 (Tender 7/1/07) (MBIA Insured) 2,750 2,890 Puerto Rico Public Fin. Corp. 5.25%, 8/1/29 (Tender 2/1/12) (MBIA Insured) 7,000 7,781 5.75%, 8/1/27 (Tender 2/1/12) 5,000 5,637 Total Puerto Rico (Cost $24,937) 25,515 SOUTH CAROLINA 2.7% Connector 2000 Assoc. Zero Coupon, 1/1/09 2,700 1,320 Zero Coupon, 1/1/10 3,400 1,920 Zero Coupon, 1/1/11 2,200 539 Zero Coupon, 1/1/29 20,500 2,123 Georgetown County PCR, Int'l. Paper, 5.70%, 4/1/14 4,000 4,403 Piedmont Municipal Power Agency, 6.50%, 1/1/14 (FGIC Insured) 3,000 3,640 Piedmont Municipal Power Agency, 6.50%, 1/1/14 (Escrowed to Maturity) (FGIC Insured) 500 614 South Carolina Public Service Auth. 5.00%, 1/1/19 (FSA Insured) 5,000 5,325 5.875%, 1/1/23 (FGIC Insured) 8,030 8,576 6.25%, 1/1/22 (AMBAC Insured) 17,750 19,068 Total South Carolina (Cost $48,109) 47,528 SOUTH DAKOTA 0.6% South Dakota HEFA, Sioux Valley Hosp. 4.85%, 11/1/19 (Tender 5/1/06) 5,000 5,217 5.25%, 11/1/27 2,000 1,992 5.50%, 11/1/31 3,000 3,065 Total South Dakota (Cost $10,306) 10,274 TENNESSEE 1.1% Chattanooga Health Ed. & Housing Fac. Board 6.625%, 9/1/07 (MBIA Insured) (Escrowed to Maturity) 2,950 3,339 6.625%, 9/1/08 (MBIA Insured) (Escrowed to Maturity) 3,150 3,651 Clarksville Public Building Auth., GO VRDN (Currently 1.37%) 300 300 Metropolitan Nashville & Davidson Counties Water & Sewer, STEP, 7.70%, 1/1/12 (FGIC Insured) 6,250 7,742 Shelby County Health Ed. & Housing Board, Bonheur 5.50%, 8/15/12 (Escrowed to Maturity) (MBIA Insured) 4,000 4,464 Total Tennessee (Cost $17,200) 19,496 TEXAS 6.3% Abilene Health Fac. Dev. Corp., Sears Methodist Retirement 7.00%, 11/15/33 3,500 3,739 Amarillo Health Fac. Dev. Corp., Sears Panhandle Retirement 7.75%, 8/15/26 (Prerefunded 8/15/06!) 5,000 5,669 Austin, Water & Wastewater, 5.125%, 5/15/27 (FSA Insured) ++ 10,955 11,226 Brazos River Auth., PCR, Centerpoint Energy, 7.75%, 12/1/18 4,000 4,361 Denison Hosp. Auth., Texoma Medical Center 7.00%, 8/15/14 4,245 4,334 Harris County Health Fac. Dev. Corp. Memorial Hermann Healthcare, 6.375%, 6/1/29 4,000 4,345 St. Luke's Episcopal, 5.375%, 2/15/26 5,500 5,646 Texas Childrens Hosp. VRDN (Currently 1.36%) (MBIA Insured) 1,685 1,685 5.25%, 10/1/19 5,000 5,215 Harris County Hosp. Dist., 7.40%, 2/15/10 (Escrowed to Maturity) (AMBAC Insured) 515 567 Houston, 6.40%, 6/1/27 4,250 4,628 Houston, GO, 5.50%, 3/1/18 (FSA Insured) 2,750 3,059 Houston Airport 5.50%, 7/1/18 (FSA Insured) 2,265 2,531 5.50%, 7/1/19 (FSA Insured) 2,000 2,228 Houston Higher Ed. Fin. Corp., Rice Univ., 5.375%, 11/15/29 11,450 12,044 Houston Independent School Dist., GO 5.00%, 7/15/20 (FSA Insured) 3,000 3,151 Houston, Water & Sewer, 5.75%, 12/1/18 (Prerefunded 12/1/12!) (AMBAC Insured) 3,000 3,512 Lower Colorado River Auth., 6.00%, 5/15/12 (FSA Insured) 6,095 6,960 Sabine River Auth., PCR TXU Energy 5.50%, 5/1/22 (Tender 11/1/11) 4,580 4,846 5.80%, 7/1/22 1,500 1,531 6.15%, 8/1/22 2,850 2,986 Texas A&M Univ. 5.375%, 5/15/16 4,750 5,254 5.375%, 5/15/18 2,570 2,834 Texas Dept. of Housing & Community Affairs, Asmara 6.40%, 1/1/27 (Prerefunded 1/1/07!) 5,820 6,506 Total Texas (Cost $100,568) 108,857 UTAH 0.1% Murray City, IHC Health Services, VRDN (Currently 1.35%) 2,300 2,300 Total Utah (Cost $2,300) 2,300 VIRGINIA 3.2% Chesapeake IDA, PCR, Virginia Electric & Power 5.25%, 2/1/08 3,000 3,122 Fairfax County, COP, 6.10%, 4/15/32 5,000 5,676 Fairfax County Water Auth. 6.00%, 4/1/22 3,835 4,227 6.00%, 4/1/22 (Prerefunded 4/1/07!) 3,815 4,271 Fredericksburg IDA, Medicorp Health System 5.25%, 6/15/27 2,750 2,786 Greater Richmond Convention Center, 6.125%, 6/15/29 8,550 9,427 Henrico County Economic Dev. Auth., Bon Secours Health 5.75%, 11/15/30 (Prerefunded 11/15/04!) 10,000 10,091 James City & County IDA, Williamsburg Landing 6.125%, 3/1/32 2,000 2,024 Loudoun County IDA, Falcons Landing, 6.00%, 8/1/24 2,500 2,558 Virginia College Building Auth., Washington & Lee Univ. 5.25%, 1/1/31 (MBIA Insured) 5,000 5,493 Virginia Resources Auth. Goochland County Water & Sewer Zero Coupon, 11/1/18 1,140 597 Zero Coupon, 11/1/21 1,590 694 Virginia Transportation Board, 5.25%, 5/15/20 4,620 5,012 Total Virginia (Cost $53,026) 55,978 WASHINGTON 4.1% Chelan County Public Utility Dist. #1, Rock Island Hydro Zero Coupon, 6/1/18 (MBIA Insured) 10,100 5,315 King County Public Hosp., Valley Medical Center 5.75%, 9/1/20 (AMBAC Insured) 10,950 12,787 Port of Seattle, 5.50%, 2/1/26 (MBIA Insured) 6,000 6,408 Snohomish County Housing Auth., Millwood Estates 5.50%, 6/1/29 3,750 3,796 Tacoma Solid Waste Utility 5.50%, 12/1/17 (AMBAC Insured) 12,080 13,251 5.50%, 12/1/17 (Prerefunded 12/1/07!) (AMBAC Insured) 2,420 2,696 Washington, GO 5.70%, 10/1/15 14,000 16,175 6.625%, 1/1/25 6,100 7,026 Washington Public Power Supply 5.25%, 7/1/16 (FSA Insured) 3,000 3,240 Total Washington (Cost $62,726) 70,694 WEST VIRGINIA 1.3% Mason County PCR, Appalachian Power, 5.50%, 10/1/22 8,000 8,107 West Virginia Building Commission, GO, Regional Jail Court Fees 5.375%, 7/1/18 (AMBAC Insured) 2,915 3,307 West Virginia Hosp. Fin. Auth. Charleston Medical Center, 5.75%, 9/1/13 (MBIA Insured) 4,200 4,443 Oak Hill Hosp., 6.75%, 9/1/22 (Prerefunded 9/1/10!) 5,000 6,074 Total West Virginia (Cost $20,091) 21,931 WISCONSIN 0.8% Wisconsin HEFA Froedert & Community Health 5.625%, 10/1/14 1,000 1,089 5.625%, 10/1/15 1,100 1,191 5.625%, 10/1/17 3,725 3,999 Thedacare, 5.50%, 12/15/16 (MBIA Insured) 6,540 7,082 Total Wisconsin (Cost $12,313) 13,361 WYOMING 0.3% Wyoming CDA, 5.30%, 6/1/17 4,600 4,897 Total Wyoming (Cost $4,600) 4,897 U. S. VIRGIN ISLANDS 0.1% Virgin Islands PFA, GO, 4.00%, 10/1/05 1,500 1,532 Total U. S. Virgin Islands (Cost $1,531) 1,532 FUTURES CONTRACTS 0.0% Variation margin receivable (payable) on open futures contracts (2) (109) Total Futures Contracts (109) Total Investments in Securities 99.4% of Net Assets (Cost $1,612,134) $1,730,624 ---------- - -------------------------------------------------------------------------------- (2) Open Futures Contracts at August 31, 2004 were as follows: ($ 000s) Contract Unrealized Expiration Value Gain (Loss) ---------- -------- ----------- Short, 150 U.S. Treasury 30 Year contracts, $300 par of 5.125% Austin Texas bonds pledged as initial margin 12/04 $ (16,697) $ 9 Net payments (receipts) of variation margin to date (118) Variation margin receivable (payable) on open futures contracts $ (109) ------ (1) Denominated in U.S. dollars unless otherwise noted * Defaulted with respect to interest ++ All or a portion of this security is pledged to cover margin requirements on futures contracts at August 31, 2004. ! Used in determining portfolio maturity AMBAC AMBAC Assurance Corp. CDA Community Development Administration COP Certificates of Participation EFA Educational Facility Authority FGIC Financial Guaranty Insurance Company FSA Financial Security Assurance Inc. GO General Obligation HEFA Health & Educational Facility Authority HFA Health Facility Authority HFC Housing Finance Corp. HFFA Health Facility Financing Authority HHEFA Health & Higher Educational Facility Authority IDA Industrial Development Authority/Agency IDB Industrial Development Bond IDRB Industrial Development Revenue Bond MBIA MBIA Insurance Corp. PCR Pollution Control Revenue PFA Public Finance Authority RAA Radian Asset Assurance Inc. STEP Stepped coupon bond for which the coupon rate of interest will adjust on specified future date(s) TECP Tax-Exempt Commercial Paper VRDN Variable-Rate Demand Note The accompanying notes are an integral part of these financial statements. T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) August 31, 2004 Statement of Assets and Liabilities - -------------------------------------------------------------------------------- (In thousands except shares and per share amounts) Assets Investments in securities, at value (cost $1,612,134) $ 1,730,624 Other assets 31,383 Total assets 1,762,007 Liabilities Total liabilities 20,124 NET ASSETS $ 1,741,883 ----------- Net Assets Consist of: Undistributed net investment income (loss) $ 2,606 Undistributed net realized gain (loss) (2,991) Net unrealized gain (loss) 118,608 Paid-in-capital applicable to 173,683,630 shares of $1.00 par value capital stock outstanding; 500,000,000 shares authorized 1,623,660 NET ASSETS $ 1,741,883 ----------- NET ASSET VALUE PER SHARE Investor Class ($1,443,649,984/143,961,573 shares outstanding) $ 10.03 ----------- Advisor Class ($298,233,257/29,722,057 shares outstanding) $ 10.03 ----------- The accompanying notes are an integral part of these financial statements. T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) Statement of Operations - -------------------------------------------------------------------------------- ($ 000s) 6 Months Ended 8/31/04 Investment Income (Loss) Interest income $ 41,078 Expenses Investment management 3,935 Shareholder servicing Investor Class 321 Advisor Class 108 Rule 12b-1 fees -- Advisor Class 293 Custody and accounting 118 Prospectus and shareholder reports Investor Class 45 Advisor Class 15 Registration 33 Legal and audit 10 Directors 3 Miscellaneous 6 Total expenses 4,887 Expenses paid indirectly (5) Net expenses 4,882 Net investment income (loss) 36,196 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities (1,509) Futures (355) Written options 51 Net realized gain (loss) (1,813) Change in net unrealized gain (loss) Securities (26,166) Futures 170 Change in net unrealized gain (loss) (25,996) Net realized and unrealized gain (loss) (27,809) INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 8,387 ---------- The accompanying notes are an integral part of these financial statements. T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) Statement of Changes in Net Assets - -------------------------------------------------------------------------------- ($ 000s) 6 Months Year Ended Ended 8/31/04 2/29/04 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 36,196 $ 69,544 Net realized gain (loss) (1,813) 6,795 Change in net unrealized gain (loss) (25,996) 18,853 Increase (decrease) in net assets from operations 8,387 95,192 Distributions to shareholders Net investment income Investor Class (31,359) (66,063) Advisor Class (4,668) (2,986) Decrease in net assets from distributions (36,027) (69,049) Capital share transactions * Shares sold Investor Class 52,982 181,840 Advisor Class 165,728 170,913 Distributions reinvested Investor Class 21,438 44,495 Advisor Class 4,664 2,986 Shares redeemed Investor Class (112,248) (241,651) Advisor Class (36,622) (11,868) Increase (decrease) in net assets from capital share transactions 95,942 146,715 Net Assets Increase (decrease) during period 68,302 172,858 Beginning of period 1,673,581 1,500,723 End of period $ 1,741,883 $ 1,673,581 ------------------------- (Including undistributed net investment income of $2,606 at 8/31/04 and $2,437 at 2/29/04) T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) Statement of Changes in Net Assets - -------------------------------------------------------------------------------- ($ 000s) 6 Months Year Ended Ended 8/31/04 2/29/04 *Share information Shares sold Investor Class 5,322 18,141 Advisor Class 16,851 17,004 Distributions reinvested Investor Class 2,162 4,437 Advisor Class 470 298 Shares redeemed Investor Class (11,321) (24,132) Advisor Class (3,726) (1,190) Increase (decrease) in shares outstanding 9,758 14,558 The accompanying notes are an integral part of these financial statements. T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report (Unaudited) August 31, 2004 Notes to Financial Statements - -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Tax-Free Income Fund, Inc. (the fund) is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end management investment company. The fund seeks to provide a high level of income exempt from federal income taxes by investing primarily in long-term investment-grade municipal securities. The fund has two classes of shares: the Tax-Free Income Fund original share class, referred to in this report as the Investor Class, offered since October 26, 1976, and Tax-Free Income Fund--Advisor Class (Advisor Class), offered since September 30, 2002. Advisor Class shares are sold only through brokers and other financial intermediaries that are compensated by the class for distribution, shareholder servicing, and/or certain administrative services under a Board-approved Rule 12b-1 plan. Each class has exclusive voting rights on matters related solely to that class, separate voting rights on matters that relate to both classes, and, in all other respects, the same rights and obligations as the other class. The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates made by fund management. Valuation The fund values its investments and computes its net asset value per share at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day that the NYSE is open for business. Debt securities are generally traded in the over-the-counter market. Securities are valued at prices 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. Options on futures contracts are valued at the last sale price. Financial futures contracts are valued at closing settlement prices. Other investments and those 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 the T. Rowe Price Valuation Committee, established by the fund's Board of Directors. Class Accounting The Advisor Class pays distribution, shareholder servicing, and/or certain administrative expenses in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% of the class's average daily net assets. Shareholder servicing, prospectus, and shareholder report expenses incurred by each class are charged directly to the class to which they relate. Expenses common to both classes and investment income are allocated to the classes based upon the relative daily net assets of each class's settled shares; realized and unrealized gains and losses are allocated based upon the relative daily net assets of each class's outstanding shares. Credits The fund earns credits on temporarily uninvested cash balances at the custodian that reduce the fund's custody charges. Custody expense in the accompanying financial statements is presented before reduction for credits, which are reflected as expenses paid indirectly. Investment Transactions, Investment Income, and Distributions Income and expenses are recorded on the accrual basis. Premiums and discounts on debt securities are amortized for financial reporting purposes. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Payments ("variation margin") made or received to settle the daily fluctuations in the value of futures contracts are recorded as unrealized gains or losses until the contracts are closed. Unsettled variation margin on futures contracts are included in investments in securities, and any unrealized gains and losses are included in the change in net unrealized gain or loss in the accompanying financial statements. Distributions to shareholders are recorded on the ex-dividend date. Income distributions are declared by each class on a daily basis and paid monthly. Capital gain distributions, if any, are declared and paid by the fund, typically on an annual basis. Other In the normal course of business, the fund enters into contracts that provide general indemnifications. The fund's maximum exposure under these arrangements is dependent on claims that may be made against the fund in the future and, therefore, cannot be estimated; however, based on experience, the risk of material loss from such claims is considered remote. NOTE 2 - INVESTMENT TRANSACTIONS Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks or enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund's prospectus and Statement of Additional Information. Futures Contracts During the six months ended August 31, 2004, the fund was a party to futures contracts, which provide for the future sale by one party and purchase by another of a specified amount of a specific financial instrument at an agreed upon price, date, time, and place. Risks arise from possible illiquidity of the futures market and from movements in security values and/or interest rates. Options Call and put options on futures contracts give the holder the right to purchase or sell, respectively, a particular futures contract at a specified price on a certain date. Risks arise from possible illiquidity of the options market and from movements in underlying futures prices. Transactions in options written and related premiums received during the six months ended August 31, 2004, were as follows: - -------------------------------------------------------------------------------- Number of Contracts Premiums Outstanding at beginning of period -- $ -- Written 75 56,000 Closed (75) (56,000) ------ ------- Outstanding at end of period -- $ -- Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $368,026,000 and $271,341,000, respectively, for the six months ended August 31, 2004. 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 under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its income and gains. Federal income tax regulations differ from generally accepted accounting principles; therefore, distributions determined in accordance with tax regulations may differ in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. The amount and character of tax-basis distributions and composition of net assets are finalized at fiscal year-end; accordingly, tax-basis balances have not been determined as of August 31, 2004. At August 31, 2004, the cost of investments for federal income tax purposes was $1,610,390,000. Net unrealized gain aggregated $120,352,000 at period-end, of which $127,924,000 related to appreciated investments and $7,572,000 related to depreciated investments. NOTE 4- RELATED PARTY TRANSACTIONS The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The investment management agreement between the fund and the manager provides for an annual investment management fee, which is computed daily and paid monthly. The fee consists of an individual fund fee, equal to 0.15% of the fund's average daily net assets, and the fund's pro-rata share of a group fee. The group fee is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.295% for assets in excess of $120 billion. The fund's portion of the group fee is determined by the ratio of its average daily net assets to those of the group. At August 31, 2004, the effective annual group fee rate was 0.31%, and investment management fee payable totaled $684,000. The Advisor Class is also subject to a contractual expense limitation through June 30, 2006. During the limitation period, the manager is required to waive its management fee and reimburse the class for any expenses, excluding interest, taxes, brokerage commissions, and extraordinary expenses, that would otherwise cause the class's ratio of total expenses to average net assets (expense ratio) to exceed its expense limitation of 0.90%. Through June 30, 2008, the class is required to repay the manager for expenses previously reimbursed and management fees waived to the extent its net assets have grown or expenses have declined sufficiently to allow repayment without causing the class's expense ratio to exceed its expense limitation. For the six months ended August 31, 2004, the Advisor Class operated below its expense limitation. In addition, the fund has entered into service agreements with Price Associates and a wholly owned subsidiary of Price Associates (collectively, Price). Price Associates computes the daily share prices and maintains the financial records of the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund's transfer and dividend disbursing agent. For the six months ended August 31, 2004, expenses incurred pursuant to these service agreements were $57,000 for Price Associates and $219,000 for T. Rowe Price Services, Inc. At period-end, a total of $45,000 of these expenses was payable. T. Rowe Price Tax-Free Income Fund - -------------------------------------------------------------------------------- Certified Semiannual Report Information on Proxy Voting Policies, Procedures, and Records - -------------------------------------------------------------------------------- A description of the policies and procedures used by T. Rowe Price funds and portfolios to determine how to vote proxies relating to portfolio securities is available in each fund's Statement of Additional Information, which you may request by calling 1-800-225-5132 or by accessing the SEC's Web site, www.sec.gov. The description of our proxy voting policies and procedures is also available on our Web site, www.troweprice.com. To access it, click on the words "Company Info" at the top of our homepage for individual investors. Then, in the window that appears, click on the "Proxy Voting Policy" navigation button in the top left corner. Each fund's most recent annual proxy voting record is available on our Web site and through the SEC's Web site. To access it through our Web site, follow the directions above, then click on the words "Proxy Voting Record" at the bottom of the Proxy Voting Policy page. How to Obtain Quarterly Portfolio Holdings - -------------------------------------------------------------------------------- The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available electronically on the SEC's Web site (www.sec.gov); hard copies may be reviewed and copied at the SEC's Public Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330. The Form N-Q is also available on our Web site (www.troweprice.com). Item 2. Code of Ethics. A code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions is filed as an exhibit to the registrant's annual Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the registrant's most recent fiscal half-year. Item 3. Audit Committee Financial Expert. Disclosure required in registrant's annual Form N-CSR. Item 4. Principal Accountant Fees and Services. Disclosure required in registrant's annual Form N-CSR. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. Schedule of Investments. Not applicable. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 9. Submission of Matters to a Vote of Security Holders. Not applicable. Item 10. Controls and Procedures. (a) The registrant's principal executive officer and principal financial officer have evaluated the registrant's disclosure controls and procedures within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) The registrant's principal executive officer and principal financial officer are aware of no change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 11. Exhibits. (a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is filed with the registrant's annual Form N-CSR. (2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached. (3) Written solicitation to repurchase securities issued by closed-end companies: not applicable. (b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. T. Rowe Price Tax-Free Income Fund, Inc. By /s/ James S. Riepe James S. Riepe Principal Executive Officer Date October 15, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ James S. Riepe James S. Riepe Principal Executive Officer Date October 15, 2004 By /s/ Joseph A. Carrier Joseph A. Carrier Principal Financial Officer Date October 15, 2004