Letter to Shareholders -------------------------------------------------- April 30, 2001 Dear Shareholder: Fund Performance Duff & Phelps Utilities Tax-Free Income Fund (DTF) provided an attractive level of tax-free income over the past six months ending April 30, 2001. On April 30th, the stock closed at $13.99. Our $0.0625 cent monthly dividend translates to a tax- free yield of 5.36%. This level of income continues to be generated by a high quality, well- diversified investment portfolio. The DTF's total return for its one, three and five year periods is compared to its Lipper Leveraged Municipal Peer Group below: ANNUALIZED TOTAL RETURN (4/30/01) One Year Three Year Five Year Since Inception1 DTF 11.48% 4.79% 6.42% 7.50% Lipper Leveraged Peer Group 12.00 4.16 6.32 6.95 1) Inception date 11/30/91. The Fund's call protection and diversified sector holdings contributed to this performance over these periods. The Fund's diversification by market sector is shown below: FUND DIVERSIFICATION Market Sectors -------------- Electric Utilities 20% Pollution Control 11 Water/Sewer Revenue 25 Pre-Refunded Utilities 11 Non-Utilities 32 Cash 1 General Economic Commentary The bond market's volatility has continued into 2001 as short-term U.S. Treasury rates have declined significantly due to five interest rate decreases by the Federal Reserve, totaling 250 basis points, as the U.S. economy has slowed. The Fed remains on close watch due to the increasing threat that 1 the U.S. economy may be moving towards a recession. Over the past six months ending April 30, 2001, one-year U.S. Treasury rates have decreased by 225 basis points while five-year U.S. Treasury rates have declined by only 92 basis points and 30-year U.S. Treasury rates are unchanged. This significant decline in shorter- term rates when compared to intermediate and long- term rates is opposite of the market's experience last year. As a result of the significant decline in shorter-term rates due to the Fed's easing of monetary policy and an increase in long-term yields caused partly by a reduction in the Treasury's buyback of 30-year US Treasury bonds, the U.S. Treasury yield curve has steepened dramatically. We expect the U.S. Treasury curve to remain steep over the near term as the threat of a recession and a very aggressive Fed should keep shorter-term rates low. The U.S. economy has begun to show signs of slowing after setting a post war record of over nine years of uninterrupted economic expansion. Corporate layoff announcements are increasing, consumer spending has slowed, GDP growth has declined, and a dramatic reversal in the performance of the equity markets has all contributed to reduced consumer confidence and the threat of a recession. The national unemployment rate, which ended April, 2000 at 4.0%, rose to 4.5% at the end of April, 2001 as company layoffs are starting to impact employment. Consumer spending, as measured by retail sales, has experienced several monthly declines over the past six months as consumers have become more cautious in the face of rising unemployment. Inflation, as measured by the Consumer Price Index (CPI), has declined recently after moving steadily upward since 1998 as it ended the first quarter at approximately 2.9%, down from 3.8% a year ago. Despite the recent easing of monetary policy, the economy remains fragile as labor markets have slowed and consumer spending is weaker. The willingness of consumers to borrow and spend is the necessary fuel to keep the economy healthy. We expect the Fed to remain vigilant to ensure that the economy does not dip into a prolonged recession. The Municipal Market and Your Fund The past six months in the tax-exempt market could be characterized by two major themes: a significant steepening of the tax-exempt yield curve and increased supply of municipal bonds. The aggressive interest rate actions by the Fed in attempt to jump start the economy resulted in a significant steepening of the municipal yield curve. Through the first four months of 2001, there was very little change in long maturity tax- exempt rates, while there was a significant decline in rates from seven years and shorter causing the yield curve to steepen. The second theme has been increased supply. Municipalities have taken advantage of historically low municipal yields to fund new projects as well as refund older, higher cost debt. Through the first four months of 2001, new issuance is up over 36% year over year with refundings, which are essentially refinacings of older debt, up over 300% compared to this same period in 2000. It is anticipated that new supply will remain high through the balance of the year, especially in light of the significant amount of issuance expected from California as a result of its power crisis. Generally, new issues are heavily weighted with longer-dated maturities compared to shorter-dated 2 maturities especially when rates are lower. As such, this higher amount of longer-dated bonds has contributed to the steepening of the municipal yield curve as more supply in the longer-end of the curve has kept pressure on municipal rates from declining. Overall, municipal credit spreads have widened over the past twelve months. However, credit spreads still remain narrow when taking the risks of lower rated securities into consideration making higher quality bonds still good relative value. Within the DTF Fund, we continue to emphasize higher quality bonds. The Fund currently has an average quality rating of AA/Aa with over 90% of its issues rated AA or higher. Within the utility segment of the portfolio, the Fund is well diversified between electric utility, pollution control, and water/sewer issues. The electric utility sector continues to be an area of close focus due to the uncertainty surrounding electric deregulation and its ultimate impact on valuations. Specifically, the power crisis that is plaguing California has cast a negative shadow over the electric utility industry, causing bond prices to remain under pressure. While numerous states have adopted various forms of electric utility deregulation, the federal government has been unable to pass a national deregulation plan despite extensive debate. This debate is likely to continue indefinitely, especially in light of the problems that California is currently experiencing. As a result, the portfolio remains well diversified in an effort to minimize exposure to any one sector, with electric utility exposure currently at 20%, which historically is a low level of exposure for the DTF fund. Further, the fund has no exposure to any California electric utilities. Outlook As we move forward into the second half of 2001, factors that could drive the relative value of municipal bonds over the balance of the year include; the U.S. economic outlook, tax reform leading to changes in the top marginal tax rates, Federal Reserve policy, legislative developments in the electric utility industry as well as the amount of new municipal supply. Finally, should the U.S. stock market continue to experience the same level of volatility and negative returns that is has experienced over the past few months, nervous investors could continue to move money into tax-exempt issues, which could be positive for the market. In spite of these uncertainties, we believe the municipal market represents good relative value at current levels. We continue to appreciate your interest in the Duff & Phelps Utilities Tax-Free Income Fund and look forward to being of continued service in the future. Sincerely, Francis E. Jeffries, CFA Chairman of the Board 3 Duff & Phelps Utilities Tax-Free Income Inc. ------------------------------------------------------------ Semi-Annual Report April 30, 2001 ---------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Portfolio of Investments April 30, 2001 (Unaudited) ---------------------------------------------------------- Principal Moody's Amount Value Rating (000) Description (a) (Note 1) ---------------------------------------------------------- LONG-TERM INVESTMENTS--97.7% Alabama--3.3% Jefferson Cnty. Swr. Rev. Capital Impvt., Aaa $ 3,000 5.125%, 2/1/29, Ser. A, F.G.I.C................ $ 2,832,420 Aaa 4,000 5.00%, 2/1/33, Ser. A.... 3,659,640 ------------ 6,492,060 ------------ California--15.9% Foothill/Eastern Trans. Corr. Agency Toll Road Rev., Aaa 5,640(b) 6.00%, 1/1/34, Ser. A, Prerefunded 1/1/07 @ $100................... 6,227,857 Fresno Swr. Rev., Aaa 3,030 6.00%, 9/1/09, A.M.B.A.C.............. 3,369,512 Aaa 2,000 6.25%, 9/1/14, A.M.B.A.C.............. 2,298,000 Pomona Sngl. Fam. Mtge. Rev., Aaa 2,705 7.375%, 8/1/10 Escrowed to maturity... 3,077,452 Riverside Cnty. Sngl. Fam. Rev., Mtge. Backed Aaa 2,500 7.80%, 5/1/21, Ser. A, Escrowed to maturity... 3,209,550 San Bernardino Cnty. Residential Mtge. Rev., Aaa 7,840 9.60%, 9/1/15 Escrowed to maturity... 11,467,646 Santa Monica Waste Wtr. Enterprise Rev., Hyperion Proj., A1 2,000(b) 6.70%, 1/1/22, Ser. A, Prerefunded 1/1/02 @ $102................... 2,086,960 ------------ 31,736,977 ------------ Colorado--1.9% Colorado Hsg. Fin. Auth., Sngl. Fam. Prog., Aa2 995 8.00%, 6/1/25............ 1,061,386 Aa2 350 8.125%, 6/1/25........... 374,105 ---------------------------------------------------------- Principal Moody's Amount Value Rating (000) Description (a) (Note 1) ---------------------------------------------------------- Colorado Springs Utils. Rev., Aa2 $ 2,300 6.50%, 11/15/15, Ser. A...................... $ 2,380,523 ------------ 3,816,014 ------------ Connecticut--3.4% Connecticut St Airport Rev., Aaa 3,000 7.65%, 10/1/12, F.G.I.C................ 3,339,480 Mashantucket Western Pequot Tribe Connecticut Spl. Rev. Baa3 3,500 5.75%, 9/1/18, Ser. B.... 3,380,580 ------------ 6,720,060 ------------ Delaware--1.8% Delaware St., Econ. Dev. Auth. Rev., Delmarva Pwr., Aaa 3,500 6.75%, 5/1/19, Ser. B, A.M.B.A.C.............. 3,655,540 ------------ Florida--3.8% Dade Cnty. Wtr. & Swr. Sys. Rev., Aaa 3,000 5.25%, 10/1/26, F.G.I.C................ 2,954,340 St. Petersburg Public Utility Aaa 5,000 Rev., Ser. A, 5.00%, 10/1/28, F.S.A.................. 4,709,900 ------------ 7,664,240 ------------ Georgia--9.6% Atlanta Wtr. & Waste Rev., Ser. A, Aaa 5,000 5.00%, 11/1/29, F.G.I.C................ 4,701,050 Aaa 1,500 5.00%, 11/1/38, F.G.I.C................ 1,368,675 De Kalb Cnty. Wtr. & Sewage Rev., Aa2 4,000 5.00%, 10/1/24........... 3,801,840 Georgia Mun. Elec. Auth. Pwr. Rev., Ser. Y, Aaa 145(b) 6.40%, 1/1/13............ 166,429 Prerefunded 1/1/11 @ $100 Aaa 2,470 6.40%, 1/1/13............ 2,809,798 Georgia Mun. Elec. Auth. Rev., Aaa 5,500 6.50%, 1/1/20, Ser. X, A.M.B.A.C.............. 6,318,510 ------------ 19,166,302 ------------ See Notes to Financial Statements. 4 ---------------------------------------------------------- Principal Moody's Amount Value Rating (000) Description (a) (Note 1) ---------------------------------------------------------- Idaho--3.3% Idaho Hsg. Agcy., Sngl. Fam. Mtge. Sr., Aa1 $ 3,555 6.65%, 7/1/14, Ser. B.... $ 3,713,447 Aaa 2,720 6.60%, 7/1/27, Ser. B.... 2,826,515 ------------ 6,539,962 ------------ Illinois--4.7% Chicago Gas Supply Rev., (People's Gas, Lt. & Coke Co.), Aa3 4,600 6.875%, 3/1/15........... 4,795,592 Chicago Gen. Oblig. Aaa 4,000 6.25%, 1/1/11, A.M.B.A.C.............. 4,486,960 ------------ 9,282,552 ------------ Indiana--2.8% Indiana Mun. Pwr. Agcy., Pwr. Supply Sys. Rev., Aaa 5,000 6.00%, 1/1/13, Ser. B, M.B.I.A................ 5,516,800 ------------ Kentucky--0.9% Louisville & Jefferson Cnty. Met. Swr. District Swr. & Drainage Sys. Rev., Aaa 2,000 5.00%, 5/15/30, F.G.I.C................ 1,874,980 ------------ Louisiana--0.7% St. Charles Parish, Solid Waste Disp. Rev., (Louisiana Pwr. & Lt. Co.), Aaa 1,250 7.00%, 12/1/22, F.S.A.... 1,326,562 ------------ Massachusetts--5.0% Boston Wtr. & Swr. Commission Rev., Aaa 2,000 5.00%, 11/1/28, Ser. D, F.G.I.C................ 1,850,280 Massachusetts St. Tpk. Auth., Metropolitan Highway Sys. Rev., Aaa 2,355 5.125%, 1/1/23, Ser. B... 2,263,956 Massachusetts St., Wtr. Res. Auth., Aaa 5,330(b) 7.00%, 8/1/13, Ser. A, M.B.I.A. Prerefunded 8/1/04 @ $101 1/2............... 5,936,660 ------------ 10,050,896 ------------ ---------------------------------------------------------- Principal Moody's Amount Value Rating (000) Description (a) (Note 1) ---------------------------------------------------------- Nebraska--2.8% Omaha Pub. Pwr. Dist., Elec. Rev., Aa2 $ 2,500 6.15%, 2/1/12, Ser. B, Escrowed to maturity... $ 2,801,800 Aa2 2,500 6.20%, 2/1/17, Ser. B, Escrowed to maturity... 2,788,175 ------------ 5,589,975 ------------ New York--10.6% Long Island Pwr. Auth. Elec. Sys. Rev., Aaa 4,000 5.25%, 12/1/26, Ser. A, M.B.I.A................ 3,911,680 New York City Mun. Wtr. Fin. Auth. Wtr. & Swr. Sys. Rev., Aaa 5,000 5.00%, 6/15/29, Ser. B, F.S.A.................. 4,718,950 New York St. Dorm. Auth. Rev., Comsewogue Pub. Lib. Insd., Aaa 2,485 6.00%, 7/1/15, M.B.I.A................ 2,633,181 New York St. Energy Research & Dev. Auth. Facs. Rev., (Con Edison Co. of N.Y.), A1 4,000 7.125%, 12/1/29.......... 4,388,360 New York St. Envir. Fac. Corp. Poll. Ctrl. Rev., Aaa 5,000 6.90%, 11/15/15, Ser. D...................... 5,538,400 ------------ 21,190,571 ------------ Pennsylvania--1.6% Montgomery Cnty. Ind. Dev. Auth., Poll. Ctrl. Rev., (PECO Energy Co.), Aaa 3,000 6.70%, 12/1/21, M.B.I.A................ 3,108,510 ------------ Tennessee--1.7% Tennessee Hsg. Dev. Agcy., Mtge. Finance, Aaa 3,135 6.15%, 7/1/15, Ser. B, M.B.I.A................ 3,288,176 ------------ Texas--8.5% Bexar Met. Wtr. Dist. Waterworks Sys. Rev., Aaa 2,500 5.00%, 5/1/25, M.B.I.A................ 2,331,375 See Notes to Financial Statements. 5 ---------------------------------------------------------- Principal Moody's Amount Value Rating (000) Description (a) (Note 1) ---------------------------------------------------------- Texas (cont'd.) Coastal Wtr. Auth. Contract Rev., City Of Houston Proj., Aaa $ 4,000 5.00%, 12/15/25, F.S.A.................. $ 3,685,680 Harris Cnty. Toll Road Sub. Lien., Aa2 1,650 7.00%, 8/15/10, Ser. A... 1,943,799 Houston Wtr. & Swr. Sys. Rev., Ser. A, Aaa 3,500 5.00%, 12/1/28........... 3,236,100 Lower Colorado River Auth. Texas Rev. Refunding & Improvement, Aaa 2,000 5.00%, 5/15/31........... 1,840,560 San Antonio Elec. & Gas Rev., Aa1 4,000 5.00%, 2/1/18, Ser. A.... 3,811,600 ------------ 16,849,114 ------------ Virginia--1.9% Henrico Cnty. Wtr. & Swr. Rev., Aa2 3,985 5.00%, 5/1/28............ 3,749,606 ------------ Washington--11.4% Conservation & Renewable Energy Sys. Conservation Proj. Rev., Aa1 2,600 6.875%, 10/1/11.......... 2,874,924 Lewis Cnty. Pub. Utils. Dist. No. 1, Cowlitz Falls Hydroelectric Proj. Rev., Aaa 5,000(b) 7.00%, 10/1/22, Prerefunded 10/1/01 @ $102................... 5,178,900 Snohomish Cnty., Pub. Utils. Dist. No. 1 Elec. Rev., A1 1,500 6.90%, 1/1/06, Ser. A.... 1,580,850 A1 8,000 5.80%, 1/1/24............ 7,941,440 ---------------------------------------------------------- Principal Moody's Amount Value Rating (000) Description (a) (Note 1) ---------------------------------------------------------- Washington St. Pub. Pwr. Supply, Nuclear Proj. No. 1 Rev., Aaa $ 2,500(b) 6.875%, 7/1/17, Ser. A, Prerefunded 7/1/01 @ $102 $ 2,564,275 Nuclear Proj. No. 2 Rev., Aa1 2,400 6.00%, 7/1/07, Ser. A.... 2,602,632 ------------ 22,743,021 ------------ Wyoming--2.1% Wyoming St. Farm Loan Board Capital Fac. Rev., AA-* 4,000 5.75%, 10/1/20........... 4,218,040 ------------ Total long-term investments (cost $181,048,969).... 194,579,958 ------------ SHORT-TERM INVESTMENTS--0.6% Shares (000) --------- Goldman Sachs Tax Exempt Money Market Fund, NR 1,319 (cost $1,319,109)........ 1,319,109 ------------ Total Investments--98.3% (cost $182,368,078).... 195,899,067 Other assets in excess of liabilities--1.7%...... 3,289,310 ------------ Net Assets--100%......... $199,188,377 ------------ ------------ --------------- (a) The following abbreviations are used in portfolio descriptions: A.M.B.A.C.--American Municipal Bond Assurance Corporation. M.B.I.A.--Municipal Bond Insurance Association. F.G.I.C.--Financial Guarantee Insurance Company. F.S.A.--Financial Security Assurance Inc. (b) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations. * Standard & Poor's rating. NR--Not Rated by Moody's or Standard & Poor's. See Notes to Financial Statements. 6 ---------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Statement of Assets and Liabilities April 30, 2001 (Unaudited) ---------------------------------------------------------- Assets Investments, at value (cost $182,368,078)........................ $195,899,067 Cash................................... 83,069 Interest receivable.................... 3,405,840 ------------ Total assets......................... 199,387,976 ------------ Liabilities Advisory fee payable (Note 2).......... 80,192 Accrued expenses....................... 68,001 Dividends payable...................... 27,351 Administration fee payable (Note 2).... 24,055 ------------ Total liabilities.................... 199,599 ------------ Net Assets............................. $199,188,377 ------------ ------------ Remarketed preferred stock ($.01 par value; 1,300 preferred shares, issued and outstanding, liquidation preference $50,000 per share; Note 4)........... $ 65,000,000 ------------ Net assets were comprised of: Common stock at par ($.01 par value; 600,000,000 shares authorized and 8,507,456 issued and outstanding)....................... 85,075 Paid-in capital...................... 120,408,778 Undistributed net investment income............................. 509,090 Accumulated net realized loss on investments........................ (345,555) Net unrealized appreciation on investments........................ 13,530,989 ------------ Net assets applicable to common stock (equivalent to $15.77 per share based on 8,507,456 shares outstanding)....................... 134,188,377 ------------ Total capital (Net assets)........... $199,188,377 ------------ ------------ ---------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Statement of Operations Six Months Ended April 30, 2001 (Unaudited) ---------------------------------------------------------- Net Investment Income Income Interest.............................. $ 5,588,684 ----------- Expenses Investment advisory fee............... 494,826 Administration fee.................... 148,448 Remarketing expense................... 81,000 Directors' fees and expenses.......... 62,000 Custodian's fees and expenses......... 31,000 Audit fees and expenses............... 22,000 Transfer agent's fees and expenses.... 16,000 Reports to shareholders............... 14,000 Registration fees..................... 12,000 Legal fees and expenses............... 9,000 Miscellaneous......................... 3,344 ----------- Total expenses...................... 893,618 ----------- Net investment income................... 4,695,066 ----------- Realized and Unrealized Gain (Loss) on Investments Net realized loss on investment transactions.......................... (160,195) Net change in unrealized appreciation on investments........................... 2,923,292 ----------- Net realized and unrealized gain on investments........................... 2,763,097 ----------- Net Increase in Net Assets Resulting from Operations............... $ 7,458,163 ----------- ----------- See Notes to Financial Statements. See Notes to Financial Statements. 7 ---------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Statement of Changes In Net Assets (Unaudited) ---------------------------------------------------------- Six Months Ended Year Ended Increase in April 30, October 31, Net Assets 2001 2000 ------------ ------------ Operations: Net investment income...... $ 4,695,066 $ 9,582,390 Net realized gain (loss) on investment transactions............. (160,195) 110,084 Net change in unrealized appreciation of investments.............. 2,923,292 4,213,584 ------------ ------------ Net increase in net assets resulting from operations............... 7,458,163 13,906,058 Dividends: Dividends to common shareholders from net investment income........ (3,170,386) (7,256,711) Dividends to preferred shareholders from net investment income........ (1,258,753) (2,728,990) ------------ ------------ Total increase........... 3,029,024 3,920,357 Net Assets Beginning of period(a)....... 196,159,353 192,238,996 ------------ ------------ End of period(a)(b).......... $199,188,377 $196,159,353 ------------ ------------ ------------ ------------ --------------- (a) Includes $65,000,000 in preferred stock. (b) Includes undistributed net investment income of..... $ 509,090 $ 243,163 ------------ ------------ ------------ ------------ See Notes to Financial Statements. 8 -------------------------------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Financial Highlights (Unaudited) -------------------------------------------------------------------------------- Six Months Ended Year Ended October 31, PER SHARE OPERATING PERFORMANCE OF COMMON April 30, ------------------------------------------------------------ SHAREHOLDERS: 2001 2000 1999 1998 1997 1996 ---------- -------- -------- -------- -------- -------- Net asset value, beginning of period..... $ 15.42 $ 14.96 $ 16.62 $ 16.28 $ 15.84 $ 15.90 ---------- -------- -------- -------- -------- -------- Net investment income(d)............... .55 1.13 1.14 1.17 1.18 1.21 Net realized and unrealized gain (loss) on investments(d)...................... .32 .50 (1.59) .41 .50 -- ---------- -------- -------- -------- -------- -------- Net increase (decrease) from investment operations............................. .87 1.63 (.45) 1.58 1.68 1.21 ---------- -------- -------- -------- -------- -------- Dividends from net investment income to: Preferred shareholders................. (.15) (.32) (.25) (.28) (.28) (.27) ---------- -------- -------- -------- -------- -------- Common shareholders.................... (.37) (.85) (.96)(e) (.96) (.96) (.96) ---------- -------- -------- -------- -------- -------- Distributions from net realized gains to: Preferred shareholders................. -- -- -- -- -- (.01) ---------- -------- -------- -------- -------- -------- Common shareholders.................... -- -- -- -- -- (.03) ---------- -------- -------- -------- -------- -------- Net asset value, end of period(a)........ $ 15.77 $ 15.42 $ 14.96 $ 16.62 $ 16.28 $ 15.84 ---------- -------- -------- -------- -------- -------- Per share market value, end of period(a).............................. $ 13.99 $ 12.69 $ 14.13 $ 17.31 $ 16.00 $ 15.13 ---------- -------- -------- -------- -------- -------- TOTAL INVESTMENT RETURN OF COMMON SHAREHOLDERS(b).......................... 13.33% (4.08)% (13.34)% 11.41% 12.42% 12.19% RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:(c) Operating expenses....................... 1.32%(f) 1.38% 1.39% 1.34% 1.35% 1.35% Net investment income.................... 6.95%(f) 7.51% 7.10% 7.18% 7.46% 7.69% SUPPLEMENTAL DATA: Average net assets of common shareholders (000).................................. $ 136,180 $127,639 $136,111 $137,680 $133,055 $132,361 Portfolio turnover rate.................. 2% 26% 6% 0% 5% 10% Net assets of common shareholders, end of period (000)........................... $ 134,188 $131,159 $127,239 $140,465 $136,817 $132,678 Asset coverage per share of preferred stock, end of period................... $ 153,222 $150,892 $147,876 $158,050 $155,243 $152,126 Preferred stock outstanding (000)........ $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 --------------- (a) NAV and market value are published in The Wall Street Journal each Monday. (b) Total investment return is calculated assuming a purchase of common stock at the current market value on the first day and a sale at the current market value on the last day of each period reported. Dividends are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Brokerage commissions are not reflected. Total return for periods of less than a full year are not annualized. (c) Ratios calculated on the basis of income and expenses applicable to both the common and preferred shares relative to the average net assets of common shareholders. Ratios do not reflect the effect of dividend payments to preferred shareholders. (d) Calculated based upon weighted average shares outstanding during the period. (e) The unrounded amount is $0.955. (f) Annualized. See Notes to Financial Statements. 9 ---------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Notes to Financial Statements (Unaudited) ---------------------------------------------------------- Duff & Phelps Utilities Tax-Free Income Inc. (the 'Fund') was organized in Maryland on September 24, 1991 as a diversified, closed-end management investment company. The Fund had no operations until November 20, 1991 when it sold 8,000 shares of common stock for $112,400 to Duff & Phelps Corporation. Investment operations commenced on November 29, 1991. The Fund's investment objective is current income exempt from regular federal income tax consistent with preservation of capital. The Fund will seek to achieve its investment objective by investing primarily in a diversified portfolio of investment grade tax-exempt utility obligations. The ability of the issuers of the securities held by the Fund to meet their obligations may be affected by economic developments in a specific state, industry or region. Note 1. Significant The following is a summary of Accounting Policies significant accounting policies followed by the Fund in the preparation of its financial statements. Securities Valuation: The Fund values its fixed income securities by using market quotations, prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics in accordance with procedures established by the Board of Directors of the Fund. The relative liquidity of some securities in the Fund's portfolio may adversely affect the ability of the Fund to accurately value such securities. Any securities or other assets for which such current market quotations are not readily available are valued at fair value as determined in good faith under procedures established by and under the general supervision and responsibility of the Fund's Board of Directors. Debt securities having a remaining maturity of 60 days or less when purchased and debt securities originally purchased with maturities in excess of 60 days but which currently have maturities of 60 days or less are valued at cost adjusted for amortization of premiums and accretion of discounts. Securities Transactions and Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses on sales of securities are calculated on the identified cost basis. Interest income is recorded on the accrual basis. The Fund amortizes premiums and accretes original issue discount on securities using the effective interest method. Federal Income Taxes: It is the Fund's intention to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute sufficient net income to shareholders to qualify as a regulated investment company. For this reason, no federal income tax provision is required. Dividends and Distributions: The Fund will declare and pay dividends to common shareholders monthly from net investment income. Net long-term capital gains, if any, in excess of loss carryforwards are expected to be distributed annually. The Fund will make a determination at the end of its fiscal year as to whether to retain or distribute such gains. Dividends and distributions are recorded on the ex-dividend date. Dividends to preferred shareholders are accrued on a weekly basis and are determined as described in Note 4. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from investment income and capital gains recorded in accordance with generally accepted accounting principles. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Note 2. Agreements The Fund has an Advisory Agreement with Duff & Phelps Investment Management Co. (the 'Adviser'), a subsidiary of Phoenix Duff & Phelps Corporation, and an Administration Agreement with Prudential Investments Fund Management LLC ('PIFM'), a wholly owned subsidiary of The Prudential Insurance Company of America. The investment fee paid to the Adviser is computed weekly and payable monthly at an annual rate of .50% of the Fund's average weekly managed assets. The administration fee paid to PIFM is also computed weekly and payable monthly at an annual rate of .15% of the Fund's average weekly managed assets. Pursuant to the agreements, the Adviser provides continuous supervision of the investment portfolio and pays the compensation of officers of the Fund who are affiliated persons of the Adviser. PIFM pays occupancy and certain clerical and 10 accounting costs of the Fund. The Fund bears all other costs and expenses. Note 3. Portfolio Purchases and sales of invest Securities ment securities, other than short-term investments, for the six months ended April 30, 2001 aggregated $4,591,629 and $3,858,005, respectively. The Federal income tax basis of the Fund's investments at April 30, 2001 was substantially the same as the basis for financial reporting and, accordingly, net unrealized appreciation for federal income tax purposes was $13,530,989 (gross unrealized appreciation--$13,654,557; gross unrealized depreciation--$123,568). The Fund had a capital loss carryforward as of October 31, 2000 of approximately $185,400, of which $62,100 expires in 2006 and $123,300 expires in 2007. Accordingly, no capital gains distribution is expected to be paid to shareholders until net realized gains have been realized in excess of such amounts. Note 4. Capital There are 600 million shares of $.01 par value common stock authorized. During the six months ended April 30, 2001 the Fund did not issue any common shares in connection with the reinvestment of dividends. For the year ended October 31, 2000 the Fund did not issue any common shares in connection with the reinvestment of dividends. The Fund's Articles of Incorporation authorize the issuance of Remarketed Preferred Stock ('RP'). Accordingly, the Fund issued 1,300 shares of RP on February 4, 1992. The RP has a liquidation value of $50,000 per share plus any accumulated but unpaid dividends. Dividends on shares of RP are cumulative from their date of original issue and payable on each dividend payment date. Dividend rates ranged from 3.30% to 5.00% during the six months ended April 30, 2001. Under the Investment Company Act of 1940, the Fund may not declare dividends or make other distributions on shares of common stock or purchase any such shares if, at the time of the declaration, distribution or purchase, asset coverage with respect to the outstanding preferred stock would be less than 200%. The RP is redeemable at the option of the Fund, in whole or in part, on any dividend payment date at $50,000 per share plus any accumulated or unpaid dividends whether or not declared. The RP is also subject to a mandatory redemption at $50,000 per share plus any accumulated or unpaid dividends, whether or not declared, if certain requirements relating to the composition of the assets and liabilities of the Fund as set forth in the Articles of Incorporation are not satisfied. The holders of RP have voting rights equal to the holders of common stock (one vote per share) and will vote together with holders of shares of common stock as a single class. However, holders of RP are also entitled to elect two of the Fund's directors. In addition, the Investment Company Act of 1940 requires that along with approval by shareholders that might otherwise be required, the approval of the holders of a majority of any outstanding preferred shares, voting separately as a class would be required to (a) adopt any plan of reorganization that would adversely affect the preferred shares, and (b) take any action requiring a vote of security holders, including, among other things, changes in the Fund's subclassification as a closed-end investment company or changes in its fundamental investment restrictions. Note 5. Dividends Subsequent to April 30, 2001, dividends declared and paid on preferred shares totalled $179,725. On May 1, 2001, the Board of Directors of the Fund declared a dividend of $.0625 per common share payable on May 31, to common shareholders of record on May 15. On May 23, 2001, the Board of Directors approved a dividend of $.0625 per common share to be declared on June 1, 2001 payable on June 29, to common shareholders of record on June 13. 11 -------------------------------------------------------------------------------- OTHER INFORMATION (Unaudited) -------------------------------------------------------------------------------- Pursuant to certain rules of the Securities and Exchange Commission the following additional disclosure is required. Pursuant to the Fund's Dividend Reinvestment Plan (the 'Plan'), common shareholders may elect to have all distributions of dividends and capital gains automatically reinvested by State Street Bank & Trust Company (the 'Plan Agent') in shares of common stock of the Fund ('Fund Shares') pursuant to the Plan; provided that such election is subject to the power of the Board of Directors to declare capital gains distributions in the form of stock (if such a declaration is made by the Board of Directors, all shareholders who do not elect to receive cash will receive the distribution in the form of stock whether or not they elect to participate in the Plan). Common shareholders who do not participate in the Plan will receive all distributions in cash (except as described above) paid by check in United States dollars mailed directly to the shareholder of record (or if the shares are held in street or other nominee name, then to the nominee) by the Custodian, as dividend disbursing agent. Common shareholders who wish to participate in the Plan should contact the Fund at P.O. Box 8200, Boston, Massachusetts, 02266 or call toll free (800) 451-6788. The Plan Agent serves as agent for the common shareholders in administering the Plan. After the Fund declares a dividend or determines to make a capital gain distribution, if (1) the market price is lower than net asset value, the participants in the Plan will receive the equivalent in Fund Shares valued at the market price determined as of the time of purchase (generally, the payment date of the dividend or distribution); or if (2) the market price of Fund Shares on the payment date of the dividend or distribution is equal to or exceeds their net asset value, participants will be issued Fund Shares at the higher of net asset value or 95% of the market price. This discount reflects savings in underwriting and other costs that the Fund otherwise will be required to incur to raise additional capital. If net asset value exceeds the market price of Fund Shares on the payment date or the Fund declares a dividend or other distribution payable only in cash (i.e., if the board of directors precludes reinvestment in Fund Shares for that purpose), the Plan Agent will, as agent for the participants, receive the cash payment and use it to buy Fund Shares in the open market, on the New York Stock Exchange, other national securities exchanges on which the Fund's common stock is listed or elsewhere, for the participants' accounts. If, before the Plan Agent has completed its purchases, the market price exceeds the net asset value of a Fund Share, the average per share purchase price paid by the Plan Agent may exceed the net asset value of Fund Shares, resulting in the acquisition of fewer shares than if the dividend or distribution had been paid in shares issued by the Fund. The Fund will not issue shares under the Plan below net asset value. Participants in the Plan may withdraw from the Plan upon written notice to the Plan Agent and will receive certificates for whole Fund Shares and a cash payment will be made for any fraction of a Fund Share. There is no charge to participants for reinvesting dividends or capital gain distributions, except for certain brokerage commissions, as described below. The Plan Agent's fees for the handling of the reinvestment of dividends and distributions will be paid by the Fund. There will be no brokerage commissions charged with respect to shares issued directly by the Fund. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with the reinvestment of dividends and distributions. The automatic reinvestment of dividends and distributions will not relieve participants of any federal income tax that may be payable on such dividends or distributions. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan as applied to any dividend or distribution paid subsequent to written notice of the change sent to all shareholders of the Fund at least 90 days before the record date for the dividend or distribution. The Plan also may be amended or terminated by the Plan Agent upon at least 90 days written notice to all common shareholders of the Fund. All correspondence concerning the Plan should be directed to the Fund at the address on the front of this report. The Plan has been amended to permit Plan participants periodically to purchase additional common shares through the Plan by delivering to the Plan Agent a check for at least $100, but not more than $5,000, in any month. The Plan Agent will use the funds to purchase shares in the open market or in private transactions as described above with respect to reinvestment of dividends and distributions. This amendment to the Plan was approved by the Board on May 27, 1998 and is effective September 1, 1998. Thereafter, purchases made pursuant to the Plan will be made commencing at the time of the first dividend or distribution payment following the second business day after receipt of the funds for additional purchases, and may be aggregated with 12 purchases of shares for reinvestment of the dividends and distributions. Shares will be allocated to the accounts of participants purchasing additional shares at the average price per share, plus a service charge imposed by the Plan Agent and brokerage commissions (or equivalent purchase costs) paid by the Plan Agent for all shares purchased by it, including for reinvestment of dividends and distributions. Checks drawn on a foreign bank are subject to collection and collection fees, and will be invested at the time of the next distribution after funds are collected by the Plan Agent. The Plan Agent will make every effort to invest funds promptly, and in no event more than 30 days after the Plan Agent receives a dividend or distribution, except where postponement is deemed necessary to comply with applicable provisions of the federal securities laws. Funds sent to the Plan Agent for voluntary additional share investment may be recalled by the participant by written notice received by the Plan Agent not later than two business days before the next distribution payment date. If for any reason a regular monthly distribution is not paid by the Fund, funds for voluntary additional share investment will be returned to the participant, unless the participant specifically directs that they continue to be held by the Plan Agent for subsequent investment. There have been no material changes in the Fund's investment objectives or policies, charter or by-laws and principal risk factors associated with investment in the Fund. 13 ------------------------------------------------------------------- Directors Francis E. Jeffries, Chairman E. Virgil Conway William W. Crawford William N. Georgeson Philip R. McLoughlin Everett L. Morris Eileen A. Moran Richard A. Pavia Harry Dalzell-Payne Officers Francis E. Jeffries, President & Chief Executive Officer James D. Wehr, Vice President & Chief Investment Officer Timothy M. Heaney, Vice President Nancy Engberg, Secretary, Vice President & Counsel Alan M. Meder, Treasurer & Assistant Secretary Investment Adviser Duff & Phelps Investment Management Co. 55 East Monroe Street Suite 3600 Chicago, IL 60603 (312) 263-2610 Administrator Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Call toll free (800) 225-1852 Custodian and Transfer Agent State Street Bank and Trust Company One Heritage Drive North Quincy, MA 02171 Call toll free (800) 451-6788 Independent Auditors Ernst & Young LLP 233 South Wacker Drive Chicago, IL 60606 Legal Counsel Skadden, Arps, Slate, Meagher & Flom (Illinois) 333 West Wacker Drive Chicago, IL 60606 The accompanying financial statements as of April 30, 2001 were not audited and accordingly, no opinion is expressed on them. This report is for stockholder information. This is not a prospectus intended for use in the purchase or sale of Fund shares. 264325101