Annual Report - Financial Statements
T. Rowe Price
Tax-Free
Income Fund
February 28, 1997
Portfolio Highlights
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
8/31/96 2/28/97
_____________________________________________________
Hospital Revenue 14% 14%
Nuclear Revenue 11 12
Housing Finance Revenue 7 10
Dedicated Tax Revenue 10 9
Prerefunded Bonds 6 8
General Obligation - State 8 8
General Obligation - Local 6 7
Electric Revenue 8 5
Lease Revenue 6 5
Water and Sewer Revenue 6 5
Escrowed to Maturity 5 5
Educational Revenue 4 4
Ground Transportation Revenue 3 3
All Others 6 5
Other Assets Less Liabilities - -
_____________________________________________________
Total 100% 100%
T. Rowe Price Tax-Free Income Fund
For a share outstanding throughout each period
Financial Highlights
Year Ended
2/28/97 2/29/96 2/28/95 2/28/94 2/28/93
NET ASSET VALUE
Beginning of
period $ 9.66 $ 9.25 $ 9.66 $ 9.84 $ 9.09
Investment
activities
Net investment
income 0.52 0.52 0.53 0.54 0.56
Net realized
and unrealized
gain (loss) (0.07) 0.41 (0.37) - 0.75
Total from
investment
activities 0.45 0.93 0.16 0.54 1.31
Distributions
Net investment
income (0.52) (0.52) (0.53) (0.54) (0.56)
Net realized
gain - - (0.04) (0.18) -
Total distri-
butions (0.52) (0.52) (0.57) (0.72) (0.56)
NET ASSET VALUE
End of period $ 9.59 $ 9.66 $ 9.25 $ 9.66 $ 9.84
Ratios/Supplemental Data
Total return 4.81% 10.31% 1.90% 5.50% 14.88%
Ratio of expenses
to average net
assets 0.57% 0.58% 0.59% 0.59% 0.61%
Ratio of net
investment
income to
average
net assets 5.41% 5.49% 5.80% 5.40% 5.98%
Portfolio
turnover
rate 40.7% 48.7% 49.3% 71.2% 76.7%
Net assets, end
of period
(in millions) $ 1,337 $1,376 $1,329 $ 1,453 $ 1,442
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Tax-Free Income Fund
February 28, 1997
Statement of Net Assets
Par Value
In thousands
ALABAMA 2.2%
Alabama, GO
Zero Coupon, 9/1/03 $ 10,000 $ 7,124
Zero Coupon, 3/1/04 10,000 6,853
Zero Coupon, 9/1/04 5,500 3,635
Alabama Water Pollution Control Auth.
6.75%, 8/15/17
(AMBAC Insured) 2,750 3,049
Alexander City Special
Care Fac. Fin. Auth.,
Russell Hosp. Corp.
6.00%, 12/1/22 3,250 3,132
Baldwin County, Eastern
Shore Health Care Auth.
Thomas Hosp., 6.75%, 4/1/21 1,900 1,960
Mobile,
Capital Improvement Warrants, GO
Zero Coupon, 8/15/16
(MBIA Insured) 4,330 1,274
Zero Coupon, 8/15/17
(MBIA Insured) 4,435 1,216
Mobile IDB, Mobile Energy
Services, 6.95%, 1/1/20 1,500 1,592
Total Alabama (Cost $27,150) 29,835
ALASKA 1.1%
Alaska Housing Fin. Corp.
5.85%, 12/1/14
(MBIA Insured) 3,405 3,429
5.875%, 12/1/24
(MBIA Insured) 11,000 10,932
Total Alaska (Cost $14,045) 14,361
ARIZONA 0.8%
Maricopa County, PCR, Public
Service Co. of New Mexico
6.30%, 12/1/26 1,500 1,514
Salt River Agricultural
Improvement and Power
Dist. Electric System,
6.50%, 1/1/22 8,000 8,547
Total Arizona (Cost $9,194) 10,061
ARKANSAS 0.5%
Little Rock Health Fac.
Board, Baptist Medical Center
6.85%, 11/1/08 2,495 2,821
North Little Rock, Electric,
6.50%, 7/1/15
(MBIA Insured) 4,000 4,538
Total Arkansas (Cost $6,476) 7,359
CALIFORNIA 8.3%
California, GO
5.375%, 6/1/26
(FGIC Insured) $ 5,000 $ 4,791
RAN, 4.50%, 6/30/97 14,300 14,343
Foothill / Eastern
Transportation Corridor
Agency California Toll Road
Zero Coupon, 1/1/15 5,000 1,662
Zero Coupon, 1/1/17 20,000 5,797
Zero Coupon, 1/1/19 1,000 254
Zero Coupon, 1/1/26 5,000 810
Los Angeles City
GO, 5.80%, 9/1/09
(FGIC Insured) 2,400 2,499
GO, 6.00%, 9/1/14
(MBIA Insured) 5,000 5,213
Wastewater, 7.15%,
6/1/20 (Prerefunded
6/1/00!) 10,500 11,645
Los Angeles County
Marina del Rey, COP
6.25%, 7/1/03 4,000 4,198
6.50%, 7/1/08 3,250 3,380
Public Works Fin. Auth.
5.50%, 10/1/18
(FSA Insured) 2,000 1,975
Los Angeles County Metropolitan Transportation Auth.
Sales Tax
7.40%, 7/1/15 5,530 5,985
6.25%, 7/1/13
(MBIA Insured) 8,965 9,516
Los Angeles Harbor Dept.
7.60%, 10/1/18
(Escrowed to Maturity) 3,200 4,014
Port of Oakland, 7.30%,
11/1/09 (BIGI Insured)
(Prerefunded 5/1/97!) 1,650 1,694
Sacramento Fin. Auth.,
5.375%, 11/1/14 (AMBAC
Insured) 4,000 3,988
San Bernardino, Sisters of
Charity Health Care System
7.00%, 7/1/21
(Prerefunded 7/1/01!) 3,000 3,361
San Francisco Building Auth.
San Francisco Civic Center Complex
5.25%, 12/1/21
(AMBAC Insured) 5,000 4,722
San Francisco City and
County Airport
6.30%, 5/1/11
(AMBAC Insured) 2,000 2,144
5.25%, 5/1/14
(FGIC Insured) 2,035 1,988
San Mateo County Transit Dist.
5.25%, 6/1/16
(MBIA Insured) $ 6,000 $ 5,809
5.25%, 6/1/17
(MBIA Insured) 2,000 1,934
Southern California Public Power Auth.
6.75%, 7/1/11 4,050 4,565
5.15%, 7/1/15
(AMBAC Insured) 5,000 4,727
Total California
(Cost $104,037) 111,014
COLORADO 1.5%
Boulder County, Longmont United Hosp.
8.20%, 12/1/20
(Prerefunded 12/1/00!) 2,000 2,277
Denver City and County Airport
5.50%, 11/15/25
(MBIA Insured) 9,800 9,417
Jefferson County School
Dist., GO
6.00%, 12/15/12
(AMBAC Insured) 8,000 8,355
Total Colorado (Cost $19,100) 20,049
CONNECTICUT 1.1%
Connecticut, State
Special Tax, 7.125%, 6/1/10 7,350 8,732
Connecticut HEFA, Yale-
New Haven Hosp.
7.10%, 7/1/25
(MBIA Insured)
(Prerefunded 7/1/00!) 5,825 6,427
Total Connecticut
(Cost $13,248) 15,159
DELAWARE 0.3%
Delaware HFA, Beebe
Medical Center, 6.75%, 6/1/14 3,500 3,617
Total Delaware (Cost $3,423) 3,617
DISTRICT OF COLUMBIA 0.4%
Dist. of Columbia
American Univ.
VRDN (Currently 3.35%) 1,655 1,655
5.625%, 10/1/26
(AMBAC Insured) 3,530 3,404
Total District of Columbia
(Cost $5,050) 5,059
FLORIDA 3.1%
Broward County Resource Recovery
Broward Waste Energy,
L.P. North
7.95%, 12/1/08 $ 10,640 $ 11,676
Broward Waste Energy,
L.P. South
7.95%, 12/1/08 870 954
Dade County
Capital Appreciation
Zero Coupon, 2/1/09
(MBIA Insured) 12,185 6,545
Zero Coupon, 2/1/13
(MBIA Insured) 9,000 3,764
Florida Board of Ed.
Public Ed. Capital Outlay, GO
7.25%, 6/1/23 6,210 6,805
7.25%, 6/1/23
(Prerefunded 6/1/00!) 35 39
Jacksonville Transportation
Auth., GO
7.375%, 7/1/20
(Prerefunded 7/1/00!) 8,750 9,748
Port St. Lucie
Capital Appreciation
Zero Coupon, 9/1/16
(FGIC Insured) 5,000 1,575
Zero Coupon, 9/1/26
(FGIC Insured) 5,000 835
Total Florida (Cost $38,600) 41,941
GEORGIA 7.5%
Burke County Dev. Auth.,
PCR, Georgia Power Co.
VRDN (Currently 3.45%) 1,600 1,600
Chatham County Hosp. Auth.,
Memorial Medical Center
5.25%, 1/1/16
(AMBAC Insured) 10,205 9,746
Coweta County Residential
Care Fac. for the Elderly Auth.
Wesley Woods of Newnan-
Peachtree City
8.20%, 10/1/16 1,350 1,365
8.25%, 10/1/26 1,800 1,821
Fulton-Dekalb Hosp. Auth.
Grady Memorial Hosp.
6.80%, 1/1/07 (AMBAC
Insured)(Escrowed to
Maturity) 5,530 6,346
6.80%, 1/1/08
(AMBAC Insured)
(Escrowed to Maturity) 5,905 6,790
Fulton-Dekalb Hosp. Auth.
Grady Memorial Hosp.
6.85%, 1/1/09
(AMBAC Insured)
(Escrowed to Maturity) $ 6,310 $ 7,285
6.85%, 1/1/10
(AMBAC Insured)
(Escrowed to Maturity) 6,745 7,782
Gwinnett County School Dist., GO
6.40%, 2/1/11 1,905 2,131
6.40%, 2/1/12 1,255 1,406
Henry County School
Dist., GO, 6.45%, 8/1/11 2,100 2,353
Metropolitan Atlanta Rapid Transit Auth.
Sales Tax
6.55%, 7/1/20
(Prerefunded 7/1/01!) 5,500 6,053
6.90%, 7/1/16
(MBIA Insured)
(Prerefunded 7/1/04!) 5,655 6,540
Municipal Electric Auth.
of Georgia
8.125%, 1/1/17 5,680 5,978
6.40%, 1/1/07
(AMBAC Insured) 7,500 8,326
7.25%, 1/1/24
(AMBAC Insured) 6,500 8,022
5.70%, 1/1/19
(FGIC Insured) 5,100 5,228
6.125%, 1/1/14
(FGIC Insured) 5,500 5,725
Paulding County, Water and Sewer
6.00%, 12/1/13
(MBIA Insured) 5,000 5,397
Total Georgia (Cost $91,544) 99,894
IDAHO 0.1%
Idaho HFA, St Lukes Regional
Med. Center
VRDN (Currently 3.45%) 500 500
Idaho Housing Agency, 7.70%,
7/1/17 (FHA Guaranteed) 640 674
Total Idaho (Cost $1,140) 1,174
ILLINOIS 3.1%
Chicago
GO, 5.50%, 1/1/18
(AMBAC Insured) 6,630 6,477
GO, 6.25%, 1/1/15
(AMBAC Insured) 1,000 1,088
GO, 5.125%, 1/1/16
(FGIC Insured) 6,200 5,811
Water, 5.00%, 11/1/20
(FGIC Insured) 4,890 4,442
Cook, Dupage, Kane, Lake,
McHenry, and Will Counties
Regional Transportation Auth.
7.75%, 6/1/19
(FGIC Insured) $ 5,350 $ 6,819
Illinois EFA, Art Institute of
Chicago, VRDN
(Currently 3.35%) 1,800 1,800
Illinois HFA
Glen Oak Medical Center,
7.00%, 11/15/19 3,300 3,456
Hinsdale Hosp., 9.00%,
11/15/15 4,670 5,222
Illinois Regional
Transportation Auth.
6.70%, 11/1/21
(FGIC Insured) 5,000 5,752
Total Illinois (Cost $39,371) 40,867
INDIANA 1.3%
Indiana HFFA, Clarion Health
Partners, Inc., 5.50%, 2/15/16 9,205 8,869
Indiana State Office Building
Commission Capitol Complex,
Gov't. Center North
5.25%, 7/1/15
(AMBAC Insured) 7,000 6,706
St. Joseph's County Hosp Auth.,
St. Joseph's Medical Center
6.70%, 12/1/02
(MBIA Insured) 1,985 2,196
Total Indiana (Cost $17,257) 17,771
KENTUCKY 1.4%
Carroll County, PCR, Kentucky
Utilities, 7.45%, 9/15/16 15,000 17,022
Kentucky Turnpike Auth.,
Economic Dev.
7.25%, 5/15/10
(Prerefunded 5/15/00!) 1,000 1,101
Total Kentucky (Cost $16,858) 18,123
LOUISIANA 1.5%
East Baton Rouge Mortgage Fin. Auth.
7.375%, 3/1/10
(Escrowed to Maturity) 2,800 3,222
Louisiana, GO, 6.00%, 8/1/02
(FGIC Insured) 5,000 5,343
Louisiana Offshore Terminal
Auth., LOOP, 7.60%, 9/1/10 10,440 11,397
Total Louisiana (Cost $18,533) 19,962
MAINE 0.2%
Maine Housing Auth., 6.10%,
11/15/15 (AMBAC Insured) $ 3,000 $ 3,071
Total Maine (Cost $3,000) 3,071
MARYLAND 5.4%
Baltimore City, Convention Center
6.00%, 9/1/17
(FGIC Insured) 1,750 1,803
Baltimore County, Pickersgill
Retirement Community
7.70%, 1/1/21 2,000 2,104
Gaithersburg Economic Auth.,
Asbury Methodist Home
7.85%, 1/1/20
(Prerefunded 1/1/00!) 3,000 3,332
Maryland CDA
Single Family
5.95%, 4/1/16 7,500 7,566
5.95%, 7/1/23 5,000 5,025
6.45%, 4/1/14 2,000 2,078
7.25%, 4/1/19 2,500 2,630
7.60%, 4/1/17 7,810 8,141
Maryland HHEFA
Johns Hopkins Hosp.,
Zero Coupon, 7/1/19 8,350 2,331
Johns Hopkins Univ.,
7.50%, 7/1/20 9,475 10,051
Kennedy Kreiger Institute,
6.75%, 7/1/22 1,500 1,539
Univ. of Maryland Medical System
7.00%, 7/1/22
(FGIC Insured) 1,500 1,794
Maryland Stadium Auth., Sports Fac.
5.75%, 3/1/18
(AMBAC Insured) 5,000 5,015
Maryland Water Quality Fin. Administration
Revolving Loan Fund
7.25%, 9/1/12
(Prerefunded 9/1/00!) 1,950 2,175
Montgomery County Housing
Opportunities Commission
Single Family, 7.50%, 7/1/17 1,085 1,144
Prince George's County,
Dimensions Health Corp.
5.30%, 7/1/24 8,685 7,970
Univ. of Maryland, Auxiliary
Fac. and Tuition, 5.75%,
4/1/17 6,715 6,830
Total Maryland (Cost $67,203) 71,528
MASSACHUSETTS 2.3%
Massachusetts Housing Fin.
Agency, 6.30%, 12/1/14 $ 6,250 $ 6,483
Massachusetts Bay
Transportation Auth.
General Transportation, GO
7.00%, 3/1/14 3,150 3,714
7.00%, 3/1/21 6,200 7,375
5.375%, 3/1/25
(AMBAC Insured) 3,500 3,319
Massachusetts HEFA
Harvard Univ., 6.25%,
4/1/20 5,000 5,515
Massachusetts General Hosp.
6.00%, 7/1/15
(AMBAC Insured) 4,500 4,606
Total Massachusetts (Cost $28,343) 31,012
MICHIGAN 0.9%
Michigan HDA
6.45%, 12/1/14 2,120 2,201
7.55%, 12/1/15 1,750 1,849
Michigan Hosp. Fin. Auth.
Bay Medical Center, 8.25%,
7/1/12 1,000 1,129
Henry Ford Hosp., 5.25%,
11/15/20 5,000 4,690
Univ. of Michigan, Medical
Service Plan, 3.50%, 12/1/27 1,400 1,400
Univ. of Michigan Hosp.,
VRDN (Currently 3.50%) 200 200
Total Michigan (Cost $11,176) 11,469
MINNESOTA 1.2%
Northern Minnesota Municipal
Power Agency, 7.35%, 1/1/02 5,000 5,345
Rochester Health Care Fac.
Mayo Foundation/Mayo
Medical Center
5.90%, 11/15/10 2,000 2,142
6.25%, 11/15/21 3,000 3,174
Univ. of Minnesota, Residual
Interest Bond / Inverse Floater
(Currently 5.919%),
8/15/03 5,800 5,851
Total Minnesota (Cost $15,064) 16,512
MISSISSIPPI 0.7%
Claiborne County, PCR,
Systems Energy Resources
7.30%, 5/1/25 $ 2,750 $ 2,881
9.875%, 12/1/14 3,400 3,746
Mississippi Home Corp.,
Single Family
9.25%, 3/1/12
(FGIC Insured) 670 720
Warren County, PCR,
Mississippi Power and Light
7.00%, 4/1/22 1,500 1,593
Total Mississippi (Cost $8,621) 8,940
MISSOURI 0.3%
Joplin IDA, Tri-State
Osteopathic Hosp. Assoc.
8.25%, 12/15/14 1,375 1,487
Missouri HEFA
Bethesda Health Group,
7.50%, 8/15/12 1,250 1,334
Washington Univ., VRDN
(Currently 3.45%) 1,000 1,000
Total Missouri (Cost $3,573) 3,821
NEBRASKA 0.2%
Omaha Public Power Dist.,
Electric System
6.20%, 2/1/17
(Escrowed to Maturity) 3,000 3,271
Total Nebraska (Cost $2,987) 3,271
NEVADA 0.6%
Clark County School Dist.,
Limited Tax School Improvement, GO
7.00%, 6/1/11
(MBIA Insured) 3,500 4,098
Nevada, Municipal Bond Bank, GO
7.25%, 11/1/10
(Escrowed to Maturity) 3,050 3,468
Nevada Housing Division,
Single Family, 7.85%, 10/1/15 980 1,028
Total Nevada (Cost $7,472) 8,594
NEW HAMPSHIRE 0.7%
New Hampshire Higher Ed.
and Health Fac., Dartmouth College
5.70%, 6/1/27** $ 10,000 $ 9,999
Total New Hampshire
(Cost $9,787) 9,999
NEW JERSEY 1.7%
New Jersey Sports and
Exposition Auth., Monmouth Park
8.00%, 1/1/25 4,500 4,966
New Jersey Transportation
Trust Fund Auth.
Transportation Systems
5.25%, 6/15/15 5,000 4,851
6.00%, 6/15/02
(AMBAC Insured) 10,000 10,716
New Jersey Turnpike Auth.,
6.50%, 1/1/16
(MBIA Insured) 2,000 2,240
Total New Jersey
(Cost $21,848) 22,773
NEW MEXICO 0.7%
Farmington, PCR
Public Service Co. of
New Mexico
6.30%, 12/1/16 2,400 2,430
6.375%, 4/1/22 4,325 4,388
Gallup, PCR, Plains Electric Generation and Transmission Coop.
6.65%, 8/15/17
(MBIA Insured) 2,000 2,206
Total New Mexico (Cost $8,718) 9,024
NEW YORK 12.7%
Dormitory Auth. of the State of New York
City Univ.
5.75%, 7/1/13 10,000 9,989
6.00%, 7/1/14 10,000 10,271
5.75%, 7/1/18
(AMBAC Insured) 5,000 5,162
New York State Dept.
of Health, 5.50%, 7/1/23 4,250 3,944
State Univ. Ed. Fac.,
5.25%, 5/15/19 3,325 3,086
Vassar College, 7.25%,
7/1/15 2,000 2,222
New York City, GO
5.875%, 8/1/24 $ 5,000 $ 4,806
6.00%, 2/15/25 5,000 4,868
6.00%, 8/15/26 5,000 4,885
6.00%, 10/15/26 6,500 6,350
6.25%, 8/1/09 9,550 9,921
6.375%, 8/1/04 4,145 4,401
8.00%, 8/1/16 180 207
6.00%, 12/1/18,
(FSA Insured)
(Escrowed to Maturity) 5,000 5,056
New York State Environmental
Fac. Corp.
PCR, State Water
Revolving Fund
6.90%, 11/15/15 5,365 6,081
New York State Housing
Fin. Agency
State Univ. Construction
7.80%, 5/1/01
(Escrowed to Maturity) 2,000 2,258
New York State Local Gov't.
Assistance Corp.
Public Benefit Corp.
5.50%, 4/1/21 16,135 15,510
7.20%, 4/1/04 5,000 5,594
New York State Medical Care Fac. Fin. Agency
Albany and St. John's Medical Center
6.20%, 2/15/28
(FHA Guaranteed) 3,480 3,597
Buffalo General Hosp.
6.00%, 8/15/14
(FHA Guaranteed) 8,975 9,098
Mental Health Services,
6.50%, 8/15/24 6,000 6,298
New York Hosp.
6.50%, 8/15/29
(AMBAC Insured) 4,625 5,036
New York State Urban Dev. Corp.
Correctional Capital Fac.,
5.50%, 1/1/16 3,500 3,296
Senior Lien Corp.
5.375%, 7/1/22 9,000 8,598
5.50%, 7/1/26 10,000 9,633
Triborough Bridge and Tunnel
Auth., 5.50%, 1/1/17 20,00019,998
Total New York (Cost $159,580) 170,165
NORTH CAROLINA 2.5%
Cumberland County, Civic
Center, COP
6.40%, 12/1/24
(AMBAC Insured) $ 2,750 $ 2,981
North Carolina Eastern
Municipal Power Agency
6.50%, 1/1/18 (Escrowed
to Maturity) 1,155 1,324
7.50%, 1/1/10 4,330 5,017
7.50%, 1/1/10 (Escrowed
to Maturity) 4,650 5,628
5.875%, 1/1/21
(MBIA Insured) 3,525 3,550
North Carolina Housing Fin.
Agency, 7.40%, 3/1/28 2,150 2,230
North Carolina Medical Care Commission
Duke Univ. Hosp.,
5.25%, 6/1/26 5,000 4,674
Stanly Memorial Hosp.
7.80%, 10/1/19
(Prerefunded 10/1/99!) 3,000 3,322
Univ. of North Carolina,
Univ. of North Carolina Hosp.
5.25%, 2/15/26 4,620 4,352
Total North Carolina
(Cost $30,426) 33,078
NORTH DAKOTA 0.3%
Mercer County, PCR, Basin
Electric Power
6.05%, 1/1/19
(AMBAC Insured) 4,500 4,662
Total North Dakota (Cost $4,540) 4,662
OHIO 2.0%
Cleveland
Public Power System
5.00%, 11/15/20
(MBIA Insured) 5,000 4,615
Waterworks, 5.50%, 1/1/13
(MBIA Insured) 4,765 4,840
Dayton Special Fac.,
Emery Air Freight,
6.05%, 10/1/09 2,500 2,557
Franklin County
GO, 6.80%, 12/1/09
(Prerefunded 12/1/00!) 2,860 3,158
GO, 6.80%, 12/1/10
(Prerefunded 12/1/00!) 3,240 3,578
County Courthouse (Limited Tax), GO
6.375%, 12/1/17
(Prerefunded 12/1/01!) 2,000 2,202
Montgomery County Hosp. Fac.,
Kettering Medical Center
7.375%, 4/1/02
(MBIA Insured) $ 2,500 $ 2,683
Ohio Water Dev. Auth., PCR,
Cleveland Electric,
7.70%, 8/1/25 2,700 2,923
Total Ohio (Cost $24,970) 26,556
OKLAHOMA 0.8%
Grand River Dam Auth., 5.50%,
6/1/13 (AMBAC Insured) 5,000 5,124
Tulsa County Home Fin. Auth.,
Single Family
6.90%, 8/1/10
(FGIC Insured)
(Escrowed to Maturity) 4,250 4,921
Total Oklahoma (Cost $9,173) 10,045
PENNSYLVANIA 3.2%
Beaver County IDA, PCR,
Cleveland Electric, 7.75%,
7/15/25 3,900 4,260
Pennsylvania Convention
Center Auth.
6.70%, 9/1/14
(FSA Insured) 5,000 5,513
Pennsylvania HEFA, Carnegie
Mellon Univ., 3.45%, 11/1/29 1,400 1,400
Pennsylvania Intergovernmental
Cooperative Auth.
Special Tax
6.75%, 6/15/21
(FGIC Insured)
(Prerefunded 6/15/05!) 4,750 5,423
5.00%, 6/15/22
(MBIA Insured) 5,000 4,478
Philadelphia
Water and Wastewater
5.50%, 6/15/06
(MBIA Insured) 12,750 13,334
5.50%, 6/15/07
(MBIA Insured) 4,000 4,169
Philadelphia Hosp. and
Higher Ed. Fac. Auth.
Children's Hosp. of
Philadelphia
VRDN (Currently 3.45%) 4,000 4,000
Total Pennsylvania (Cost $41,105) 42,577
PUERTO RICO 1.6%
Puerto Rico Commonwealth, GO
5.65%, 7/1/15
(MBIA Insured) 7,300 7,562
Puerto Rico Ind. Medical
Higher Ed. and Environmental
Pollution Control Fac. Fin. Auth.
Catholic Univ. of
Puerto Rico,
9.25%, 12/1/97 $ 1,730 $ 1,793
Puerto Rico Infrastructure
Fin. Auth.
7.50%, 7/1/09 9,955 10,572
7.75%, 7/1/08 1,740 1,853
Total Puerto Rico (Cost $20,546) 21,780
RHODE ISLAND 1.5%
Rhode Island Health and Ed.
Building Corp.
Bryant College, 6.125%,
6/1/19 (MBIA Insured) 5,000 5,125
Rhode Island Hosp.
Residual Interest Bond/
Inverse Floater
(Currently 9.968%), 8/15/21
(FGIC Insured) 1,000 1,231
Rhode Island Housing and
Mortgage Fin. Corp.
Homeownership Opportunity
6.70%, 10/1/14 5,000 5,253
7.85%, 10/1/16 8,000 8,454
Total Rhode Island (Cost $18,852) 20,063
SOUTH CAROLINA 2.8%
Fairfield County, PCR, South
Carolina Electric and Gas Co.
6.50%, 9/1/14 4,000 4,301
Greenville Hosp. System
Board of Trustees, Hosp. Fac.
5.25%, 5/1/17 3,000 2,808
5.50%, 5/1/16 5,250 5,110
Piedmont Municipal Power Agency
6.50%, 1/1/14
(FGIC Insured) 3,000 3,351
6.50%, 1/1/14
(FGIC Insured)
(Prerefunded 9/9/99!) 500 563
South Carolina Public Service Auth.
6.25%, 1/1/22
(AMBAC Insured) 17,750 18,810
South Carolina Public Service Auth.
Santee Cooper
7.00%, 7/1/12
(Prerefunded 7/1/01!) $ 1,650 $ 1,848
Total South Carolina
(Cost $34,675) 36,791
SOUTH DAKOTA 0.3%
South Dakota HDA
Homeownership
5.95%, 5/1/16 2,000 2,010
6.65%, 5/1/14 2,000 2,095
Total South Dakota (Cost $4,000) 4,105
TENNESSEE 1.8%
Chattanooga Health, Ed. and
Housing Fac. Board
Memorial Hosp.
6.625%, 9/1/07
(MBIA Insured) 2,950 3,349
6.625%, 9/1/08
(MBIA Insured) 3,150 3,576
Metropolitan Gov't. of Nashville
and Davidson Counties
Water and Sewer
Step, Zero Coupon,
1/1/12 (FGIC Insured) 11,250 12,314
Shelby County Health Ed. and
Housing Fac. Board
Le Bonhuer Children's
Medical Center
5.50%, 8/15/12
(MBIA Insured)
(Escrowed to Maturity) 4,250 4,374
Total Tennessee (Cost $22,426) 23,613
TEXAS 7.0%
Amarillo Health Fac. Corp.,
Sears Panhandle Retirement
7.75%, 8/15/26 5,000 5,030
Arlington Independent
School Dist., Capital
Appreciation, GO
Zero Coupon, 2/15/16 9,650 3,130
Brazos River Auth., Houston
Lighting and Power
8.25%, 5/1/15 18,000 19,009
Denison Hosp. Auth., Texoma
Medical Center, 7.00%,
8/15/14 4,245 4,450
Harris County, Toll Road, GO
Zero Coupon, 8/15/04
(MBIA Insured) 6,000 4,190
Harris County Health Fac.
Dev. Corp.
Memorial Hosp.
7.125%, 6/1/15 (Prerefunded
6/1/02!) $ 2,500 $ 2,843
5.50%, 6/1/24
(MBIA Insured) 2,500 2,391
Methodist Hosp., VRDN
(Currently 3.45%) 7,500 7,500
Sisters of Charity of the
Incarnate Word
7.10%, 7/1/21 4,000 4,370
St. Luke's Episcopal Hosp.
VRDN (Currently 3.45%) 1,000 1,000
Texas Medical Center, 7.375%,
5/15/20
(MBIA Insured)
(Prerefunded 5/15/00!) 7,645 8,479
Harris County Hosp. Dist.,
7.40%, 2/15/10 (AMBAC Insured) 1,500 1,795
Matagorda County Navigation Dist., PCR
Central Power and Light,
7.50%, 12/15/14 1,500 1,649
Houston Lighting and Power
7.20%, 12/1/18
(FGIC Insured) 3,600 3,913
Northwest Texas Independent
School Dist.
School Buildings, GO,
Zero Coupon, 8/15/17 4,000 1,173
Texas
Veterans Housing
Assistance, GO
6.25%, 12/1/15 3,290 3,357
7.40%, 12/1/20 14,205 15,688
Texas Department of Housing
and Community Affairs
NHP Foundation,
6.40%, 1/1/27 3,500 3,569
Total Texas (Cost $87,856) 93,536
UTAH 1.4%
Intermountain Power Agency
Power Supply
7.20%, 7/1/19 6,200 6,383
7.50%, 7/1/21 4,750 5,018
5.75%, 7/1/19
(MBIA Insured)** 8,000 7,959
Total Utah (Cost $18,392) 19,360
VERMONT 0.5%
Vermont Ed. and Health
Buildings Fin. Agency
Medical Center Hosp. of Vermont
7.35%, 9/1/13
(FGIC Insured) $ 4,650 $ 4,949
7.45%, 9/1/23
(FGIC Insured) 2,000 2,129
Total Vermont (Cost $6,650) 7,078
VIRGINIA 6.2%
Fairfax County IDA, Inova
Health Care System, 6.00%,
8/15/26 10,815 10,922
Fairfax County Water Auth.,
6.00%, 4/1/22 10,250 10,497
Fredericksburg IDA, Medicorp
Health System
5.25%, 6/15/23
(AMBAC Insured) 2,200 2,057
Hanover County IDA, Memorial
Regional Medical Center
6.375%, 8/15/18
(MBIA Insured) 4,185 4,582
Henrico County IDA
Bon Secours Health System,
St. John's Hosp.
7.50%, 9/1/15 (Prerefunded
7/1/00!) 1,800 1,998
Bon Secours Health System,
St. Mary's Hosp.
7.50%, 9/1/07 (Prerefunded
8/1/00!) 1,580 1,743
Peninsula Ports Auth., Shell
Oil, VRDN (Currently 3.50%) 3,500 3,500
Richmond, GO, BAN,
VRDN (Currently 3.30%) 1,000 1,000
Roanoke IDA, Roanoke Memorial
Hosp., Carilion Health System
VRDN (Currently 3.25%) 5,000 5,000
Virginia HDA
6.25%, 7/1/11 5,000 5,156
6.75%, 7/1/14 7,435 7,854
6.80%, 7/1/17 8,900 9,365
6.90%, 7/1/13 11,100 11,513
Virginia Transportation
Board, Route 28 Project,
6.50%, 4/1/18 3,000 3,209
Winchester IDA
Winchester Medical Center
Embedded Interest Rate Swap
(Currently 5.33%), 1/1/05
(AMBAC Insured) 1,500 1,489
Winchester IDA
Winchester Medical Center
Embedded Interest Rate
Swap(Currently 5.43%),
1/1/06
(AMBAC Insured) $ 1,500 $ 1,494
Embedded Interest Rate Swap
(Currently 5.53%), 1/1/07
(AMBAC Insured) 1,600 1,599
Total Virginia (Cost $80,359) 82,978
WASHINGTON 4.6%
Port of Seattle, 7.40%,
12/1/09 1,000 1,121
Tacoma
Electric
Residual Interest Bond / Inverse Floater
(Currently 9.195%), 1/2/15
(AMBAC Insured)
(Prerefunded 1/1/01!) 5,000 5,919
6.25%, 1/1/15
(FGIC Insured) 7,550 7,974
Washington, GO, 5.70%, 10/1/15 14,000 14,471
Washington HFA, Fred
Hutchinson Cancer Research
Center
VRDN (Currently 3.45%) 400 400
Washington Public Power
Supply System
7.25%, 7/1/09 3,000 3,474
7.25%, 7/1/15
(Prerefunded 1/1/00!) 2,200 2,414
7.50%, 7/1/15
(Prerefunded 7/1/99!) 7,110 7,774
6.25%, 7/1/12
(FSA Insured) 5,000 5,267
5.60%, 7/1/15
(MBIA Insured) 6,500 6,411
6.25%, 7/1/17
(MBIA Insured) 6,000 6,210
Total Washington (Cost $56,110) 61,435
WEST VIRGINIA 0.9%
Kanawha County Building Commission
Charleston Area Medical Center
7.50%, 11/1/08
(Prerefunded 11/1/99!) 2,250 2,480
Marshall County, PCR,
Mountaineer Carbon Company
VRDN (Currently 3.45%) 1,100 1,100
West Virginia Hosp. Fin. Auth.,
Charleston Area Medical Center
5.75%, 9/1/13
(MBIA Insured) $ 4,500 $ 4,589
West Virginia State Parkways,
Economic Dev. and Tourism Auth.
Residual Interest Bond / Inverse Floater
(Currently 7.849%), 5/16/19
(FGIC Insured) 3,600 3,546
Total West Virginia (Cost $11,304) 11,715
WISCONSIN 0.6%
Wisconsin HEFA, United Health
Group
5.50%, 12/15/16
(MBIA Insured) 6,540 6,333
Wisconsin Public Power Agency
7.00%, 7/1/02
(AMBAC Insured) 1,500 1,634
Total Wisconsin (Cost $7,734) 7,967
Total Investments in Securities
99.8% of Net Assets
(Cost $1,251,516) $ 1,333,764
Other Assets Less Liabilities 2,862
NET ASSETS $ 1,336,626
____________
Net Assets Consist of:
Accumulated net investment
income - net of distributions $ 660
Accumulated net realized gain/
loss - net of distributions (8,933)
Net unrealized gain (loss) 82,248
Paid-in-capital applicable to
139,418,543 shares of $1.00 par
value capital stock outstanding;
500,000,000 shares authorized 1,262,651
NET ASSETS $ 1,336,626
____________
NET ASSET VALUE PER SHARE $ 9.59
____________
** When-issued security
! Used in determining portfolio maturity
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
HFFA Health Facility Financing 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
RAN Revenue Anticipation Note
STEP Stepped Coupon Bond
VRDN Variable Rate Demand Note
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Tax-Free Income Fund
Statement of Operations
In thousands
Year
Ended
2/28/97
Investment Income
Interest income $ 80,130
Expenses
Investment management 6,426
Shareholder servicing 782
Custody and accounting 243
Registration 39
Prospectus and shareholder reports 30
Directors 14
Legal and audit 14
Miscellaneous 37
Total expenses 7,585
Net investment income 72,545
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities (2,051)
Futures (1,002)
Net realized gain (loss) (3,053)
Change in net unrealized gain or loss
Securities (7,319)
Futures 258
Change in net unrealized gain
or loss (7,061)
Net realized and unrealized gain
(loss) (10,114)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 62,431
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Tax-Free Income Fund
Statement of Changes in Net Assets
In thousands
Year
Ended
2/28/97 2/29/96
Increase (Decrease)
in Net Assets
Operations
Net investment income $ 72,545 $ 74,269
Net realized gain (loss) (3,053) 19,515
Change in net unrealized
gain or loss (7,061) 37,333
Increase (decrease) in
net assets from operations 62,431 131,117
Distributions to shareholders
Net investment income (72,541) (74,269)
Capital share transactions *
Shares sold 133,711 176,155
Distributions reinvested 48,012 49,694
Shares redeemed (210,494) (235,865)
Increase (decrease) in
net assets from capital
share transactions (28,771) (10,016)
Net Assets
Increase (decrease) during
period (38,881) 46,832
Beginning of period 1,375,507 1,328,675
End of period $ 1,336,626 $ 1,375,507
_______________________
*Share information
Shares sold 14,128 18,568
Distributions reinvested 5,064 5,233
Shares redeemed (22,237) (24,917)
Increase (decrease) in
shares outstanding (3,045) (1,116)
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Tax-Free Income Fund
February 28, 1997
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Tax-Free Income Fund, Inc. (the fund), is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company and
commenced operations on October 26, 1976.
Valuation Debt securities are generally traded in the
over-the-counter market. Investments in securities 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.
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.
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.
Other Income and expenses are recorded on the accrual basis.
Investment transactions are accounted for on the trade date.
Realized gains and losses are reported on the identified cost
basis. Distributions to shareholders are recorded by the fund on
the ex-dividend date. Income and capital gain distributions are
determined in accordance with federal income tax regulations and
may differ from those determined in accordance with generally
accepted accounting principles.
Note 2 - Investment Transactions
Purchases and sales of portfolio securities, other than
short-term securities, aggregated $524,777,000 and $519,525,000,
respectively, for the year ended February 28, 1997.
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
$7,665,000, of which $4,521,000 expires in 2003, and $3,144,000
in 2005. 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, the following reclassifications were made during
the year ended February 28, 1997. The results of operations and
net assets were not affected by the reclassifications.
Undistributed net investment income $ 15,000
Undistributed net realized gain (75,000)
Paid-in-capital 60,000
At February 28, 1997, the aggregate cost of investments for
federal income tax and financial reporting purposes was
$1,251,516,000, and net unrealized gain aggregated $82,248,000,
of which $82,889,000 related to appreciated investments and
$641,000 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 $491,000 was payable at
February 28, 1997. 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 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
0.305% for assets in excess of $50 billion. At February 28,
1997, and for the year then ended, the effective annual group
fee rate was 0.33%. The fund pays a pro-rata share of the group
fee based on the ratio of its net assets to those of the group.
T. Rowe Price Tax-Free Income Fund
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 $696,000 for the year ended February 28, 1997, of
which $69,000 was payable at period-end.
During fiscal year 1996, Coopers & Lybrand L.L.P. succeeded
Price Waterhouse LLP as independent accountants for the Tax-Free
Income Fund, a decision that was approved by the fund's Board of
Directors. During the two fiscal years preceding the change, the
fund received unqualified opinions and had no disagreements with
Price Waterhouse LLP or reportable events that caused the
change.
T. Rowe Price Tax-Free Income Fund
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 28, 1997,
and the related statement of operations, statement of changes in
net assets and financial highlights for each of the two years in
the period 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 audits. The
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 audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
investments owned as of February 28, 1997, by correspondence
with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of T. Rowe Price Tax-Free
Income Fund, Inc. as of February 28, 1997, the results of its
operations, the changes in its net assets, and financial
highlights for each of the respective periods stated in the
first paragraph, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 19, 1997
Investment Services And Information
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your
distributions.
Automated 24-Hour Services Including Tele*Access(registered
trademark) and T. Rowe Price OnLine.
Discount Brokerage*
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
Investment Information
Combined Statement Overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies
and results.
T. Rowe Price Report Quarterly investment newsletter discussing
markets and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund
results.
Insights Educational reports on investment strategies and
financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit,
Personal Strategy Planner, Retirees Financial Guide, and
Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member
NASD/SIPC.
T. Rowe Price Mutual Funds
Stock Funds
Domestic
Balanced
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
OTC**
Science & Technology
Small-Cap Value*
Spectrum Growth
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
Bond Funds
Domestic Taxable
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-free
California Tax-Free Bond
Florida Insured
Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term
Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured
Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term
Tax-Free Bond
Virginia Tax-Free Bond
International/Global
Global Government Bond
Emerging Markets Bond
International Bond
Money Market Funds
Taxable
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
California Tax-Free Money
New York Tax-Free Money
Summit Municipal
Money Market
Tax-Exempt Money
Blended Asset Funds
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
T. Rowe Price No-Load
Variable Annuity
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
* Closed to new investors.
** Effective May 1, 1997, the fund's name will change to
Small-Cap Stock.
Please call for a prospectus. Read it carefully before you
invest or send money.
The T. Rowe Price No-Load Variable Annuity [V6021] is issued by
Security Benefit Life Insurance Company. In New York, it
[FSB201(11-96)] is issued by First Security Benefit Life
Insurance Company of New York, White Plains, NY.
T. Rowe Price refers to the underlying portfolios' investment
managers and the distributors, T. Rowe Price Investment
Services, Inc., T. Rowe Price Insurance Agency, Inc., and T.
Rowe Price Insurance Agency of Texas, Inc. The Security Benefit
Group of Companies and the T. Rowe Price companies are not
affiliated. The variable annuity may not be available in all
states. The contract has limitations. Call a representative for
costs and complete details of the coverage.
T. Rowe Price Discount Brokerage
Discount Brokerage
A Division of T. Rowe Price Investment Services, Inc., Member
NASD/SIPC
This low-cost service gives you the opportunity to easily
consolidate all your investments with one company. Through T.
Rowe Price Discount Brokerage, you can buy and sell individual
securities - stocks, bonds, options, and others - at
considerable commission savings. We also provide a wide range of
services, including:
Automated Telephone and Computer Services You can enter trades,
access quotes, and review account information 24 hours a day,
seven days a week. Any trades executed through these programs
save you an additional 10% on commissions.*
Investor Information A variety of informative reports, such as
our Brokerage Insights series, S&P Market Month newsletter, and
optional S&P Stock Reports, can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service Virtually all stocks held in
customer accounts are eligible for this service, free of charge.
* Discount applies to our current commission schedule; subject
to our $35 minimum commission.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://www.troweprice.com
T. Rowe Price Associates
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 Income Fund(registered trademark).
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor.
RPRTTFI 2/28/97
THE SHAREHOLDER LETTER AND REPORT FOR THE COMBINED TAX-FREE
FUNDS IS ATTACHED HERE BY ACCESSING THE FOLLOWING:
Annual Report
Tax-Free
Funds
February 28, 1997
T. Rowe Price
Report Highlights
o Interest rates ended the fiscal year slightly higher than a year ago,
resulting in moderate returns for municipal bond investors.
o Municipal bonds outperformed Treasuries during most of the year.
o All five funds generated greater returns than their peer group averages
during the year ended February 28.
o Your funds relied to a great extent on credit research and sector
selection to enhance returns. Tax-exempt high-yield securities were
particularly good performers.
o With the economy showing ongoing strength and the Federal Reserve
indicating a bias toward tighter monetary policy, our outlook is
somewhat cautious for the coming months.
Fellow Shareholders
The municipal bond market and your funds generated moderate returns during
the fiscal year ended February 28, 1997. Interest rates fluctuated during the
year and ended slightly higher than where they started at the end of last
February. The U.S. economy was characterized by modest wage inflation with
low unemployment, prompting the Federal Reserve to leave monetary policy
unchanged since January 1996.
MARKET ENVIRONMENT
Much of the movement in interest rates reflected the market's anticipation
of action or inaction by the Federal Reserve. The fiscal year began with
interest rates rising due to signs of both stronger growth and the
realization that balanced budget legislation would not be passed in 1996. As
market expectations for a tightening in monetary policy grew throughout the
first half, rates continued to increase. The long-term Treasury bond yield
remained in a trading range between 6.75% and 7.20% during the third quarter.
Intermediate and long-term rates then reversed course and fell through
November as it became evident that the economy was slowing in the third
quarter and the Federal Reserve was not going to raise rates. Another uptick
in rates took place late in 1996 as investors once again perceived strength
in the economy and anticipated possible tightening by the Federal Reserve.
Chart 1 - Municipal Bond and Yield Notes line chart
In the municipal market, rates came full circle over the year, rising about
45 basis points (100 basis points equal one percent) during the first six
months before settling slightly above year-ago levels. Long-term high-grade
general obligation bonds yielded 5.50% on February 28, 1997, versus 5.75% on
August 31, 1996, and 5.45% a year ago. Five-year high-grade bonds were 20
basis points higher in yield than in February 1996. One-year note rates
traded within a 70-basis-point range during the year, ending at 3.70%
compared with 3.25% a year ago.
Municipals provided higher returns than long-term Treasuries throughout most
of the fiscal year, as concerns regarding tax reform and flat tax legislation
diminished. As a result, long-term municipal yields were 81% of the yield on
comparable Treasuries on February 28, a level that benefits investors in
brackets above 19%, whereas a year ago with the ratio at 87%, investors in
brackets upwards of 13% benefited from municipals.
Lower-quality bonds performed well as the spread between their yields and
those of higher-rated bonds narrowed, resulting in good price appreciation.
The narrowing yield spread between different quality bonds reflected a solid
economy with no immediate concern about recession and also the growing number
of insured bonds in the market, which shrunk the supply of higher-yielding
bonds.
New issuance in both the long- and short-term markets increased in 1996 for
the first time since 1993, reflecting healthier state and local economies,
a backlog of borrowing needs, and less resistance from the voters to new
bond-financed projects. The increased supply was well received by investors
after two years of declining issuance.
TAX-EXEMPT MONEY FUND
Our longer maturity strategy resulted in attractive returns, helping your
fund outperform its peer group during both the 6- and 12-month periods ended
February 28, 1997.
Chart 2- Performance Comparison
Periods Ended 2/28/976 Months 12 Months
____________________________________________________________
Tax-Exempt Money Fund1.51% 3.05%
Lipper Tax-Exempt Money
Market Funds Average1.45 2.91
Despite last year's stable monetary policy, the yields of 6- and 12-month
municipal notes managed to vacillate in a range of 70 basis points. At the
end of the fiscal year, yields of 1- to 30-day maturities were little changed
from a year ago, but yields on 60-day to 1-year maturities were 20 to 50
basis points higher.
Your fund ended the fiscal year with a weighted average maturity of 58 days,
shorter than the 65 days of a year earlier and 66 days at the end of August.
By comparison, the weighted average maturity for our peer group at the end
of February was only 46 days. Lending support to our modestly longer maturity
posture was the robust demand generated by cash inflows to tax-exempt money
funds, which expanded to a record $147 billion. An additional $12 billion in
new cash inflows more than offset a $5 billion increase in the supply of new
issues.
We emphasized longer maturities throughout the year, since we felt reasonably
confident that the Federal Reserve would wait for more concrete evidence of
rising inflation before raising the federal funds rate. We took advantage of
the upwardly sloping yield curve by concentrating more on 6- and 12-month
municipal notes, which provided an average of 40 basis points more yield than
shorter maturities. We also reduced the percentage of variable rate
securities in the portfolio. We will carefully consider recent remarks by
Chairman Greenspan about a possible preemptive move against inflation (see
the Outlook section) as we set our maturity strategy in coming months.
TAX-FREE SHORT-INTERMEDIATE FUND
Duration management and credit research helped your fund outperform the
average for similar funds during both the 6- and 12- month periods ended
February 28.
Chart 3- Performance Comparison
Periods Ended 2/28/97 6 Months 12 Months
_____________________________________________________
Tax-Free Short-
Intermediate Fund 3.13% 4.02%
Lipper Short-Intermediate
Debt Funds Average 3.07 3.72
The threat of higher short-term interest rates early in the year prompted us
to keep duration (a measure of a fund's sensitivity to changes in interest
rates) around 2.6 years, near the short end of our usual range. However, as
we moved into the third quarter, signs of slower growth began to emerge,
causing yields on five-year maturities to fall from 4.65% in early September
to 4.15% in early December. We extended the fund's duration to about 3.0
years, gaining some but not all of the price appreciation in the rally.
Recently, we reduced duration to 2.8 years because of the decreasing
likelihood of further increases in bond prices.
While our timing on duration was modestly successful, we were able to enhance
performance with credit research and sector selection. The prolonged strength
of the economy improved the financial condition of many municipal issuers.
Last year, Standard & Poor's upgraded credit ratings on more than three times
as many issues as it downgraded. As a result, lower-rated securities
outperformed higher-rated AAA issues, narrowing the yield differential
between them. We had positioned the fund to take advantage of this phenomenon
in both 1995 and 1996 by increasing fund exposure to lower-rated states such
as Massachusetts, Louisiana, New York, and Pennsylvania. We also purchased
financially sound hospital revenue bonds, which we think will benefit from
demographic changes.
Two sectors we continued to underweight are municipally owned electric
utilities and housing bonds. In many cases, municipal utilities sell
high-cost nuclear power, and deregulation of the industry should allow
low-cost providers to compete more effectively. As a result, many local
utilities were downgraded last year by Moody's and Standard & Poor's.
We avoided short-term housing bonds primarily because of their structure, not
because of creditworthiness. Housing bonds are issued at par, while we prefer
higher-yielding bonds at premium prices. If interest rates should rise, the
prices of short-term par bonds tend to fall faster than bonds trading at a
premium with the same duration.
TAX-FREE INSURED INTERMEDIATE BOND FUND
A combination of higher yield, credit management, and a lower fund expense
ratio enabled your fund to match the average return of similar funds over the
six-month period and slightly surpass it over 12 months.
Chart 4- Performance Comparison
Periods Ended 2/28/97 6 Months 12 Months
_____________________________________________________
Tax-Free Insured
Intermediate Bond Fund 4.00% 4.19%
Lipper Intermediate
Municipal Debt Funds Average 3.98 4.14
Interest rates over the past 12 months have been confined to a relatively
tighter trading range than in recent years. Yields on 10-year AAA-rated
securities ranged between 4.65% and 5.30% since early March, a 65-basis-point
range compared with 100 basis points a year ago and 155 two years earlier.
The recent tighter range limited returns that could be reaped from duration
management, which generated mixed results over the 6- and 12-month periods.
In the first half, our short posture contributed positively to performance
as interest rates moved higher. We gave back some of these gains in the
second half, as rates turned lower in September while we remained slightly
cautious.
Lower volatility rendered credit research and sector selection increasingly
important in our effort to outperform our peer group. We focused on
undervalued securities within the insured market. Even though two different
issues may carry insurance from the same company, the marketplace sometimes
values them differently. For instance, Denver International Airport is rated
BBB by Moody's and Standard & Poor's. While insurance earns the bonds a AAA
rating from both agencies, the marketplace usually values bonds lower,
according to their underlying rating. Early in the year we increased the
fund's exposure to the Denver Airport bonds because we believed they
represented good value versus other insured bonds.
TAX-FREE INCOME FUND
Overall, it was a year of modest returns for long-term bonds. In this
environment, your fund matched the average performance of its peer group
during the past six months and exceeded it over the year.
Chart 5- Performance Comparison
Periods Ended 2/28/97 6 Months 12 Months
_____________________________________________________
Tax-Free Income Fund 4.80% 4.81%
Lipper General Municipal
Debt Funds Average 4.79 4.51
During much of the year, we kept the fund's duration within a narrow range.
We felt that interest rates were likely to fluctuate more modestly than
during the two prior years, providing few opportunities for aggressive shifts
in strategy. As a result, the fund's duration remained close to 7.5 years for
most of 1996. We increased it slightly in the third quarter but then returned
to a more conservative position near the end of the fiscal year.
With municipal yields flirting with their lows of the past two decades, we
felt there was little chance of a strong rise in bond prices and further rate
declines. Therefore, we focused more on enhancing the portfolio's yield where
we could. This strategy included holding on to older, higher-yielding bonds
and identifying suitable high-yield securities, which performed well in 1996.
Going forward, the opportunity for further price appreciation from
lower-quality bonds seems limited, leading us to be more selective in
considering them.
Bonds insured by third parties began to look more attractive as the amount
of insured new issues rose during the year. Twelve months ago, the yields of
insured municipal bonds were only 10 to 15 basis points higher than those of
high-quality general obligation bonds; by year-end this spread was closer to
25 basis points, making the yields on insured bonds relatively appealing.
We will continue to focus on income enhancement, maintain duration closer to
the low end of our neutral range, and wait for opportunities to extend
maturities. The municipal market's stronger performance relative to taxable
securities during the first two months of the year, combined with a growing
new issues calendar for March, suggests that we will be able to invest at
higher yield levels in coming months.
TAX-FREE HIGH YIELD FUND
The Tax-Free High Yield Fund outperformed its peer group over both the fiscal
year and the most recent six-month period. It has exceeded the average
performance of similar funds for the past nine fiscal years.
Chart 6- Performance Comparison
Periods Ended 2/28/97 6 Months 12 Months
_____________________________________________________
Tax-Free High Yield Fund 5.37% 6.22%
Lipper High Yield Municipal
Debt Funds Average 4.98 5.27
Opportunistic credit selection dominated fund performance last year,
enhancing returns in three important ways. First, several individual holdings
boosted fund returns by outperforming the market because of improved credit
standing and refinancings. Key issues in this category included
investor-owned utility and hospital revenue bonds. Second, the selective sale
of securities and avoidance of certain sectors, such as specialized solid
waste and paper recycling bonds, meant we were able to avoid significant
credit problems. Finally, the fund was a beneficiary of yet another year of
narrowing yield spreads, with lower-quality bonds significantly outperforming
many higher-quality issues.
Your fund's concentration in below-investment-grade holdings fell steadily
last year, from 28% to 23% of net assets. This move reflected a combination
of factors, including ratings upgrades, refinancings, and a continuing
selective approach when considering new issues. However, positions in the BBB
category rose slightly to 34% of net assets. Absent a recession or a large
market sell-off, we expect yield differences between securities of different
credit ratings to remain tight. Another factor contributing to the narrow
yield spreads was the increasing market share of bond insurance, shrinking
the supply of uninsured lower-rated bonds. As a result, we are being
selective in our purchases of lower-quality bonds and do not expect a
material change in your fund's average credit quality, which was BBB+ at the
end of February.
Chart 7- Quality Diversification pie
We managed duration and the weighted average maturity within a narrow range,
with duration remaining between 7.0 and 7.4 years. Your fund was slightly
defensive versus its peer group early in the year, which was a plus in a down
market. We lengthened maturities modestly during much of the second half,
maintaining a weighted average maturity of 19 years and a cash level of about
3%. At the end of February, your fund could be characterized as being fairly
neutral versus its peer group.
OUTLOOK
The economy is in its sixth year of expansion, and while it has exhibited few
signs of inflationary pressure, the Federal Reserve remains on alert. Fed
chairman Alan Greenspan stated in recent testimony to the Senate Banking
Committee that the Fed cannot rule out a preemptive tightening in monetary
policy before signs of actual higher inflation become evident.
We expect economic growth and inflation to remain moderate throughout the
rest of 1997, with no evidence of recession visible to date. Consumer and
business sentiment remain high, inventories are not excessive, and
availability of credit is ample. The Federal Reserve, as indicated, could
push the fed funds rate higher to keep prices in check, but we believe any
increase will be small since short-term rates are well above the recent trend
rate of inflation. This was not the case in 1994, when the Fed was forced to
move aggressively.
The supply of municipal bonds should increase over the near term, possibly
exerting some downward pressure on bond prices if demand does not increase
commensurately. Given our expectation that interest rates will move in a
relatively narrow channel, we would regard higher rates as an opportunity to
provide additional yield in the funds. Overall, however, we do not expect to
see a significant move in bond prices in the months ahead. As in the past
year, the returns from municipal securities should come primarily from
income.
Respectfully submitted,
Mary J. Miller
Director
Municipal Bond Department
March 21, 1997
T. Rowe Price Tax-Free Funds
Portfolio Highlights
KEY STATISTICS
8/31/96 2/28/97
Tax-Exempt Money Fund
_____________________________________________________
Price Per Share $ 1.00 $ 1.00
Dividends Per Share!
For 6 months 0.015 0.015
For 12 months 0.031 0.030
Dividend Yield
(7-Day Compound) * 3.06% 3.02%
Weighted Average
Maturity (days) 66 58
Weighted Average Quality ** First Tier First Tier
Tax-Free Short-Intermediate Fund
_____________________________________________________
Price Per Share $ 5.30 $ 5.35
Dividends Per Share!
For 6 months 0.12 0.11
For 12 months 0.23 0.23
Dividend Yield *
For 6 months 4.32% 4.37%
For 12 months 4.40 4.39
Weighted Average Maturity
(years) 3.2 3.6
Weighted Average Effective
Duration (years) 2.6 2.8
Weighted Average Quality *** AA AA
(continued on next page)
T. Rowe Price Tax-Free Funds
Portfolio Highlights
Key statistics
8/31/96 2/28/97
Tax-Free Insured Intermediate Bond Fund
_____________________________________________________
Price Per Share $ 10.62$ 10.80
Dividends Per Share!
For 6 months 0.24 0.24
For 12 months 0.48 0.48
Dividend Yield *
For 6 months 4.44% 4.58%
For 12 months 4.51 4.56
Weighted Average
Maturity (years) 7.7 7.4
Weighted Average Effective
Duration (years) 5.6 5.3
Weighted Average Quality *** AA AA
Tax-Free Income Fund
Price Per Share $ 9.40 $ 9.59
Dividends Per Share!
For 6 months 0.26 0.26
For 12 months 0.52 0.52
Dividend Yield *
For 6 months 5.44% 5.48%
For 12 months 5.52 5.54
Weighted Average
Maturity (years) 17.0 17.0
Weighted Average Effective
Duration (years) 7.5 7.7
Weighted Average Quality *** AA- AA-
Key statistics
8/31/962/28/97
Tax-Free High Yield Fund
_____________________________________________________
Price Per Share $ 11.84 $ 12.12
Dividends Per Share!
For 6 months 0.35 0.35
For 12 months 0.71 0.70
Dividend Yield *
For 6 months 5.92% 5.94%
For 12 months 6.05 6.02
Weighted Average
Maturity (years) 19.4 19.1
Weighted Average Effective
Duration (years) 7.1 7.2
Weighted Average Quality *** BBB+ BBB+
! Taxability of dividends: 100% of the dividends paid for the 12 months
ended 2/28/97 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.
** All securities purchased in the money fund are rated in the two highest
categories (tiers) as established by national rating agencies or, if
unrated, are deemed of comparable quality by T. Rowe Price.
*** Based on T. Rowe Price research.
T. Rowe Price Tax-Free Funds
Performance Comparison
These charts show the value of a hypothetical $10,000 investment in each fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Chart 8 - Tax Exempt Money Fund line chart
Chart 9 - Tax-Free Short-Intermediate Fund line chart
Chart 10 - Tax-Free Insured Intermediate Bond Fund line chart
Chart 11 - Tax-Free Income Fund line chart
Chart 12 - Tax-Free High Yield Fund line chart
Average Annual Compound Total Return
This table shows how each fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
Periods Ended Since Incep-
2/28/97 1 5 10 Incep- tion
Year Years Years tion Date
_________________________________________________________
Tax-Exempt Money 3.05% 2.70% 3.77% - 4/8/81
Tax-Free Short-
Intermediate 4.02 4.94 5.13 - 12/23/83
Tax-Free Insured
Intermediate Bond 4.19 - - 6.76% 11/30/92
Tax-Free Income 4.81 7.38 6.40 - 10/26/76
Tax-Free High Yield 6.22 7.82 7.60 - 3/1/85
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://www.troweprice.com
T. Rowe Price Associates
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.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor.
RPRTTFF 2/28/97
Chart 1- yield line chart showing 30-year AAA GO, 5-year AAA GO, and 1-year
MIG1 note from 2/29/96 through 2/28/97
Chart 7 - quality diversification pie chart showing AAA 4%, AA 26%, A 13%,
BBB 34%, and BB and Below 23% on 2/28/97
Chart 8 - Tax Exempt Money Fund line chart showing the cumulative growth of
$10,000 invested in the TEM Fund over the past 10 years (or from inception
for funds lacking 10-year histories) compared with $10,000 invested in a
broad-based index or average over the same period.
Chart 9 - Tax-Free Short-Intermediate Fund line chart showing the cumulative
growth of $10,000 invested in the TEM Fund over the past 10 years (or from
inception for funds lacking 10-year histories) compared with $10,000 invested
in a broad-based index or average over the same period.
Chart 10 - Tax-Free Insured Intermediate Bond Fund line chart showing the
cumulative growth of $10,000 invested in the TEM Fund over the past 10 years
(or from inception for funds lacking 10-year histories) compared with $10,000
invested in a broad-based index or average over the same period.
Chart 11 - Tax-Free Income Fund line chart showing the cumulative growth of
$10,000 invested in the TEM Fund over the past 10 years (or from inception
for funds lacking 10-year histories) compared with $10,000 invested in a
broad-based index or average over the same period.
Chart 12 - Tax-Free High Yield Fund line chart showing the cumulative growth
of $10,000 invested in the TEM Fund over the past 10 years (or from inception
for funds lacking 10-year histories) compared with $10,000 invested in a
broad-based index or average over the same period.
