<PAGE>
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T. Rowe Price
- --------------------------------------------------------------------------------
Tax-Free Income Fund
February 29, 1996
- --------------------------------------------------------------------------------
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Sector Diversification
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
Hospital Revenues 15%
Nuclear Revenue 10
Dedicated Tax Revenue 8
General Obligation State 8
Electric Revenue 7
Housing Finance Revenue 7
Lease Revenue 6
Prerefunded Bonds 6
General Obligation Local 6
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
Educational Revenue 5%
Escrowed to Maturity 5
Ground Transportation Revenue 5
Water and Sewer Revenue 4
Industrial and Pollution Control Revenue 2
Air and Sea Transportation Revenue 2
Solid Waste Revenue 1
Miscellaneous Revenue 1
Other Assets Less Liabilities 2
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</TABLE>
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Statement of Net Assets
T. Rowe Price Tax-Free Income Fund / February 29, 1996
- --------------------------------------------------------------------------------
(amounts in thousands)
<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
ALABAMA -- 2.7%
Alabama, GO, Zero Coupon, 9/1/03....................................... $10,000 $6,810
Zero Coupon, 3/1/04................................................. 10,000 6,509
Zero Coupon, 9/1/04................................................. 5,500 3,483
Alabama Special Care Fac., Daughters of Charity, St. Vincents Hosp.,
5.00%, 11/1/25...................................................... 7,155 6,479
Alabama Water Pollution Control Auth., (AMBAC Insured),
5.00%, 8/15/15...................................................... 4,000 3,758
6.75%, 8/15/17...................................................... 2,750 3,098
Alexander City Special Care Fac. Fin. Auth., Russell Hosp. Corp.,
6.00%, 12/1/22...................................................... 3,250 3,014
Mobile, Capital Improvement Warrants, GO, (MBIA Insured),
Zero Coupon, 8/15/16................................................ 4,330 1,190
Zero Coupon, 8/15/17................................................ 4,435 1,136
Mobile IDB, Mobile Energy Services, 6.95%, 1/1/20...................... 1,500 1,591
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</TABLE>
<PAGE>
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<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
ALASKA -- 1.0%
Alaska Housing Fin. Corp., (MBIA Insured), 5.85%, 12/1/14.................. $ 3,405 $ 3,375
5.875%, 12/1/24......................................................... 7,525 7,498
Anchorage, School, GO, (FGIC Insured), 6.00%, 10/1/12...................... 1,500 1,618
6.00%, 10/1/14.......................................................... 1,000 1,070
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ARIZONA -- 0.6%
Salt River Agricultural Improvement and Power Dist., Electric System,
6.50%, 1/1/22........................................................... 8,000 8,661
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ARKANSAS -- 0.5%
Little Rock Health Fac. Board, Baptist Medical Center, 6.85%, 11/1/08...... 2,495 2,838
North Little Rock, Electric System, (MBIA Insured), 6.50%, 7/1/15.......... 4,000 4,550
- ------------------------------------------------------------------------------------------------
CALIFORNIA -- 9.1%
Cupertino, COP, 5.75%, 1/1/16.............................................. 2,500 2,465
Foothill/Eastern Transportation Corridor Agency, California Toll Road,
Zero Coupon, 1/1/15..................................................... 5,000 1,540
Zero Coupon, 1/1/17..................................................... 20,000 5,381
Zero Coupon, 1/1/19..................................................... 1,000 235
Zero Coupon, 1/1/26..................................................... 15,000 2,224
6.00%, 1/1/34........................................................... 4,225 4,037
Los Angeles, GO, (FGIC Insured), 5.80%, 9/1/09............................. 2,400 2,509
(MBIA Insured), 6.00%, 9/1/14........................................... 5,000 5,246
Wastewater System, 7.15%, 6/1/20 (Prerefunded 6/1/00+).................. 10,500 11,915
Los Angeles County, Marina del Rey, COP, 6.25%, 7/1/03..................... 4,000 4,073
6.50%, 7/1/08........................................................... 3,250 3,327
Los Angeles County Metropolitan Trans. Auth., Sales Tax,
7.40%, 7/1/15........................................................... 5,530 6,141
(MBIA Insured), 6.25%, 7/1/13........................................... 8,965 9,545
Los Angeles County Sanitation Dist., 5.00%, 10/1/23........................ 5,500 4,989
Los Angeles Harbor Dept., GO, 7.60%, 10/1/18 (Escrowed to Maturity)........ 3,200 3,576
Modesto Irrigation Dist., Geysers Geothermal Power, COP, 7.25%, 10/1/15.... 5,000 5,192
Port of Oakland, (BIGI Insured), 7.30%, 11/1/09............................ 1,650 1,738
7.25%, 11/1/16.......................................................... 12,275 12,930
Sacramento Fin. Auth., (AMBAC Insured), 5.375%, 11/1/14.................... 4,000 3,988
5.40%, 11/1/20.......................................................... 7,000 6,943
San Bernardino, Sisters of Charity Health Care, 7.00%, 7/1/21.............. 3,000 3,333
San Francisco, City and County Airport, (AMBAC Insured), 6.30%, 5/1/11..... 2,000 2,146
(FGIC Insured), 5.25%, 5/1/14........................................... 3,285 3,191
San Joaquin Hills, Transportation Hills Corridor Agency Toll Road,
Zero Coupon, 1/1/26..................................................... 10,000 1,509
San Mateo County Transit Dist., (MBIA Insured), 5.25%, 6/1/16.............. 6,000 5,889
5.25%, 6/1/17........................................................... 2,000 1,947
Southern California Public Power Auth., 6.75%, 7/1/11...................... 4,050 4,624
6.00%, 7/1/12........................................................... 5,000 5,131
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</TABLE>
2
<PAGE>
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<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
COLORADO -- 1.1%
Arapahoe County, Capital Improvement Public Highway,
Zero Coupon, 8/31/10....................................................... $10,000 $ 3,916
Boulder County, Longmont United Hosp.,
8.20%, 12/1/20 (Prerefunded 12/1/00+)...................................... 2,000 2,353
Jefferson County School Dist., GO, (AMBAC Insured), 6.00%, 12/15/12........... 8,000 8,427
- ---------------------------------------------------------------------------------------------------
CONNECTICUT -- 1.1%
Connecticut, State Special Tax, GO, 7.125%, 6/1/10............................ 7,350 8,769
Connecticut HEFA, Yale-New Haven Hosp., (MBIA Insured),
7.10%, 7/1/25.............................................................. 5,825 6,441
- ---------------------------------------------------------------------------------------------------
DELAWARE -- 0.6%
Delaware HFA, Beebe Medical Center, 6.75%, 6/1/14............................. 3,500 3,600
Pooled Loan, (MBIA Insured), VRDN (Currently 3.25%)........................ 5,000 5,000
- ---------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA -- 0.5%
Washington D.C. Metropolitan Transit Auth., (FGIC Insured),
5.25%, 7/1/14.............................................................. 7,300 7,099
- ---------------------------------------------------------------------------------------------------
FLORIDA -- 4.3%
Broward County Resource Recovery, Broward Waste Energy, L.P. North,
7.95%, 12/1/08............................................................. 11,045 12,385
Broward Waste Energy, L.P. South, 7.95%, 12/1/08........................... 905 1,015
Dade County, (MBIA Insured), Zero Coupon, 2/1/13.............................. 9,000 3,477
Capital Appreciation, (MBIA Insured), Zero Coupon, 2/1/09.................. 12,185 6,075
First Florida Gov't. Fin. Corp., (MBIA Insured), VRDN (Currently 3.05%)....... 100 100
Florida Board of Ed., Public Ed. Capital Outlay, GO, 5.20%, 6/1/23............ 10,375 9,674
7.25%, 6/1/23.............................................................. 6,210 6,969
7.25%, 6/1/23 (Prerefunded 6/1/00+)........................................ 35 40
Florida Housing Fin. Agency, Homeowner Mortgage, 5.95%, 7/1/14................ 1,250 1,263
6.00%, 7/1/17.............................................................. 1,000 1,013
Florida Turnpike Auth., (FGIC Insured), 5.00%, 7/1/15......................... 4,500 4,249
Jacksonville Transportation Auth., GO, 7.375%, 7/1/20
(Prerefunded 7/1/00+)...................................................... 8,750 10,021
Saint Lucie County, PCR, Florida Power and Light Co.,
VRDN (Currently 3.45%)..................................................... 2,200 2,200
- ---------------------------------------------------------------------------------------------------
GEORGIA -- 6.8%
Cherokee County Water and Sewage Auth., (MBIA Insured), 5.20%, 8/1/25......... 2,500 2,423
DeKalb County Dev. Auth., Emory Univ., 5.25%, 11/1/15......................... 3,000 2,964
Fulton-Dekalb Hosp. Auth., Grady Memorial Hosp., GO, (AMBAC Insured),
6.80%, 1/1/07 (Escrowed to Maturity)....................................... 5,530 6,436
6.80%, 1/1/08 (Escrowed to Maturity)....................................... 5,905 6,898
6.85%, 1/1/09 (Escrowed to Maturity)....................................... 6,310 7,399
6.85%, 1/1/10 (Escrowed to Maturity)....................................... 6,745 7,891
</TABLE>
3
<PAGE>
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<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
Gwinnett County School Dist., GO, 6.40%, 2/1/11.............................. $ 3,905 $ 4,400
6.40%, 2/1/12............................................................. 1,255 1,414
Henry County School Dist., GO, 6.45%, 8/1/11................................. 2,100 2,352
Metropolitan Atlanta Rapid Transit Auth., Sales Tax, 6.90%, 7/1/16........... 5,655 6,430
6.55%, 7/1/20............................................................. 5,500 5,998
Municipal Electric Auth. of Georgia, 8.125%, 1/1/17.......................... 5,680 6,138
(AMBAC Insured), 6.40%, 1/1/07............................................ 7,500 8,443
7.25%, 1/1/24............................................................. 6,500 8,177
(FGIC Insured), 6.125%, 1/1/14............................................ 5,500 5,785
5.70%, 1/1/19............................................................. 5,100 5,272
Paulding County, Water and Sewer, (MBIA Insured), 6.00%, 12/1/13............. 5,000 5,429
- ----------------------------------------------------------------------------------------------------
HAWAII -- 0.1%
Honolulu City and County, GO, (MBIA Insured), 5.00%, 11/1/12................. 1,000 963
- ----------------------------------------------------------------------------------------------------
IDAHO -- 0.1%
Idaho Housing Agency, (FHA Guaranteed), 7.70%, 7/1/17........................ 765 813
- ----------------------------------------------------------------------------------------------------
ILLINOIS -- 4.2%
Chicago, GO, (AMBAC Insured), 6.25%, 1/1/15**................................ 1,000 1,080
5.50%, 1/1/18**........................................................... 6,630 6,544
(FGIC Insured), 5.125%, 1/1/16............................................ 11,200 10,592
Water, (FGIC Insured), 5.00%, 11/1/20..................................... 4,890 4,493
Cook, Dupage, Kane, Lake, McHenry, and Will Counties Regional
Transportation Auth., (FGIC Insured), 7.75%, 6/1/19....................... 5,350 6,918
Illinois, GO, (FGIC Insured), 5.25%, 12/1/20................................. 5,000 4,741
Illinois Dev. Fin. Auth., Palos Community Hosp., VRDN (Currently 3.25%)...... 12,500 12,500
Illinois HFA, Hinsdale Health System, 9.00%, 11/15/15........................ 4,765 5,472
Illinois Regional Trans. Auth., (FGIC Insured), 6.70%, 11/1/21............... 5,000 5,804
- ----------------------------------------------------------------------------------------------------
INDIANA -- 0.2%
St. Joseph's County Hosp. Auth., St. Joseph's Medical Center,
(MBIA Insured), 6.70%, 12/1/02............................................ 1,985 2,239
- ----------------------------------------------------------------------------------------------------
KENTUCKY -- 1.3%
Carroll County, PCR, Kentucky Utilities, 7.45%, 9/15/16...................... 15,000 17,201
Kentucky Turnpike Auth., Economic Dev., 7.25%, 5/15/10
(Prerefunded 5/15/00+).................................................... 1,000 1,125
- ----------------------------------------------------------------------------------------------------
LOUISIANA -- 1.4%
East Baton Rouge Mortgage Fin. Auth., 7.375%, 3/1/10
(Escrowed to Maturity).................................................... 2,800 3,151
Louisiana Offshore Terminal Auth., LOOP, 7.60%, 9/1/10....................... 10,440 11,468
Louisiana Public Fac. Auth., Willis Knighton Medical Center,
(AMBAC Insured), VRDN (Currently 3.25%)................................... 5,000 5,000
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</TABLE>
4
<PAGE>
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<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
MARYLAND -- 4.6%
Baltimore City, Convention Center, (FGIC Insured), 6.00%, 9/1/17............... $ 3,500 $ 3,627
Baltimore County, Pickersgill Retirement Community, 7.70%, 1/1/21.............. 2,000 2,105
Gaithersburg Economic Auth., Asbury Methodist Home,
7.85%, 1/1/20 (Prerefunded 1/1/00+)...................................... 3,000 3,445
Maryland CDA, Single Family, 6.45%, 4/1/14..................................... 2,000 2,069
7.60%, 4/1/17............................................................ 7,810 8,178
7.25%, 4/1/19............................................................ 2,500 2,650
Maryland HHEFA, Good Samaritan Hosp., 5.75%, 7/1/19............................ 1,250 1,242
Howard County General Hosp., 5.50%, 7/1/13.................................. 3,750 3,490
Johns Hopkins Hosp., Zero Coupon, 7/1/19.................................... 8,800 2,336
Johns Hopkins Univ., 7.50%, 7/1/20.......................................... 9,475 10,307
Kennedy Kreiger Institute, 6.75%, 7/1/22.................................... 1,500 1,524
Univ. of Maryland Medical System, (FGIC Insured), 5.00%, 7/1/20............. 8,005 7,461
7.00%, 7/1/22............................................................ 1,500 1,821
Maryland Water Quality Fin. Administration, Revolving Loan Fund,
7.25%, 9/1/12 (Prerefunded 9/1/00+)...................................... 1,950 2,227
Montgomery County Housing Opportunities Commission, Single Family,
7.50%, 7/1/17............................................................ 1,085 1,154
Prince George's County, Dimensions Health Corp., 5.30%, 7/1/24................. 11,000 10,110
- -------------------------------------------------------------------------------------------------------
MASSACHUSETTS -- 3.8%
Massachusetts Housing Fin. Agency, 6.30%, 12/1/14.............................. 6,250 6,376
Massachusetts Bay Transportation Auth., General Transportation, GO,
7.00%, 3/1/14............................................................ 3,150 3,726
7.00%, 3/1/21............................................................ 6,200 7,427
(AMBAC Insured), 5.375%, 3/1/25.......................................... 3,500 3,373
Massachusetts HEFA, Harvard Univ., 6.25%, 4/1/20............................... 5,000 5,569
5.375%, 11/1/32.......................................................... 8,000 7,708
Massachusetts General Hosp., (AMBAC Insured), 6.00%, 7/1/15................. 4,500 4,676
Massachusetts Municipal Wholesale Electric Company, Supply Systems,
(AMBAC Insured), 5.00%, 7/1/14........................................... 11,000 10,345
Univ. of Massachusetts Building Auth., GO, (MBIA Insured), 5.50%, 5/1/15....... 2,750 2,721
- -------------------------------------------------------------------------------------------------------
MICHIGAN -- 1.0%
Michigan HDA, 6.45%, 12/1/14................................................... 2,120 2,197
7.55%, 12/1/15........................................................... 1,750 1,862
Michigan Hosp. Fin. Auth., Bay Medical Center, 8.25%, 7/1/12................... 1,000 1,080
Henry Ford Hosp., 5.25%, 11/15/20........................................... 9,000 8,546
- -------------------------------------------------------------------------------------------------------
MINNESOTA -- 1.5%
Northern Minnesota Municipal Power Agency, 7.35%, 1/1/02....................... 5,000 5,434
Rochester Health Care Fac., Mayo Foundation/Mayo Medical Center,
5.90%, 11/15/09.......................................................... 2,000 2,126
5.90%, 11/15/10.......................................................... 4,000 4,243
6.25%, 11/15/21.......................................................... 3,000 3,120
Univ. of Minnesota, Residual Interest Bond/Inverse Floater, 8/15/03
(Currently 5.97%)........................................................... 5,800 5,981
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</TABLE>
5
<PAGE>
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<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
MISSISSIPPI -- 0.7%
Claiborne County, PCR, Systems Energy Resources, 9.875%, 12/1/14................. $ 3,400 $ 3,887
7.30%, 5/1/25.............................................................. 2,750 2,890
Mississippi Home Corp., Single Family Mortgage, (FGIC Insured),
9.25%, 3/1/12.............................................................. 830 908
Warren County, PCR, Mississippi Power and Light, 7.00%, 4/1/22................... 1,500 1,572
- -------------------------------------------------------------------------------------------------------
MISSOURI -- 0.3%
Joplin IDA, Tri-State Osteopathic Hosp. Assoc., 8.25%, 12/15/14.................. 1,410 1,506
Missouri HEFA, Bethesda Health Group, 7.50%, 8/15/12............................. 1,250 1,315
Washington Univ., VRDN (Currently 3.35%)...................................... 1,200 1,200
- -------------------------------------------------------------------------------------------------------
NEBRASKA -- 0.2%
Omaha Public Power Dist., Electric System, 6.20%, 2/1/17......................... 3,000 3,319
- -------------------------------------------------------------------------------------------------------
NEVADA -- 0.6%
Clark County School Dist., Limited Tax School Improvement, GO,
(MBIA Insured), 7.00%, 6/1/11.............................................. 3,500 4,141
Nevada, Municipal Bond Bank, GO, 7.25%, 11/1/10
(Escrowed to Maturity)..................................................... 3,050 3,569
Nevada Housing Division, Single Family, 7.85%, 10/1/15........................... 1,070 1,134
- -------------------------------------------------------------------------------------------------------
NEW JERSEY -- 1.8%
New Jersey EFA, University Medicine and Dentistry, (AMBAC Insured),
5.00%, 12/1/02............................................................. 2,880 2,983
5.00%, 12/1/03............................................................. 3,840 3,969
5.25%, 12/1/21............................................................. 9,820 9,431
5.25%, 12/1/25............................................................. 1,250 1,199
New Jersey Sports and Exposition Auth., Monmouth Park,
8.00%, 1/1/25.............................................................. 4,500 4,954
New Jersey Turnpike Auth., (MBIA Insured), 6.50%, 1/1/16......................... 2,000 2,263
- -------------------------------------------------------------------------------------------------------
NEW MEXICO -- 0.2%
Gallup, PCR, Plains Electric Generation and Transmission Coop.,
(MBIA Insured), 6.65%, 8/15/17............................................. 2,000 2,200
- -------------------------------------------------------------------------------------------------------
NEW YORK -- 13.1%
Dormitory Auth. of the State of New York, City Univ., 5.75%, 7/1/13.............. 10,000 10,065
6.00%, 7/1/14.............................................................. 10,000 10,315
(AMBAC Insured), 5.75%, 7/1/18............................................. 5,000 5,185
(FGIC Insured), 5.375%, 7/1/14............................................. 9,000 8,860
New York State Dept. of Health, 5.50%, 7/1/23................................. 4,250 4,026
5.50%, 7/1/25.............................................................. 8,525 8,006
Vassar College, 7.25%, 7/1/15................................................. 2,000 2,275
Municipal Assistance Corp. for the City of New York,
7.375%, 7/1/08 (Prerefunded 7/1/96+)....................................... 2,500 2,583
</TABLE>
6
<PAGE>
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<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
New York City, GO, 5.30%, 2/15/02................................................. $ 4,000 $ 3,980
6.375%, 8/1/04.............................................................. 4,145 4,350
8.00%, 8/1/16............................................................... 180 211
5.75%, 2/1/19............................................................... 7,000 6,576
(FGIC Insured), VRDN (Currently 3.35%)...................................... 2,500 2,500
(FSA Insured), 6.00%, 12/1/18 (Escrowed to Maturity)........................ 5,000 5,060
New York City IDA, Civic Fac., Rockefeller Foundation, 5.375%, 7/1/23............. 2,500 2,470
New York City Municipal Water Fin. Auth., Water and Sewer,
5.50%, 6/15/23.............................................................. 10,340 9,958
New York State Environmental Fac. Corp., PCR, State Water
Revolving Fund, 5.75%, 6/15/12................................................. 1,450 1,524
6.90%, 11/15/15............................................................. 5,365 6,135
New York State Housing Fin. Agency, State Univ. Construction,
7.80%, 5/1/01 (Escrowed to Maturity)........................................ 2,000 2,330
New York State Local Gov't. Assistance Corp., 5.00%, 4/1/21....................... 16,000 14,534
Public Benefit Corp., 7.20%, 4/1/04............................................ 5,000 5,717
New York State Medical Care Fac. Fin. Agency, Albany and St.
John's Medical Center, (FHA Guaranteed), 6.20%, 2/15/28........................ 3,480 3,589
Buffalo General Hosp., (FHA Guaranteed), 6.00%, 8/15/14........................ 9,035 9,218
Mental Health Services, 6.50%, 8/15/24......................................... 6,000 6,331
New York Hosp., (AMBAC Insured), 6.50%, 8/15/29................................ 4,625 5,011
Presbyterian Hosp., (FHA Guaranteed), 5.50%, 8/15/24........................... 5,000 4,820
New York State Urban Dev. Corp., Correctional Capital Fac.,
Zero Coupon, 1/1/10......................................................... 5,000 2,236
5.50%, 1/1/16............................................................... 3,500 3,397
5.375%, 1/1/25.............................................................. 8,700 8,070
Triborough Bridge and Tunnel Auth., 5.50%, 1/1/17................................. 20,000 20,147
- ------------------------------------------------------------------------------------------------------------
NORTH CAROLINA -- 2.0%
Cumberland County, Civic Center, COP, (AMBAC Insured), 6.40%, 12/1/24............. 2,750 2,969
North Carolina Eastern Municipal Power Agency, 7.50%, 1/1/10...................... 4,330 5,032
7.50%, 1/1/10 (Escrowed to Maturity)........................................ 4,650 5,701
6.50%, 1/1/18 (Escrowed to Maturity)........................................ 2,655 3,188
6.00%, 1/1/26............................................................... 3,500 3,529
North Carolina Housing Fin. Agency, 7.40%, 3/1/28................................. 2,250 2,399
North Carolina Medical Care Commission, Gaston Memorial Hosp.,
5.50%, 2/15/19.............................................................. 2,000 1,956
Stanley Memorial Hosp., 7.80%, 10/1/19......................................... 3,000 3,203
- ------------------------------------------------------------------------------------------------------------
NORTH DAKOTA -- 0.2%
Mercer County, PCR, Basin Electric Power, (AMBAC Insured),
6.05%, 1/1/19.................................................................. 3,000 3,138
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</TABLE>
7
<PAGE>
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<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
OHIO -- 1.4%
Cleveland, Waterworks, (MBIA Insured), 5.50%, 1/1/13........................... $ 4,765 $ 4,870
Franklin County, GO, 6.80%, 12/1/09 (Prerefunded 12/1/00+)..................... 2,860 3,226
6.80%, 12/1/10 (Prerefunded 12/1/00+).................................... 3,240 3,654
County Courthouse (Limited Tax), GO,
6.375%, 12/1/17 (Prerefunded 12/1/01+)................................... 2,000 2,242
Montgomery County Hosp. Fac., Kettering Medical Center,
(MBIA Insured), 7.375%, 4/1/02........................................... 2,500 2,750
Ohio Water Dev. Auth., PCR, Cleveland Electric, 7.70%, 8/1/25.................. 2,700 2,866
- ----------------------------------------------------------------------------------------------------------
OKLAHOMA -- 0.7%
Grand River Dam Auth., (AMBAC Insured), 5.50%, 6/1/13.......................... 5,000 5,123
Tulsa County Home Fin. Auth., Single Family Mortgage, (FGIC Insured),
6.90%, 8/1/10 (Escrowed to Maturity)..................................... 4,250 5,005
- ----------------------------------------------------------------------------------------------------------
PENNSYLVANIA -- 2.4%
Allegheny County Hosp. Dev. Auth., Montefiore Hosp. Assoc.
of Western Pennsylvania, 9.75%, 7/1/05 (Prerefunded 7/1/96+)................ 12,000 12,481
Beaver County IDA, PCR, Cleveland Electric, 7.75%, 7/15/25..................... 3,900 4,170
Pennsylvania IDA, Economic Dev., (AMBAC Insured), 5.50%, 1/1/14................ 6,250 6,187
Pennsylvania Intergovernmental Cooperative Auth., Special Tax,
(FGIC Insured), 6.75%, 6/15/21........................................... 4,750 5,339
(MBIA Insured), 5.00%, 6/15/22........................................... 5,000 4,570
- ----------------------------------------------------------------------------------------------------------
PUERTO RICO -- 2.8%
Puerto Rico Aqueduct and Sewer Auth., 7.875%, 7/1/17
(Prerefunded 7/1/00+).................................................... 11,500 12,771
Puerto Rico Commonwealth, GO, (MBIA Insured), 5.65%, 7/1/15.................... 7,300 7,597
Puerto Rico Ind., Med., Higher Ed. and Environmental Pollution
Control Fac. Fin. Auth., Catholic Univ. of Puerto Rico, 9.25%, 12/1/97...... 4,930 5,322
Puerto Rico Infrastructure Fin. Auth., 7.75%, 7/1/08........................... 1,740 1,906
7.50%, 7/1/09............................................................ 9,955 10,852
- ----------------------------------------------------------------------------------------------------------
RHODE ISLAND -- 1.5%
Rhode Island Health and Ed. Building Corp., Bryant College,
(MBIA Insured), 6.125%, 6/1/19........................................... 5,000 5,072
Rhode Island Hosp., (FGIC Insured),
Residual Interest Bond/Inverse Floater, 8/15/21 (Currently 10.12%)....... 1,000 1,175
Rhode Island Housing and Mortgage Fin. Corp., Homeownership
Opportunity, 6.70%, 10/1/14................................................. 5,000 5,262
7.85%, 10/1/16........................................................... 8,000 8,515
----------------------------------------------------------------------------------------------------------
SOUTH CAROLINA -- 1.6%
Greenville Hosp. System, Board of Trustees, Hosp. Fac., 5.50%, 5/1/16.......... 5,250 5,082
Piedmont Municipal Power Agency, (FGIC Insured), 6.50%, 1/1/14................. 3,500 3,954
(MBIA Insured), 5.375%, 1/1/25........................................... 3,900 3,841
South Carolina Public Service Auth., (AMBAC Insured), 6.25%, 1/1/22............ 6,500 6,955
Santee Cooper, 7.00%, 7/1/12 (Prerefunded 7/1/01+).......................... 1,650 1,889
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</TABLE>
8
<PAGE>
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<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
SOUTH DAKOTA -- 0.5%
South Dakota Building Auth., 7.50%, 12/1/16........................................ $ 4,000 $ 4,167
South Dakota HDA, Homeownership Mortgage, 6.65%, 5/1/14............................ 2,000 2,098
- --------------------------------------------------------------------------------------------------------------
TENNESSEE -- 1.5%
Chattanooga Health, Ed. and Housing Fac. Board, Memorial Hosp.,
(MBIA Insured), 6.625%, 9/1/07............................................... 2,950 3,410
6.625%, 9/1/08............................................................... 3,150 3,641
Shelby County Health Ed. and Housing Fac. Board, Le Bonhuer Children's
Medical Center, (MBIA Insured), 5.50%, 8/15/12
(Escrowed to Maturity)....................................................... 4,250 4,366
Tennessee, GO, BAN, VRDN (Currently 3.25%)......................................... 8,800 8,800
- --------------------------------------------------------------------------------------------------------------
TEXAS -- 6.7%
Arlington Independent School Dist., Capital Appreciation, GO,
Zero Coupon, 2/15/16......................................................... 9,650 2,942
Brazos River Auth., Houston Lighting and Power, 8.25%, 5/1/15...................... 18,000 19,473
Denison Hosp. Auth., Texoma Medical Center, 7.00%, 8/15/14......................... 4,245 4,396
Harris County, Toll Road, GO, (MBIA Insured), Zero Coupon, 8/15/04................. 6,000 3,970
Harris County Health Fac. Dev. Corp., Memorial Hosp., 7.125%, 6/1/15............... 2,500 2,730
Methodist Hosp., VRDN (Currently 3.45%)......................................... 8,300 8,300
Sisters of Charity of the Incarnate Word, 7.10%, 7/1/21......................... 4,000 4,379
St. Luke's Episcopal Hosp., VRDN (Currently 3.45%).............................. 5,200 5,200
Texas Medical Center, (MBIA Insured), 7.375%, 5/15/20........................... 7,645 8,543
Harris County Hosp. Dist., (AMBAC Insured), 7.40%, 2/15/10......................... 1,500 1,841
Matagorda County Navigation Dist., PCR, Central Power and Light,
7.50%, 12/15/14.............................................................. 1,500 1,674
Houston Lighting and Power, (FGIC Insured), 7.20%, 12/1/18...................... 3,600 3,998
Texas, Veterans Housing Assistance, GO, 6.25%, 12/1/15............................. 4,250 4,338
7.40%, 12/1/20............................................................... 14,205 15,785
Texas Turnpike Auth., Dallas North Tollway, President George Bush
Turnpike, (FGIC Insured), 5.00%, 1/1/25......................................... 5,000 4,600
- --------------------------------------------------------------------------------------------------------------
UTAH -- 1.7%
Intermountain Power Agency, 7.20%, 7/1/19.......................................... 6,200 6,540
5.00%, 7/1/21................................................................ 7,000 6,370
7.50%, 7/1/21................................................................ 4,750 5,143
5.00%, 7/1/23................................................................ 6,000 5,368
- --------------------------------------------------------------------------------------------------------------
VERMONT -- 0.5%
Vermont Ed. and Health Buildings Fin. Agency, Medical Center Hosp.
of Vermont, (FGIC Insured), 7.35%, 9/1/13....................................... 4,650 4,977
7.45%, 9/1/3................................................................. 2,000 2,140
- --------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
VIRGINIA -- 5.3%
Chesapeake Bay Bridge and Tunnel Dist., (MBIA Insured),
5.00%, 7/1/22................................................................. $ 3,600 $ 3,327
Fairfax County Water Auth., 6.00%, 4/1/22........................................... 10,400 10,791
Hanover County IDA, Memorial Regional Medical Center,
(MBIA Insured), 6.375%, 8/15/18............................................... 4,185 4,659
Henrico County IDA, Bon Secours Health System, St. John's Hosp.,
7.50%, 9/1/15................................................................. 1,850 2,051
Bon Secours Health System, St. Mary's Hosp., 7.50%, 9/1/07....................... 1,665 1,842
Peninsula Ports Auth., Shell Oil, VRDN (Currently 3.40%)............................ 1,400 1,400
Roanoke IDA, Roanoke Memorial Hosp., Carilion Health System,
VRDN (Currently 3.30%)........................................................ 3,500 3,500
Upper Occoquan Sewage Auth., (FGIC Insured), 5.00%, 7/1/15.......................... 7,000 6,578
Virginia HDA, 6.25%, 7/1/11......................................................... 5,000 5,136
6.90%, 7/1/13................................................................. 11,100 11,568
6.75%, 7/1/14................................................................. 7,435 7,813
6.80%, 7/1/17................................................................. 8,900 9,337
Winchester IDA, Winchester Medical Center, Inc., (AMBAC Insured),
Embedded Interest Rate Swap, 1/1/05 (Currently 5.37%)............................ 1,500 1,487
Embedded Interest Rate Swap, 1/1/06 (Currently 5.47%)............................ 1,500 1,492
Embedded Interest Rate Swap, 1/1/07 (Currently 5.57%)............................ 1,600 1,597
- ---------------------------------------------------------------------------------------------------------------
WASHINGTON -- 4.6%
Port of Seattle, 7.40%, 12/1/09..................................................... 1,000 1,153
Seattle, Water, VRDN (Currently 3.30%).............................................. 1,800 1,800
Tacoma, Electric, (AMBAC Insured),
Residual Interest Bond/Inverse Floater, 1/1/15 (Currently 9.205%)................ 5,000 5,713
(FGIC Insured), 6.25%, 1/1/15................................................. 7,550 7,999
Washington, GO, 5.70%, 10/1/15...................................................... 14,000 14,435
Washington Public Power Supply System, 7.25%, 7/1/09................................ 3,000 3,507
7.25%, 7/1/15 (Prerefunded 1/1/00+)........................................... 2,200 2,477
7.50%, 7/1/15................................................................. 2,800 3,065
7.50%, 7/1/15 (Prerefunded 7/1/99+)........................................... 4,310 4,845
(FSA Insured), 6.25%, 7/1/12.................................................. 5,000 5,303
(MBIA Insured), 5.60%, 7/1/15................................................. 6,500 6,409
6.25%, 7/1/17................................................................. 6,000 6,265
- ---------------------------------------------------------------------------------------------------------------
WEST VIRGINIA -- 0.8%
Kanawha County Building Commission, Charleston Area Medical Center,
7.50%, 11/1/08 (Prerefunded 11/1/99+)......................................... 2,250 2,549
West Virginia Hosp. Fin. Auth., Charleston Area Medical Center,
(MBIA Insured), 5.75%, 9/1/13................................................. 5,000 5,093
West Virginia State Parkways, Economic Dev. and Tourism Auth.,
(FGIC Insured), Residual Interest Bond/Inverse Floater, 5/16/19
(Currently 7.919%)............................................................ 3,600 3,704
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Value
-------- -------
<S> <C> <C>
WISCONSIN -- 0.1%
Wisconsin Public Power Agency, (AMBAC Insured), 7.00%, 7/1/02................... $ 1,500 $ 1,677
- ----------------------------------------------------------------------------------------------------------
WYOMING -- 0.2%
Uinta County, PCR, Chevron, VRDN (Currently 3.35%).............................. 2,300 2,300
- ----------------------------------------------------------------------------------------------------------
Total Investments in Securities -- 97.9% of Net Assets (Cost $1,256,942) 1,346,508
- ----------------------------------------------------------------------------------------------------------
Futures Contracts
</TABLE>
<TABLE>
<CAPTION>
Contract Unrealized
Expiration Value Gain (Loss)
---------- -------- -----------
<S> <C> <C> <C> <C>
Long, 375 U.S. Treasury thirty-year
contracts, $2,498,670 of Municipal Bonds
pledged as initial margin................... 6/96 $42,867 $ (257)
Net payments (receipts) of variation
margin to date......................................................... 280
----------
Variation margin receivable (payable) on
open futures contracts................................................. 23
Other Assets Less Liabilities............................................. 28,976
--------
<CAPTION>
Net Assets Consist of: Value
-----------
<S> <C> <C>
Accumulated net investment income - net of distributions.................. $ 641
Accumulated net realized gain/loss - net of distributions................. (5,805)
Net unrealized gain (loss)................................................ 89,309
Paid-in-capital applicable to 142,463,986 shares of $1.00 par value
capital stock outstanding; 500,000,000 shares authorized............... 1,291,362
----------
NET ASSETS................................................................ $1,375,507
==========
NET ASSET VALUE PER SHARE................................................. $9.66
=====
- ----------------------------------------------------------------------------------------------------------
</TABLE>
+ Used in determining portfolio maturity
** When-issued security
AMBAC AMBAC Indemnity Corp.
BAN Bond Anticipation Note
BIGI Bond Investors Guaranty Insurance
CDA Community Development Administration
COP Certificates of Participation
EFA Educational Facility Authority
FGIC Financial Guaranty Insurance Company
FHA Federal Housing Authority
FSA Financial Security Assurance Corp.
GO General Obligation
HDA Housing Development Authority
HEFA Health & Educational Facility Authority
HFA Health Facility Authority
HHEFA Health & Higher Educational Facility Authority
IDA Industrial Development Authority
IDB Industrial Development Bond
MBIA Municipal Bond Investors Assurance Corp.
PCR Pollution Control Revenue
VRDN Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free Income Fund / Year Ended February 29, 1996
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest income............................................ $ 82,115
--------
Expenses
Investment management................................... 6,613
Shareholder servicing................................... 726
Custody and accounting.................................. 261
Prospectus and shareholder reports...................... 131
Registration............................................ 43
Legal and audit......................................... 33
Directors............................................... 17
Miscellaneous........................................... 22
--------
Total expenses.......................................... 7,846
--------
Net investment income...................................... 74,269
--------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Securities.............................................. 22,084
Futures................................................. (2,569)
--------
Net realized gain (loss)................................ 19,515
--------
Change in net unrealized gain or loss on:
Securities.............................................. 37,590
Futures................................................. (257)
--------
Change in net unrealized gain or loss................... 37,333
--------
Net realized and unrealized gain (loss).................... 56,848
--------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS.......... $131,117
========
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free Income Fund
(in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended
Feb. 29, 1996 Feb. 28, 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income.............................. $ 74,269 $ 76,894
Net realized gain (loss)........................... 19,515 (23,348)
Change in net unrealized gain or loss.............. 37,333 (34,914)
---------- ----------
Increase (decrease) in net assets from operations.. 131,117 18,632
---------- ----------
Distributions to shareholders
Net investment income.............................. (74,269) (76,894)
Net realized gain.................................. -- (5,930)
---------- ----------
Decrease in net assets from distributions.......... (74,269) (82,824)
---------- ----------
Capital share transactions*
Shares sold........................................ 176,155 197,393
Distributions reinvested........................... 49,694 57,113
Shares redeemed.................................... (235,865) (314,220)
---------- ----------
Increase (decrease) in net assets from capital
share transactions................................ (10,016) (59,714)
---------- ----------
Increase (decrease) in net assets..................... 46,832 (123,906)
NET ASSETS
Beginning of period................................... 1,328,675 1,452,581
---------- ----------
End of period......................................... $1,375,507 $1,328,675
========== ==========
- --------------------------------------------------------------------------------
*Share information
Shares sold........................................ 18,568 21,817
Distributions reinvested........................... 5,233 6,296
Shares redeemed.................................... (24,917) (34,848)
---------- ----------
Increase (decrease) in shares outstanding.......... (1,116) (6,735)
========== ==========
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Notes To Financial Statements
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free Income Fund / February 29, 1996
Note 1 - Significant Accounting Policies
T. Rowe Price Tax-Free Income Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company.
A) Valuation - Debt securities are generally traded in the over-the-counter
market. Investments in securities originally issued with maturities of one year
or more are stated at fair value as furnished by dealers who make markets in
such securities or by an independent pricing service, which considers yield or
price of bonds of comparable quality, coupon, maturity, and type, as well as
prices quoted by dealers who make markets in such securities. Securities with
maturities when issued of less than one year are stated at fair value, which is
determined by using
13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
a matrix system that establishes a value for each security based on money market
yields. Financial futures contracts are valued at closing settlement prices.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
B) Premiums and Discounts - Premiums and original issue discounts on municipal
securities are amortized for both financial reporting and tax purposes. Market
discounts are recognized upon disposition of the security as gain or loss for
financial reporting purposes and as ordinary income for tax purposes.
C) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Distributions to shareholders are
recorded by the fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles. Payments ("variation margin") made or received by the
fund to settle the daily fluctuations in the value of futures contracts are
recorded as unrealized gain or loss until the contracts are closed. Unrealized
gains and losses on futures contracts are included in Change in net unrealized
gain or loss in the accompanying financial statements.
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.
A) Futures Contracts - At February 29, 1996, 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.
B) Other - Purchases and sales of portfolio securities, other than short-term
securities, aggregated $628,440,000 and $689,783,000, respectively, for the year
ended February 29, 1996.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
income. The fund has unused realized capital loss carryforwards for federal
income tax purposes of $4,521,000 which expires in 2003. Capital loss
carryforwards utilized in fiscal 1996 amounted to $12,225,000. The fund intends
to retain gains realized in future periods that may be offset by available
capital loss carryforwards.
In order for the fund's capital accounts and distributions to shareholders to
reflect the tax character of certain transactions, $9,000 of undistributed net
investment income was reclassified as a decrease to undistributed net realized
gains during the year ended February 29, 1996. The results of operations and
net assets were not affected by the reclassifications.
At February 29, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $1,256,942,000 and net unrealized gain
aggregated $89,566,000, of which $92,012,000 related to appreciated investments
and $2,446,000 to depreciated investments.
Note 4 - Related Party Transactions
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management fee,
of which $535,000 was payable at February 29, 1996. The fee is computed daily
and paid monthly, and consists of an Individual Fund Fee equal to 0.15% of
average daily net assets and a Group Fee. The Group Fee is based on the
combined assets of certain mutual funds
14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
sponsored by the Manager or Rowe Price-Fleming International, Inc. (the Group).
The Group Fee rate ranges from 0.48% for the first $1 billion of assets to 0.31%
for assets in excess of $34 billion. At February 29, 1996, and for the year then
ended, the effective annual Group Fee rate was 0.33% and 0.34%, respectively.
The fund pays a pro rata share of the Group Fee based on the ratio of its net
assets to those of the Group.
In addition, the fund has entered into agreements with the Manager and a
wholly owned subsidiary of the Manager, pursuant to which the fund receives
certain other services. The Manager computes the daily share price and
maintains the financial records of the fund. T. Rowe Price Services, Inc., is
the fund's transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. The fund incurred expenses pursuant to
these related party agreements totaling approximately $700,000 for the year
ended February 29, 1996, of which $72,000 was payable at period-end.
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free Income Fund
<TABLE>
<CAPTION>
For a share outstanding throughout each period
--------------------------------------------------------------
Year Ended
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29,
1996 1995 1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............... $9.25 $9.66 $9.84 $9.09 $8.79
----- ----- ----- ----- -----
Investment Activities
Net investment income........................... 0.52 0.53 0.54 0.56 0.57
Net realized and unrealized gain (loss)......... 0.41 (0.37) -- 0.75 0.30
----- ----- ----- ----- -----
Total from Investment Activities................ 0.93 0.16 0.54 1.31 0.87
----- ----- ----- ----- -----
Distributions
Net investment income........................... (0.52) (0.53) (0.54) (0.56) (0.57)
Net realized gain............................... -- (0.04) (0.18) -- --
----- ----- ----- ----- -----
Total Distributions............................. (0.52) (0.57) (0.72) (0.56) (0.57)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD..................... $9.66 $9.25 $9.66 $9.84 $9.09
===== ===== ===== ===== =====
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return....................................... 10.31% 1.90% 5.50% 14.88% 10.17%
Ratio of Expenses to Average Net Assets............ 0.58% 0.59% 0.59% 0.61% 0.62%
Ratio of Net Investment Income
to Average Net Assets........................... 5.49% 5.80% 5.40% 5.98% 6.34%
Portfolio Turnover Rate............................
Net Assets, End of Period (in thousands)...........$1,375,507 $1,328,675 $1,452,581 $1,441,646 $1,245,297
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of T. Rowe Price Tax-Free Income Fund, Inc.
We have audited the accompanying statement of net assets of T. Rowe Price
Tax-Free Income Fund, Inc. as of February 29, 1996, and the related statement of
operations, statement of changes in net assets, and financial highlights for the
year then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets and financial highlights for each
of the preceding years presented were audited by other auditors, whose report,
dated March 17, 1995, expressed an unqualified opinion thereon.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
February 29, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of T.
Rowe Price Tax-Free Income Fund, Inc. as of February 29, 1996, the results of
its operations, the changes in its net assets, and financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 19, 1996
During fiscal 1996, Coopers & Lybrand, L.L.P. succeeded Price Waterhouse LLP as
independent accountants for the T. Rowe Price Tax-Free Income fund, a decision
that was approved by the fund's Board of Directors. During the last two fiscal
years, the fund has received unqualified opinions and has had no disagreements
with Price Waterhouse LLP or reportable events that caused the change.
16
<PAGE>
- --------------------------------------------------------------------------------
Fellow Shareholders
- --------------------------------------------------------------------------------
The fiscal year ended February 29, 1996, was a banner year for bonds and the
funds that invest in them. Prices rose as yields fell through much of the year,
generating good returns for investors in fixed income securities. We were
pleased that all the T. Rowe Price municipal funds discussed here outperformed
their peer group averages over the entire fiscal year.
Market Environment
The economy slowed in 1995, and the rate of inflation remained moderate. After
tightening monetary policy in 1994 and early 1995, the Federal Reserve reversed
course when it became clear that the economy was running out of steam. Since
July, the Fed has lowered the key federal funds rate three times, from 6% to
5.25% at the end of the fiscal year.
Against a background of slower growth, moderate inflation, and apparent
progress on reducing the federal budget deficit, bond yields tumbled. The
30-year Treasury yield, nearly 7.5% a year ago, fell briefly below 6% in late
December. At fiscal year-end, the long bond yield had edged back up to 6.5%, as
efforts to come up with deficit reduction
- --------------------------------------------------------------------------------
Municipal Bond and Note Yields
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
Source: T. Rowe Price Associates
legislation flagged in early 1996. Signs that stronger economic growth might
resume in 1996 also contributed to recent uneasiness in the bond market.
After moving only slightly lower during the first half of the fiscal year
ended February 29, long-term municipal yields fell further in the second half.
Thirty-year prime general obligation (GO) bonds yielded 5.95% on February 28,
1995, and on August 31 were only 10 basis points lower (100 basis points equal
one percent). During the most recent six months, prices rose further as yields
dropped an additional 45 basis points to 5.40%.
Municipal bonds with short maturities followed a different pattern as their
yields fell more in the first half of the year than in the second. After falling
70 basis points to 4.30% on August 31, the yield of five-year prime GO bonds
fell only 10 basis points more by February 29, 1996. The net result was a lower
and steeper yield curve that led to significant price appreciation from 1994's
lows.
New issuance of municipal bonds hit a five-year low in 1995 -- 3% below 1994's
levels. Light supply for the second year in a row would have been more of a
problem if demand had not also been soft due to strong stock market returns and
tax reform discussions. Although new supply declined overall, the use of bond
insurance grew, and insured bonds constituted 43% of newly issued securities.
Bond insurers were willing to insure new issues as well as bonds in the
secondary market at a fairly low cost.
Tax-Exempt Money Fund
Short-term rates fell during the past year, with six-month to one-year yields
declining further than yields on shorter maturities. Compared with year-ago
levels, one- to seven-day yields were 50 to 70 basis points lower, while the
longer yields were 100 to 130 basis points lower. This led to a flattening in
the money
<PAGE>
market yield curve, meaning that longer maturities did not offer significantly
higher yields than short maturities (occasionally, long yields were actually
lower).
In this environment, we adopted a "barbell" strategy, concentrating
investments at both ends of the money market maturity range. The longer
maturities enabled us to lock in yields that we believed would move lower as the
Federal Reserve continued to reduce interest rates, while the short-maturity
holdings provided a high level of income considering their low level of risk.
Another indication of the remarkable shift in the yield curve was the average
spread between overnight and one-year yields -- a meager 13 basis points over
the past 12 months versus 121 basis points during the preceding 12-month period.
The yields on short-term tax-exempt issues remained relatively low compared
with the yields on their taxable counterparts, making them attractive only to
those in the highest tax brackets. Nevertheless, assets in all tax-exempt money
funds grew a robust 16% to $134 billion over the year.
Our barbell strategy, plus our lengthening weighted average maturity in recent
months, enabled your fund to outperform its peer group average during the 6- and
12-month periods ended February 29.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Exempt Money Fund 1.62% 3.38%
IBC/Donoghue Money Fund
Report Average* 1.58 3.31
- ------------------------------------------------------------------------------
</TABLE>
*Stockholder and General Purpose Funds
Tax-Free Short-Intermediate Fund
For most of the past six months, your fund sought to maintain an aggressive
posture on weighted average maturity. The combination of a weak economic
environment and prospects for federal deficit reduction enhanced the possibility
that the Federal Reserve would loosen monetary policy by lowering the fed funds
rate.
In an effort to benefit from this anticipated move, we gradually lengthened
the fund's weighted average maturity from 3.0 years at the beginning of
September to as long as 3.8 years in January. As yields fell to extremely low
levels in January and budget negotiations stalled in Washington, we began to
shorten maturities. By fiscal year-end, the weighted average maturity declined
to 3.6 years.
This strategy allowed the fund to provide solid returns and outperform its
peer group average during both the 6- and 12-month periods ended February 29.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free Short-Intermediate
Fund 2.95% 6.87%
Lipper Short-Intermediate
Debt Funds Average 2.67 6.79
- ------------------------------------------------------------------------------
</TABLE>
Tax-Free Insured Intermediate Bond Fund
Our strategy was similar to that of the Tax-Free Short-Intermediate Fund for the
reasons outlined there. We began the six-month period with a shorter duration (a
measure of a bond fund's price sensitivity to changes in interest rates) than
our more aggressive posture at the end of May. As we moved through the final
months of 1995, we reversed course and began to lengthen from 5.4 years at the
end of August to a high of 5.7 years in January.
Another component of our strategy entailed taking advantage of supply and
demand imbalances. Relative values in the municipal market are dictated to a
great extent by the supply of new issues. Bond values rise in states with low
supply and decline in states where supply is abundant. We adopted a strategy of
rotating out of low supply states into high supply states to take advantage of
the lower prices. For example, during the last six months, we sold bonds issued
in Florida and California and replaced them with New York
2
<PAGE>
and Georgia securities, which allowed us to increase the fund's return without
assuming additional interest rate risk.
This overall strategy resulted in strong returns that surpassed our peer group
average for both periods shown below.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free Insured
Intermediate Bond Fund 3.77% 9.57%
Lipper Intermediate Municipal
Debt Funds Average 3.72 8.97
- ------------------------------------------------------------------------------
</TABLE>
Tax-Free Income Fund
Given the sluggish economic environment that persisted over most of the last 12
months, we maintained a modestly aggressive posture throughout the year. Our
relatively long market profile was reflected by a duration of 7.5 years or
higher and a weighted average maturity in the range of 18 to 19 years. We also
focused on buying individual bonds with the potential for significant price
appreciation. Our sizable positions in noncallable and discount bonds, typically
the best performing structures in falling rate environments, contributed to our
aggressive posture.
From the credit perspective, our strategy focused on minimizing exposure to
areas our analysts perceived as vulnerable. For example, we identified the
electric utility sector as one that would be susceptible to proposed legislative
and regulatory changes. This proved to be the case, as many credits were
downgraded by the rating agencies. Insured bonds also played an important role
in our portfolio last year. The heavy issuance of insured bonds, discussed
earlier, provided an opportunity to pick up additional safety at relatively low
cost.
The fund provided excellent returns over the last six months and the fiscal
year, outperforming the average for similar funds by about the same margin in
each period.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free Income Fund 5.44% 10.31%
Lipper General Municipal
Debt Funds Average 4.99 9.87
- ------------------------------------------------------------------------------
</TABLE>
The fund is still positioned somewhat aggressively, but we are looking for
opportunities to reduce its duration and weighted average maturity. A more
positive outlook on the economy and continued prospects of anemic cash flows to
bond funds merit a neutral to slightly defensive posture. Additionally, we plan
to sell some of the noncallable and discount bonds that performed so well last
year and replace them with bonds whose income we expect to be the dominant
component of returns.
Tax-Free High Yield Fund
The municipal high yield market enjoyed a solid comeback last year, recovering
nicely from the beating it took in 1994. Your fund began the year with a neutral
market stance and a relatively low concentration in below investment-grade
securities. Over the following months, and particularly in the first half of the
year, we lengthened duration slightly. For much of calendar 1995, the fund
maintained a duration of 7.2 to 7.5 years and a weighted average maturity of
about 20 years. Cash reserves averaged between 4% and 6% of assets. Late in the
year, duration drifted to a more neutral stance of 7.0 to 7.2 years, ending the
fiscal year at 7.2 years.
Additionally, the bond market decline of 1994 increased the yield spread
between higher- and lower-quality securities, providing us with an opportunity
to increase your fund's below investment-grade holdings from 24% to 27% of net
assets. Much of this move occurred during the first half of the year. We believe
this worked out well for three reasons. First, it provided the opportunity to
lock in attractive yields while taking reasonable credit risk.
3
<PAGE>
Second, credit quality spreads narrowed significantly as the market rallied
through the year. This meant that, on average, lower-quality bonds enjoyed
larger relative price gains. Third, the move entailed only a slight diminution
of your fund's overall credit quality. As always, we sought to maximize
diversification when buying lower-quality bonds.
Your fund outperformed its peer group over the fiscal year and slightly lagged
it during the most recent six-month period. The fund has exceeded the average
performance of other tax-free high yield funds, measured by the benchmark shown
below, for the past eight fiscal years and for nine of its 11 complete fiscal
years.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free High Yield Fund 4.98% 10.62%
Lipper High Yield Municipal
Debt Funds Average 5.15 10.18
- ------------------------------------------------------------------------------
</TABLE>
At this time we have adopted a more cautious stance for the fund amid signs
that economic growth could be picking up. We scaled back our purchases of
lower-quality bonds, as mentioned. Credit quality spreads have narrowed
significantly, particularly during the second half of 1995, due to modest
issuance and continued strong demand. At present, the fund's average credit
quality stands at BBB+ with no material change currently anticipated.
Outlook
The municipal market paid substantial attention to the topic of tax reform last
year. Concerns that proposed revisions to the tax code would be detrimental to
municipal bonds kept municipal securities from performing quite as well as
taxable alternatives. As we anticipated, these fears have lessened somewhat as
tax reform discussions have faded from prominence. Municipals have already
recaptured some of the ground lost to taxable bonds, which we attribute to
reduced worries about the impact of tax reform.
The unusually fierce weather this winter, as well as the partial government
shutdowns, tended to delay and distort many recent economic statistics, but it
looks as though the economy is on track for a year of moderate growth. This
should be enough to keep the unemployment rate in its current zone without
significantly exacerbating inflationary pressures. This March the economic
upturn completed its fifth year, making it one of the longest peacetime
expansions on record, but still without signs of an impending recession.
Further easing by the Federal Reserve may be slow in coming, since the Fed is
concerned about the risk of fueling inflationary pressures when the economy has
only limited margins of excess capacity. The prospects for sharp deficit
reduction and the moderate inflation outlook that gave the bond market
confidence last year are not as compelling so far in 1996. Consequently, we
expect the bulk of returns this year to come from coupon income rather than
capital appreciation.
Respectfully submitted,
/s/ William T. Reynolds
William T. Reynolds
Director
Fixed Income Division
/s/ Mary J. Miller
Mary J. Miller
Director
Municipal Bond Department
March 20, 1996
4
<PAGE>
- --------------------------------------------------------------------------------
Financial Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value Dividend Per Share* Dividend Yield**
Per Share 6 Months Ended 6 Months Ended
8/31/95 2/29/96 8/31/95 2/29/96 8/31/95 2/29/96
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money $ 1.00 $ 1.00 $0.017 $0.016 3.26% 2.95%
Tax-Free Short-Intermediate 5.33 5.37 0.12 0.11 4.46 4.38
Tax-Free Insured Intermediate Bond 10.68 10.84 0.24 0.24 4.62 4.48
Tax-Free Income 9.41 9.66 0.26 0.26 5.63 5.45
Tax-Free High Yield 11.87 12.10 0.36 0.36 6.26 6.00
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Taxability of dividends: 100% of the dividends paid for the 12 months ended
2/29/96 were exempt from federal income tax.
** Dividends earned and reinvested for the periods indicated are annualized and
divided by the average daily net asset values per share for the same period.
Tax-Exempt Money reports a seven-day compound yield.
- --------------------------------------------------------------------------------
Quality Diversification
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quality Ratings* Weighted Average Quality*
1 2 3 4 5-10 8/31/95 2/29/96
--------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money 13% 87% -- -- -- 1.9 1.9
Tax-Free Short-Intermediate 41 35 20% 4% -- 1.8 1.9
Tax-Free Insured Intermediate Bond 21 66 13 -- -- 1.8 1.9
Tax-Free Income 10 50 25 12 3% 2.4 2.4
Tax-Free High Yield 4 21 16 32 27 3.7 3.6
- ---------------------------------------------------------------------------------------------------
</TABLE>
* On a T. Rowe Price scale of 1 to 10, with Grade 1 representing highest
quality.
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Exempt Money Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Exempt Money Fund $14,659
Lipper Tax-Exempt Money $14,593
Market Funds Average
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Duration and Maturity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Effective Duration (years) Maturity (years)
8/31/95 2/29/96 8/31/95 2/29/96
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money -- -- 55* 65*
Tax-Free Short-Intermediate 2.5 3.0 3.0 3.6
Tax-Free Insured Intermediate Bond 5.4 5.5 7.2 7.2
Tax-Free Income 7.8 8.3 18.1 18.1
Tax-Free High Yield 7.3 7.2 20.1 20.0
- ----------------------------------------------------------------------------------------------
</TABLE>
* Maturity is in days.
- --------------------------------------------------------------------------------
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
1 Year 5 Years 10 Years or Since Inception
--------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money 3.38% 2.82% 3.90%
Tax-Free Short-Intermediate 6.87 5.52 5.27
Tax-Free Insured Intermediate Bond 9.57 -- -- 7.57% (11/92)
Tax-Free Income 10.31 8.46 7.21
Tax-Free High Yield 10.62 8.69 8.46
- -----------------------------------------------------------------------------------------
</TABLE>
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
- ------------------------------------------
Performance Comparison --
Tax-Free Insured Intermediate Bond Fund
- ------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free Insured $12,672
Intermediate Bond Fund
Lehman 7-Year GO $12,460
Bond Index
</TABLE>
Note: The index return does not reflect
expenses, which have been deducted from
the fund's return.
- ------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Free Short-Intermediate Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free Short-Intermediate Fund $17,193
Lehman 3-Year GO Bond Index $18,355
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Free Income Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free Income Fund $20,054
Lehman Municipal Bond Index $22,001
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Free High Yield Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free High Yield Fund $22,562
Lehman Revenue Bond Index $23,188
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
Annual Report
- --------------------------------------------------------------------------------
For yield, price, last transaction, T. Rowe Price
and current balance, 24 hours, -------------
7 days a week, call:
1-800-638-2587 toll free Tax-Free Funds
625-7676 Baltimore area
For assistance with your existing
fund account, call:
Shareholder Service Center February 29, 1996
1-800-225-5132 toll free
625-6500 Baltimore area
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution
only to shareholders and to others who have
received a copy of the prospectus of the
T. Rowe Price Tax-Free Funds.
[LOGO OF T. ROWE PRICE APPEARS HERE]
TFF RPTTFF 2/29/96
