PRICE T ROWE TAX FREE HIGH YIELD FUND INC
N-30D, 1994-10-04
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<PAGE>
 
T. Rowe Price
TAX-FREE HIGH YIELD FUND

August 31, 1994

Sector Diversification

<TABLE> 
<CAPTION> 
                                              Percent of                                                   Percent of
                                              Net Assets                                                   Net Assets
                                             ------------                                                 ------------
<S>                                          <C>             <C>                                           <C>      
Hospital Revenue                                  28%        Lease Revenue                                      4%  
Housing Finance Revenue                           13         General Obligation-State                           2   
Nuclear Revenue                                    9         Dedicated Tax Revenue                              2   
Life Care/Nursing Home Revenue                     9         Water & Sewer Revenue                              2   
Industrial & Pollution                                       Electric Revenue                                   2   
Control Revenue                                    6         Air &  Sea Transportation                              
Solid Waste Revenue                                6         Revenue                                            1   
Pre-Refunded Bonds                                 5         Miscellaneous Revenue                              1   
Ground Transportation Revenue                      4         Educational Revenue                                1    
General Obligation-Local                           4         Other Assets Less Liabilities                      1 
</TABLE> 


Statement of Net Assets / August 31, 1994 (Unaudited)

<TABLE> 
<CAPTION> 
                                                                                                   Amounts in Thousands
                                                                                               ----------------------------
                                                                                               Face Amount          Value
                                                                                               -----------        --------- 
<S>                                                                                            <C>                <C> 
ALABAMA -- 2.6%
Baldwin County Eastern Shore Hosp. Auth., Thomas Hosp., 8.50%, 4/1/16.......                    $   4,000         $   4,405
Marshall County Health Care Auth., Guntersville Medical Center,
        7.00%, 10/1/13......................................................                        2,100             2,113
        10.25%, 10/1/13.....................................................                        6,750             8,134
Mobile, Capital Improvement Warrants, GO, (MBIA Insured),
        Zero Coupon, 2/15/18................................................                        1,030               222
        Zero Coupon, 8/15/18................................................                        4,550               946
        Zero Coupon, 2/15/19................................................                          905               181
        Zero Coupon, 8/15/19................................................                        4,675               904
        Zero Coupon, 2/15/20................................................                          770               144
        Zero Coupon, 8/15/20................................................                        4,810               867
Mobile Airport Auth., 8.875%, 10/1/15 *.....................................                        2,000             2,215
Shelby County, GO, (MBIA Insured), 7.40%, 8/1/07............................                        2,000             2,129
        7.70%, 8/1/17.......................................................                        1,000             1,066
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE> 
<PAGE>
 
T. Rowe Price Tax-Free High Yield Fund
Statement of Net Assets

<TABLE> 
<CAPTION> 
                                                                                                   Amounts in Thousands
                                                                                               -----------------------------
                                                                                               Face Amount          Value
                                                                                               -----------         ---------
<S>                                                                                            <C>                <C> 
ARIZONA -- 0.7%
Scottsdale IDA, Westminster Village, 10.00%, 6/1/07.........................                    $   1,285          $  1,427
            10.00%, 6/1/17..................................................                          750               833
Tempe IDA, Friendship Village of Tempe, 6.75%, 12/1/13......................                        4,000             3,870
- ----------------------------------------------------------------------------------------------------------------------------

ARKANSAS -- 0.6%
Independence County PCR, Mississippi Power & Light,
            Floating Rate (Currently 7.625%), 7/1/12........................                        3,000             3,157
Union County Hosp., Union Medical Center, 8.00%, 10/1/00....................                        2,285             2,359
- ----------------------------------------------------------------------------------------------------------------------------

CALIFORNIA -- 5.2%
California HFFA, St. Francis Medical Center, 5.75%, 10/1/23.................                        6,515             5,951
California Public Works Board, Univ. of California, 5.50%, 6/1/21...........                        5,000             4,358
Fresno Joint Powers Fin. Auth., 6.55%, 9/2/12...............................                        1,500             1,469
Inglewood Redev. Agency, Century Redev., 6.125%, 7/1/23.....................                        3,440             3,136
Los Angeles County, Marina del Rey, COP, 6.50%, 7/1/08......................                        3,250             3,275
Oakland, COP, VRDN (Currently 3.40%)........................................                        1,000             1,000
San Joaquin Hills Transportation Corridor Agency, Toll Road,
            Zero Coupon, 1/1/03.............................................                        5,600             2,832
            Zero Coupon, 1/1/10.............................................                       13,100             3,549
            Zero Coupon, 1/1/25.............................................                       25,000             2,564
            Zero Coupon, 1/1/28.............................................                       15,000               885
            7.00%, 1/1/30...................................................                        5,000             5,007
            6.75%, 1/1/32...................................................                       10,000             9,682
Southern California Public Power Auth.,
            Southern Transmission Project, 5.75%, 7/1/21....................                        3,000             2,773
- ----------------------------------------------------------------------------------------------------------------------------

COLORADO -- 3.2%
Boulder County, Longmont United Hosp., 8.20%, 12/1/20
            (Pre-refunded 12/1/00+).........................................                        1,540             1,811
Boulder County IDR, Boulder Medical Center, 8.625%, 1/1/07 *................                          820               884
            8.75%, 1/1/12 *.................................................                        1,205             1,302
            8.875%, 1/1/17 *................................................                        1,190             1,288
Colorado Housing Fin. Auth., 9.60%, 8/1/01 *................................                          800               847
            8.65%, 8/1/03...................................................                        1,005             1,024
            9.00%, 8/1/03...................................................                          985             1,015
            9.40%, 8/1/03 *.................................................                          860               886
            8.70%, 11/1/04 *................................................                        1,630             1,656
Denver City & County, Sisters of Charity of Leavenworth
            Health Services, 5.00%, 12/1/23.................................                        4,000             3,263
Denver  City & County Airport, 8.00%, 11/15/17 *............................                        5,640             5,610
            7.50%, 11/15/23 *...............................................                        4,675             4,514
El Paso County, School Dist. No. 20, GO, TAN, 6.35%, 12/15/06...............                        3,000             3,090
Westminster, Special Assessment Bonds, 9.25%, 12/1/03.......................                        1,475             1,488
- ----------------------------------------------------------------------------------------------------------------------------

DELAWARE -- 2.0%
Delaware Economic Dev. Auth., Delmarva Power & Light,
            (FGIC Insured), 7.15%, 7/1/18...................................                        2,500              2,722
        Peninsula United Methodist Homes, 8.50%, 5/1/22.....................                        2,500              2,696
</TABLE> 

2
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                                   Amounts in Thousands
                                                                                               -----------------------------
                                                                                               Face Amount          Value
                                                                                               -----------         ---------
<S>                                                                                            <C>                <C> 
DELAWARE (cont'd)
Delaware HFA, Beebe Medical Center, 6.75%, 6/1/14...........................                    $   3,975         $   3,936
            8.50%, 6/1/16 (Pre-refunded 6/1/00+)............................                        5,600             6,649
Wilmington Osteopathic Hosp. Assoc. of Delaware, Riverside Hosp.,
            10.20%, 10/1/18 (Pre-refunded 10/1/98+).........................                        2,000             2,427
- ----------------------------------------------------------------------------------------------------------------------------

DISTRICT OF COLUMBIA -- 0.2%
District of Columbia, America Geophysical, 5.875%, 9/1/23...................                        1,750             1,566
- ----------------------------------------------------------------------------------------------------------------------------

FLORIDA -- 3.8%
Brevard County Tourist Dev., Florida Marlins Spring Training Fac.,
            6.875%, 3/1/13..................................................                        1,520             1,543
Broward County Resource Recovery, Broward Waste Energy, (L.P. North),
            7.95%, 12/1/08..................................................                        4,970             5,450
        S E S Broward (L.P. South), 7.95%, 12/1/08..........................                        5,055             5,544
Charlotte County IDR, Beverly Enterprises, 10.00%, 6/1/11...................                        1,000             1,169
Collier County IDA, Beverly Enterprises, 10.75%, 3/1/03.....................                          905             1,063
Dade County Water & Sewer Systems, (FGIC Insured),
            VRDN (Currently 3.10%)..........................................                        4,300             4,300
Escambia County IDR, Beverly Enterprises, 9.80%, 6/1/11.....................                          485               557
Florida State, Board of Ed. (Public Ed. Capital Outlay), GO, 6.70%, 6/1/22..                        2,000             2,090
Hernando County IDR, Beverly Enterprises, 10.00%, 9/1/11....................                        1,000             1,165
Jacksonville IDR, Beverly Enterprises, 9.75%, 10/1/11.......................                        1,000             1,139
Leon County IDR, Beverly Enterprises, 9.80%, 6/1/11.........................                          485               558
Manatee County Housing Fin. Auth., Zero Coupon, 10/1/15.....................                       13,535             1,489
Orange County HFA, RHA/Princeton Hosp., 9.00%, 7/1/21.......................                        2,000             2,173
Orange County IDA, Beverly Enterprises, 9.25%, 8/1/10.......................                          475               531
Santa Rosa County HFA, Gulf Breeze Hosp., 8.60%, 10/1/02....................                        1,000             1,102
St. Johns County IDA, Vicar's Landing, 6.75%, 2/15/12.......................                        4,000             3,949
- ----------------------------------------------------------------------------------------------------------------------------

GEORGIA -- 2.8%
Fulco Hosp. Auth., Georgia Baptist Health Care System, 6.25%, 9/1/13........                        8,000             7,592
            6.375%, 9/1/22..................................................                        5,000             4,601
Municipal Electric Auth. of Georgia, (AMBAC Insured), 6.00%, 1/1/22.........                        6,000             5,850
Rockdale County Dev. Auth., Solid Waste Disposal, Visy Paper, Inc.,
            7.50%, 1/1/26 *.................................................                        7,000             6,949
- ----------------------------------------------------------------------------------------------------------------------------

IDAHO -- 1.7%
Gem County PCR, Boise Cascade, Floating Rate, 1/5/97 (Currently 5.115%).....                          500               500
Idaho, GO, TAN, 4.50%, 6/29/95..............................................                        6,000             6,020
Idaho Housing Agency, Single Family Mortgage, 6.75%, 7/1/23 *...............                        2,350             2,377
        7.80%, 1/1/23 *.....................................................                        2,480             2,570
Idaho Student Loan Marketing Assoc., 6.70%, 10/1/07 *.......................                        4,000             4,037
- ----------------------------------------------------------------------------------------------------------------------------

ILLINOIS -- 6.0%
Aurora, Dreyer Medical Clinic, 8.75%, 7/1/14................................                       4,485              5,060
Illinois Dev. Fin. Auth., Palos Community Hosp., VRDN (Currently 3.05%).....                       4,000              4,000
Illinois HFA, Community Hosp. of Ottawa, 6.85%, 8/15/24.....................                       1,475              1,440
        Covenant Retirement Community, 7.60%, 12/1/12.......................                       2,665              2,737
</TABLE> 

                                                                               3
<PAGE>
 
T. Rowe Price Tax-Free High Yield Fund
Statement of Net Assets

<TABLE> 
<CAPTION> 
                                                                                                   Amounts in Thousands
                                                                                               -----------------------------
                                                                                               Face Amount          Value
                                                                                               -----------         ---------
<S>                                                                                            <C>                <C> 
ILLINOIS (cont'd)
Illinois HFA (cont'd)
        Glen Oak Medical Center, 9.50%, 11/15/15............................                    $   2,300         $   2,662
            7.00%, 11/15/19.................................................                        2,500             2,488
        Hinsdale Health System, 9.00%, 11/15/15.............................                        4,930             5,600
        Holy Cross Hosp., 6.75%, 3/1/24.....................................                        4,000             3,910
        Memorial Hosp., 7.25%, 5/1/22.......................................                        9,500             9,643
        Morris Hosp., 6.125%, 12/1/23.......................................                        4,400             3,973
        Northwestern Memorial Hosp., 6.00%, 8/15/24.........................                        4,000             3,718
        Wabash General Hosp. Dist. (Wabash General Hosp.), 11.35%, 9/1/05...                        1,850             2,008
Metropolitan Pier & Exposition Auth., McCormick Place Expansion,
            (MBIA Insured), 6.00%, 6/15/27..................................                        4,250             4,062
Southwestern Dev. Auth., Anderson Hosp., 7.00%, 8/15/22.....................                        2,500             2,462
- ----------------------------------------------------------------------------------------------------------------------------

INDIANA -- 0.6%
Evansville Hosp. Auth., Daughters of Charity Health Systems
            (St. Mary's Medical Center), 10.125%, 11/1/15...................                        5,000             5,379
- ----------------------------------------------------------------------------------------------------------------------------

KENTUCKY -- 2.7%
Florence Housing Fac., Bluegrass RHF Housing, 9.50%, 7/1/17.................                        1,965             2,052
Jefferson County, Louisville Gas and Electric, 7.45%, 6/15/15...............                        4,250             4,612
Jefferson County HFA, Beverly Enterprises, 9.75%, 8/1/07....................                          900             1,032
Kenton County Airport, Delta Airlines, 7.50%, 2/1/12 *......................                        5,000             5,023
            7.50%, 2/1/20 *.................................................                        4,500             4,508
Kentucky Dev. Fin. Auth., Berea Hosp., 8.375%, 7/1/12.......................                        2,860             2,997
        St. Claire Medical Center, 7.125%, 9/1/21 (Pre-refunded 9/1/01+)....                        3,600             4,068
- ----------------------------------------------------------------------------------------------------------------------------

LOUISIANA -- 2.5%
Louisiana Offshore Terminal Auth., LOOP, 7.60%, 9/1/10......................                        8,500             9,260
Louisiana PFA, IDR, Beverly Enterprises, 8.25%, 9/1/08......................                        1,465             1,558
        St. James Place of Baton Rouge, 10.00%, 11/1/21.....................                        4,500             5,129
Parish of St. Charles, Louisiana Power & Light, 8.00%, 12/1/14..............                        4,500             4,890
Plaquemines Parish IDB, AMAX Inc., 7.25%, 10/1/09...........................                        1,280             1,280
- ----------------------------------------------------------------------------------------------------------------------------

MAINE -- 0.8%
Maine HHEFA, Waterville Osteopathic Hosp., 9.875%, 7/1/13
            (Pre-refunded 7/1/97+)..........................................                        4,370             5,055
Maine Turnpike Auth., (MBIA Insured), 6.00%, 7/1/18.........................                        2,510             2,460
- ----------------------------------------------------------------------------------------------------------------------------

MARYLAND -- 3.5%
Baltimore County, Stella Maris, 7.50%, 3/1/21...............................                        1,000             1,063
Berlin, Atlantic General Hosp., 8.375%, 6/1/22..............................                        1,980             2,112
Gaithersburg, First Mortgage Economic Dev. (Asbury Methodist Home), 
            7.85%, 1/1/20 (Pre-refunded 1/1/00+)............................                        2,000             2,294
Housing Opportunities Commission of Montgomery County,
            7.50%, 7/1/17...................................................                          700               723
Maryland Community Dev. Administration, 7.25%, 4/1/19.......................                        2,500             2,583
            6.80%, 4/1/24...................................................                        5,000             5,082
            Zero Coupon, 4/1/29 *...........................................                       25,695             1,761
Maryland Dept. of Transportation, VRDN (Currently 3.25%)....................                        1,700             1,700
</TABLE> 

4
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                                   Amounts in Thousands
                                                                                               -----------------------------
                                                                                               Face Amount          Value
                                                                                               -----------         ---------
<S>                                                                                            <C>                <C> 
MARYLAND (cont'd)
Maryland HHEFA, Doctor's Community Hosp., 5.50%, 7/1/24.....................                    $   3,200         $   2,560
        Union Hosp. of Cecil County, 6.70%, 7/1/22..........................                        2,725             2,684
Maryland Ind. Dev. Fin. Auth., Associated Catholic Charities, 9.00%, 1/1/10.                        1,725             1,915
        Economic Dev., American Association of Blood Banks, 7.25%, 8/1/13...                        2,700             2,706
            Georgetown Bakery Management Corp. Fac., 9.25%, 9/1/04 *........                        1,670             1,804
Maryland-National Capital Park & Planning Commission,
            Little Bennett Golf Fac., 8.25%, 10/1/11........................                        2,380             2,675
- ----------------------------------------------------------------------------------------------------------------------------

MASSACHUSETTS -- 2.8%
Commonwealth of Massachusetts, GO, 7.50%, 6/1/04............................                        2,750             3,206
Massachusetts Bay Transportation Auth., General Transportation System,
            7.00%, 3/1/19...................................................                        2,500             2,784
            7.00%, 3/1/21...................................................                        2,000             2,241
Massachusetts HEFA, New England Deaconess Hosp., 6.875%, 4/1/22.............                        2,620             2,615
        7.20%, 4/1/22.......................................................                        3,535             3,608
Massachusetts Housing Fin. Agency, Capital Asset Pool, (MBIA Insured), 
            6.375%, 4/1/21..................................................                        2,000             1,973
Massachusetts Ind. Fin. Agency, Nevins Home, 7.875%, 7/1/23.................                        5,515             5,498
        New England Memorial Hosp., 8.875%, 7/1/13 (Pre-refunded 7/1/98+)...                        2,795             3,212
- ----------------------------------------------------------------------------------------------------------------------------

MICHIGAN -- 4.5%
Economic Dev. Corp. of the Charter Township of Meridian, Burcham Hills
            Retirement Center III, 9.625%, 7/1/19...........................                        2,850             3,168
Economic Dev. Corp. of the County of Midland, Midland Cogeneration Project,
            9.50%, 7/23/09 *................................................                        6,000             6,653
Michigan HDA, 6.50%, 12/1/17................................................                        4,000             4,006
            7.75%, 12/1/19 *................................................                        1,175             1,227
Michigan Hosp. Fin. Auth., Bay Medical Center, 8.25%, 7/1/12................                        2,000             2,160
        Daughters of Charity Health Systems (St. Mary's Hosp.), 10.00%, 
        11/1/15.............................................................                        1,490             1,606
        Detroit Medical Center, 5.50%, 8/15/23..............................                        3,000             2,580
        Pontiac Osteopathic Hosp., 6.00%, 2/1/24............................                        8,500             7,342
        Saratoga Community Hosp., 8.75%, 6/1/10.............................                        2,800             3,012
        Sisters of Mercy Health Corp., 7.50%, 2/15/18.......................                        1,650             1,886
Michigan Strategic Fund, Genesse Power Company, 7.50%, 1/1/21 *.............                        2,000             1,959
Monroe County PCR, Detroit Edison, 10.125%, 9/1/05 *........................                          920             1,001
Waterford Township Economic Dev., Canterbury Health Care, Inc.,
            8.375%, 7/1/23..................................................                        4,000             4,165
- ----------------------------------------------------------------------------------------------------------------------------

MINNESOTA -- 0.3%
Minnesota Housing Fin. Agency, Single Family Mortgage, 6.70%, 1/1/18........                        2,000              2,061
            9.00%, 8/1/18...................................................                        1,000              1,062
- ----------------------------------------------------------------------------------------------------------------------------

MISSISSIPPI -- 2.7%
Adams County, Jefferson Davis Memorial Hosp., 8.00%, 10/1/16................                        3,805              4,096
Claiborne County PCR, Systems Energy Resources, 9.50%, 12/1/13..............                        2,000              2,277
            9.875%, 12/1/14.................................................                       11,000             12,729
Mississippi Home Corp., Single Family Mortgage,
            (FGIC Insured), 9.25%, 3/1/12...................................                          375                406
</TABLE> 

                                                                               5
<PAGE>
 
T. Rowe Price Tax-Free High Yield Fund
Statement of Net Assets

<TABLE> 
<CAPTION> 
                                                                                                   Amounts in Thousands
                                                                                               -----------------------------
                                                                                               Face Amount          Value
                                                                                               -----------         ---------
<S>                                                                                            <C>                <C> 
MISSISSIPPI (cont'd)
Mississippi Hosp. Equipment & Fac. Auth., Magnolia Hosp., 7.375%, 10/1/21...                    $   3,000         $   2,906
        Rush Memorial Foundation, 8.75%, 1/1/16.............................                        2,000             2,235
- ----------------------------------------------------------------------------------------------------------------------------

MISSOURI -- 1.8%
Hannibal IDA, Hannibal Medical Center, 9.50%, 3/1/22........................                        4,000             4,724
Joplin IDA, Tri-State Osteopathic Hosp. Assoc., 8.25%, 12/15/14.............                        2,500             2,712
Lees Summit IDA, John Knox Village, 7.125%, 8/15/12.........................                        1,500             1,555
Missouri HEFA, Bethesda Health Group, 7.50%, 8/15/12........................                        1,250             1,265
        Still Regional Medical Center, 7.70%, 2/1/13........................                        2,250             2,367
Ray County, Ray County Memorial Hosp., 9.625%, 11/15/13.....................                        3,200             3,552
- ----------------------------------------------------------------------------------------------------------------------------

MONTANA -- 1.7%
Montana Board of Housing, (FHA Insured), 7.85%, 10/1/04.....................                          890               902
            9.20%, 10/1/01 *................................................                          695               723
            8.50%, 10/1/02..................................................                          860               884
            8.525%, 10/1/02.................................................                          825               849
            8.95%, 10/1/02 *................................................                          860               896
            8.40%, 10/1/03 *................................................                          900               926
Montana Board of Investments, Yellowstone Energy
            Limited Partnership, 7.00%, 12/31/19 *..........................                       10,000             9,722
- ----------------------------------------------------------------------------------------------------------------------------

NEBRASKA -- 1.0%
Hosp. Auth. No. 1 of Douglas County, Immanuel Medical Center,
            (AMBAC Insured), 7.00%, 9/1/21..................................                        5,500             5,913
Nebraska Investment Fin. Auth., Single Family Mortgage, (GNMA Insured),
        Residual Interest Bond / Inverse Floater, 3/15/22 (Currently 
        11.774%) *..........................................................                          900               965
            9/10/30 (Currently 11.896%) *...................................                        1,700             1,847
- ----------------------------------------------------------------------------------------------------------------------------

NEVADA -- 0.3%
Nevada Housing Division, Sub Lien, 9.375%, 10/1/00 *........................                          660               686
            9.35%, 10/1/02 *................................................                          545               549
            9.65%, 10/1/02 *................................................                          755               798
        (FGIC Insured), 9.45%, 10/1/03 *....................................                          775               804
- ----------------------------------------------------------------------------------------------------------------------------

NEW HAMPSHIRE -- 0.8%
New Hampshire HHEFA, Catholic Medical Center, 8.25%, 7/1/13.................                        2,000             2,151
New Hampshire Housing Fin. Auth., 8.625%, 7/1/13 *..........................                        1,995             2,115
            6.95%, 1/1/26 *.................................................                        3,000             3,041
- ----------------------------------------------------------------------------------------------------------------------------

NEW JERSEY -- 3.2%
Atlantic City Utilities Auth., Solid Waste Systems, 7.125%, 3/1/16..........                        2,200             2,226
New Jersey Economic Dev. Auth., Holt Hauling & Warehouse System,
            10.25%, 9/15/14.................................................                          500               554
            9.75%, 12/15/16 *...............................................                        1,000             1,114
        Keswick Pines, 8.75%, 1/1/24........................................                        6,000             6,072
New Jersey HFFA, Raritan Bay Medical Center, 7.25%, 7/1/27..................                        6,500             6,356
Salem County Pollution Control Fin. Auth., (MBIA Insured), 6.25%, 6/1/31....                       12,500            12,498
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE> 

6
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                                   Amounts in Thousands
                                                                                               -----------------------------
                                                                                               Face Amount          Value
                                                                                               -----------         ---------
<S>                                                                                            <C>                <C> 
NEW YORK -- 6.7%
Babylon IDA, Babylon Community Waste Management,
            7.875%, 7/1/06 (Pre-refunded 7/1/99+)...........................                    $   1,000         $   1,148
        Babylon Recycling Center, 8.875%, 3/1/11 *++........................                        1,895               853
        Ogden Martin Systems, 8.50%, 1/1/19.................................                        1,015             1,109
Dormitory Auth. of the State of New York, City Univ., 6.00%, 7/1/14.........                        5,230             5,076
        Dept. of Health of the State of New York, 5.50%, 7/1/20.............                        4,000             3,516
        State Univ. Ed. Fac., 5.75%, 5/15/24................................                        4,500             4,141
Metropolitan Transportation Auth., 7.125%, 7/1/09...........................                        4,000             4,292
New York City, GO, 7.50%, 2/1/02............................................                        1,000             1,106
            6.00%, 8/1/06...................................................                        5,675             5,656
            6.20%, 8/1/07...................................................                        5,000             5,033
            5.625%, 10/1/12.................................................                        2,500             2,287
            7.625%, 2/1/15..................................................                        3,000             3,311
            7.75%, 8/15/15..................................................                        2,500             2,795
            7.00%, 2/1/18...................................................                        8,000             8,318
New York City Municipal Water Fin. Auth., (FGIC Insured),
        VRDN (Currently 3.15%)..............................................                        4,200             4,200
New York State Mortgage Agency, Capital Appreciation Home Ownership,
        Zero Coupon, 4/1/20.................................................                       11,800             1,565
        Homeowner Mortgage, 6.45%, 10/1/17..................................                        2,400             2,404
New York State Urban Dev. Corp., Correctional Fac., Zero Coupon, 1/1/08.....                        5,000             2,173
Syracuse IDA, Parking Fac., 7.70%, 6/1/15 (Pre-refunded 6/1/99+)............                        1,000             1,133
- ----------------------------------------------------------------------------------------------------------------------------

NORTH CAROLINA -- 1.4%
North Carolina Eastern Municipal Power Agency, 7.00%, 1/1/08................                        8,930             9,520
North Carolina Medical Care Commission, Stanley Memorial Hosp.,
            7.80%, 10/1/19..................................................                        1,000             1,069
        Valdese General Hosp., 8.75%, 10/1/16...............................                        2,140             2,303
- ----------------------------------------------------------------------------------------------------------------------------

OHIO -- 3.9%
Cambridge, Guernsey Memorial Hosp., 8.00%, 12/1/11..........................                        1,500             1,609
Cleveland Parking Fac., 8.10%, 9/15/22......................................                       12,000            13,016
Marion County Health Care Fac., United Church Homes,
        8.875%, 12/1/12 (Pre-refunded 12/1/99+).............................                        3,225             3,882
Middleburg Heights, Southwest General Hosp., 7.20%, 8/15/19.................                        2,000             2,155
Ohio Air Quality Dev. Auth. PCR, Toledo Edison, 8.00%, 5/15/19 *............                        2,000             2,093
Ohio Housing Fin. Agency, Single Family Mortgage, 11.375%, 8/1/10...........                           55                56
        Residual Interest Bond / Inverse Floater, 3/31/31  
            (Currently 10.227%) *...........................................                          750               765
Ohio Water Dev. Auth. PCR, Cleveland Electric, 9.75%, 11/1/97 *.............                        2,000             2,219
        Toledo Edison, 7.40%, 11/1/22 *.....................................                        7,000             7,078
            7.55%, 6/1/23...................................................                        2,500             2,555
- ----------------------------------------------------------------------------------------------------------------------------

OKLAHOMA -- 3.7%
Jackson County Memorial Hosp. Auth., 7.30%, 8/1/15..........................                        4,300             4,281
LeFlore County Hosp. Auth., Eastern Oklahoma Medical Center, 9.40%, 5/1/06..                        2,000             2,165
Oklahoma County IDA, Epworth Villa, 10.25%, 4/1/19..........................                        3,000             3,310
</TABLE> 

                                                                               7
<PAGE>
 
T. Rowe Price Tax-Free High Yield Fund
Statement of Net Assets

<TABLE> 
<CAPTION> 
                                                                                                   Amounts in Thousands
                                                                                               -----------------------------
                                                                                               Face Amount          Value
                                                                                               -----------         ---------
<S>                                                                                            <C>                <C> 
OKLAHOMA (cont'd)
Oklahoma Dev. Fin. Auth., Solid Waste Disposal Fac.
            (Midway Environmental Management), 9.50%, 9/1/99 *..............                    $     645         $     651
            9.50%, 9/1/15 *.................................................                        3,105             3,113
Trustees of the Tulsa Municipal Airport, American Airlines, 9.375%, 6/1/04..                        3,000             3,184
            7.375%, 12/1/20 *...............................................                        6,500             6,450
            7.60%, 12/1/30 *................................................                        5,000             5,002
Washington County Medical Auth., Jane Phillips Episcopal-Memorial Medical
            Center, 8.50%, 11/1/10..........................................                        5,200             5,648
- ----------------------------------------------------------------------------------------------------------------------------

OREGON -- 0.2%
Western Generation Agency, Wauna Cogeneration, 7.25%, 1/1/09 *..............                        2,000             2,006
- ----------------------------------------------------------------------------------------------------------------------------

PENNSYLVANIA -- 4.0%
Allegheny County Hosp. Dev. Auth., Health and Ed. Rehabilitation
        Institute of Pittsburgh, (MBIA Insured), 7.00%, 6/1/22..............                        2,000             2,005
Beaver County PCR, Toledo Edison, 12.25%, 9/15/15...........................                        1,000             1,092
Berks County IDA, Lutheran Home, 6.875%, 1/1/23.............................                        5,000             4,875
Blair County Hosp. Auth., Mercy Hosp., 8.125%, 2/1/14.......................                        2,700             2,876
Butler County IDA, Herr-Voss, 8.60%, 11/1/99 *..............................                          720               754
Clarion IDA Health Fac., Beverly Enterprises, 10.125%, 5/1/07...............                          900             1,041
Greene County IDA, Beverly Enterprises, 6.875%, 3/1/13......................                        2,430             2,445
Montgomery County Higher Ed. and Health Auth., Brittany Pointe,
            8.50%, 1/1/22...................................................                        2,500             2,640
        Redeemer Long Term Care & Elder Services, 8.20%, 6/1/06.............                          925               974
            8.00%, 6/1/22...................................................                        5,755             5,975
Pennsylvania Higher Ed. Fac. Auth., Medical College of Pennsylvania,
            8.375%, 3/1/11..................................................                        2,200             2,401
Pennsylvania Housing Fac. Auth., Residual Interest Bond / Inverse Floater,
            10/1/23 (Currently 10.37%) *....................................                        1,500             1,538
Schuylkill County IDA, Schuylkill Energy Resources, Inc., 6.50%, 1/1/10 *...                        7,500             7,103
- ----------------------------------------------------------------------------------------------------------------------------

PUERTO RICO -- 2.5%
Puerto Rico Aqueduct and Sewer Auth., 7.90%, 7/1/07.........................                        2,500             2,775
            7.875%, 7/1/17..................................................                        3,000             3,328
Puerto Rico Housing Bank and Fin. Agency, 4.375%, 12/1/97...................                        5,000             4,910
Puerto Rico Ind., Med., Higher Ed. & Environmental Pollution Control
            Fac. Fin. Auth., Catholic Univ. of Puerto Rico, 9.375%, 12/1/07
            (Pre-refunded 12/1/97+).........................................                        7,635             8,842
Puerto Rico Infrastructure Fin. Auth., 7.50%, 7/1/09........................                        2,365             2,597
- ----------------------------------------------------------------------------------------------------------------------------

RHODE ISLAND -- 1.4%
Rhode Island Health & Ed. Building Corp., Rhode Island Hosp., (FGIC Insured),
            Residual Interest Bond / Inverse Floater, 8/15/21 
            (Currently 10.331%).............................................                        1,000             1,071
Rhode Island Housing & Mortgage Fin. Corp., 8.05%, 4/1/22 *.................                        5,000             5,253
            Residual Interest Bond / Inverse Floater, 4/1/24 
             (Currently 10.722%) *..........................................                        1,000             1,019
        Homeownership Opportunity, 6.70%, 10/1/14...........................                        5,000             5,068
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE> 

8
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                                  Amounts in Thousands
                                                                                               --------------------------
                                                                                               Face Amount          Value
                                                                                               -----------          -----
<S>                                                                                            <C>                <C> 
SOUTH DAKOTA -- 0.8%
South Dakota Building Auth., 7.50%, 12/1/16.................................                    $   4,400         $   4,735
South Dakota Housing Dev. Auth., Homeownership Mortgage, 6.65%, 5/1/14......                        2,500             2,528
- ---------------------------------------------------------------------------------------------------------------------------

TENNESSEE -- 1.1%
Chattanooga-Hamilton County Hosp. Auth., VRDN (Currently 3.15%).............                        2,100             2,100
Health & Ed. Fac. Board of the Metropolitan Gov't. of Nashville and Davidson
        County, Metropolitan Nashville Teachers' Nursing Fac., 10.25%, 10/1/19                      2,250             2,126
Memphis, GO, VRDN (Currently 3.20%).........................................                        1,000             1,000
Tennessee Housing Dev. Agency, 7.625%, 7/1/22 *.............................                        1,900             1,961
        5.95%, 7/1/28.......................................................                        3,000             2,760
- ---------------------------------------------------------------------------------------------------------------------------

TEXAS -- 6.4%
Bell County Health Fac. Dev. Corp., King's Daughter Hosp., 9.25%, 7/1/08....                        3,445             3,917
Brazos River Auth., Texas Utilities, 8.25%, 12/1/16 *.......................                        1,000             1,078
        9.875%, 10/1/17 *...................................................                        2,130             2,435
Denison Hosp. Auth., Texoma Medical Center, 7.10%, 8/15/24..................                        3,650             3,645
Gainesville IDC, GTE Valenite, 8.90%, 5/15/11 *.............................                        3,360             3,667
Gulf Coast Waste Disposal Auth., Houston Lighting & Power, 
        Floating Rate, 6/1/98 (Currently 4.35%).............................                        5,000             4,925
Harris County Health Fac. Dev. Corp., Memorial Hosp., 7.125%, 6/1/15........                        2,500             2,712
        Methodist Hosp., VRDN (Currently 3.15%).............................                        5,300             5,300
        St. Luke's Episcopal Hosp., VRDN (Currently 3.15%)..................                        4,700             4,700
        Texas Medical Center, (MBIA Insured), 7.375%, 5/15/20...............                        2,350             2,535
Matagorda County Navigation Dist. Number One PCR, Central Power & Light, 
        7.50%, 12/15/14.....................................................                        2,000             2,172
Paris Health Fac. Dev. Corp., McCuistion Regional Medical Center,
        7.60%, 2/1/12.......................................................                        4,500             4,740
Tarrant County Health Fac. Dev. Corp., Harris Methodist Health System,
        6.00%, 9/1/24.......................................................                        3,500             3,332
Tomball Hosp. Auth., Tomball Regional Hosp., 6.125%, 7/1/23.................                       10,000             8,765
Weslaco Health Fac. Dev. Corp., Knapp Medical Center,
        10.375%, 6/1/16 (Pre-refunded 6/1/98+)..............................                        3,500             4,177
- ---------------------------------------------------------------------------------------------------------------------------

UTAH -- 2.5%
Davis County, Solid Waste Management & Energy Recovery 
        Special Service Dist., 6.125%, 6/15/09..............................                        6,000             5,557
Intermountain Power Agency, Utah Power Supply, 5.50%, 7/1/20................                        7,685             6,851
Utah Housing Fin. Agency, 8.55%, 7/1/04.....................................                          490               504
        8.65%, 7/1/04.......................................................                          830               853
        7.60%, 7/1/05.......................................................                        1,030             1,040
        7.75%, 7/1/05.......................................................                        1,035             1,047
        Sub Lien, 9.875%, 1/1/99 *..........................................                          210               218
        10.50%, 1/1/99 *....................................................                          310               332
        10.625%, 7/1/99 *...................................................                          205               217
        9.30%, 7/1/00 *.....................................................                          180               185
        8.70%, 7/1/01.......................................................                          390               398
</TABLE> 

                                                                               9
<PAGE>
 
T. Rowe Price Tax-Free High Yield Fund
Statement of Net Assets

<TABLE> 
<CAPTION> 
                                                                                                   Amounts in Thousands
                                                                                                --------------------------
                                                                                                Face Amount          Value
                                                                                                -----------          -----
<S>                                                                                            <C>                <C> 
UTAH (cont'd)
Utah Housing (cont'd)
    Sub Lien (cont'd)
        9.25%, 7/1/01.......................................................                    $     490         $     514
        9.60%, 7/1/02 *.....................................................                          125               129
        9.75%, 7/1/02.......................................................                          205               212
        9.85%, 7/1/02 *.....................................................                          370               385
        6.25%, 7/1/05.......................................................                          890               890
        7.50%, 7/1/05.......................................................                        1,000             1,024
        8.40%, 7/1/08 *.....................................................                          360               374
        9.00%, 1/1/19 *.....................................................                          900               930
        7.75%, 1/1/23 *.....................................................                          615               652
- ---------------------------------------------------------------------------------------------------------------------------

VERMONT -- 0.2%
Vermont Ed. and Health Buildings Fin. Agency, Medical Center Hosp.
        of Vermont, (FGIC Insured), 7.45%, 9/1/23...........................                        1,400             1,399
Vermont Housing Fin. Agency, 8.70%, 12/1/06 *...............................                          310               320
- ---------------------------------------------------------------------------------------------------------------------------

VIRGINIA -- 2.7%
Fairfax County IDA, Fairfax Hosp. System, VRDN (Currently 3.00%)............                        1,000             1,000
Henrico County IDA, Bon Secours Health System (Maryview Hosp.),
        7.50%, 9/1/11.......................................................                        1,885             2,141
Norfolk Port & Ind. Auth., Henson Aviation, 9.625%, 8/1/12 *................                          980             1,106
Peninsula Ports Auth., Dominion Terminal, 7.375%, 6/1/20....................                        4,450             4,610
Roanoke IDA, Roanoke Memorial Hosp., VRDN (Currently 3.00%).................                        1,200             1,200
Virginia HDA, Commonwealth Mortgage, 7.10%, 1/1/22..........................                        4,000             4,143
        7.10%, 1/1/25.......................................................                        5,000             5,179
        Zero Coupon, 7/1/29 *...............................................                          870                59
Virginia Housing Dev. Auth., Commonwealth Mortgage, 6.25%, 7/1/11...........                        5,000             5,013
- ---------------------------------------------------------------------------------------------------------------------------

WASHINGTON -- 0.3%
Washington Public Power Supply System,
        7.25%, 7/1/09.......................................................                        1,000             1,120
        6.30%, 7/1/12.......................................................                        2,000             2,030
- ---------------------------------------------------------------------------------------------------------------------------

WEST VIRGINIA -- 0.7%
Berkeley County Building Commission, City Hosp., 6.50%, 11/1/22.............                        2,000             1,984
West Virginia Hosp. Fin. Auth., Cabell Huntington Hosp.
        (AMBAC Insured), 6.25%, 1/1/19......................................                        2,400             2,385
        West Virginia Univ. Hosp., (MBIA Insured), Residual Interest
        Bond/Inverse Floater, 1/1/18 (Currently 9.70%)......................                        2,000             1,888
- ---------------------------------------------------------------------------------------------------------------------------

WISCONSIN -- 1.2%
Wisconsin HFA, Villa Clement, 8.75%, 6/1/12.................................                        1,500             1,535
Wisconsin Housing and Economic Dev. Auth., 7.75%, 9/1/17....................                        4,460             4,752
        8.00%, 3/1/21 *.....................................................                        4,480             4,618
</TABLE> 

10
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                                  Amounts in Thousands
                                                                                               ---------------------------
                                                                                               Face Amount           Value
                                                                                               -----------           -----
<S>                                                                                            <C>                <C> 
WYOMING -- 1.3%
Wyoming Community Dev. Auth., Single Family Mortgage, 6.70%, 6/1/17.........                    $   3,500          $  3,574
        6.00%, 6/1/23.......................................................                        9,000             8,340
===========================================================================================================================
TOTAL INVESTMENTS IN SECURITIES - 99.0% (COST - $865,226)...................                                        892,459
===========================================================================================================================
Other Assets Less Liabilities - 1.0% .......................................                                          9,419
                                                                                                                   --------
NET ASSETS CONSISTING OF:
Accumulated net investment income - net of distributions....................                           40                  
Accumulated realized gains/losses - net of distributions....................                       (6,627)                      
Net unrealized appreciation of investments..................................                       27,141                  
Paid-in-capital applicable to 76,913,554 shares of $0.01 par value capital
        stock outstanding;  1,000,000,000 shares authorized.................                      881,324                 
                                                                                                 --------
NET ASSETS - 100.0%.........................................................                                       $901,878
                                                                                                                   ========
NET ASSET VALUE PER SHARE...................................................                                         $11.73
                                                                                                                   ========
</TABLE> 

           *        -      Interest subject to alternative minimum tax
           +        -      Used in determining portfolio maturity
          ++        -      Nonincome producing
       AMBAC        -      AMBAC Indemnity Corp.
         COP        -      Certificates of Participation
        FGIC        -      Financial Guaranty Insurance Company
         FHA        -      Federal Housing Authority
        GNMA        -      Government National Mortgage Association
          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 Board
         IDR        -      Industrial Development Revenue
        MBIA        -      Municipal Bond Investors Assurance Corp.
         PCR        -      Pollution Control Revenue
         RAN        -      Revenue Anticipation Note
         TAN        -      Tax Anticipation Note
        VRDN        -      Variable Rate Demand Note





The accompanying notes are an integral part of these financial statements.

                                                                              11
<PAGE>
 
T. Rowe Price Tax-Free High Yield Fund
Statement of Operations / Six Months Ended August 31, 1994 (Unaudited)

<TABLE> 
<CAPTION> 
                                                                                                         Amounts in Thousands
                                                                                                      -------------------------- 
<S>                                                                                                   <C>              <C> 
INVESTMENT INCOME
Interest income...............................................................                                         $  30,745
Expenses
  Investment management fees..................................................                        $ 2,877
  Shareholder servicing fees & expenses.......................................                            404
  Custodian and accounting fees & expenses....................................                            118
  Registration fees & expenses................................................                             42
  Prospectus & shareholder reports............................................                             30
  Legal & auditing fees.......................................................                             36
  Directors' fees & expenses..................................................                              9
  Proxy & annual meeting......................................................                              7
  Miscellaneous...............................................................                             11
                                                                                                      -------    
  Total expenses..............................................................                                             3,534
                                                                                                                       ---------
Net investment income.........................................................                                            27,211

REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss
  Securities..................................................................                         (6,043)
  Futures.....................................................................                             (3)
                                                                                                      -------    
  Net realized loss...........................................................                         (6,046)
Change in net unrealized appreciation or depreciation.........................                        (31,503)
                                                                                                      -------    
Net loss on investments.......................................................                                           (37,549)
                                                                                                                       =========
DECREASE IN NET ASSETS FROM OPERATIONS........................................                                          $(10,338)
                                                                                                                       =========
</TABLE> 
 



The accompanying notes are an integral part of these financial statements.  
 
12
<PAGE>
 
T. Rowe Price Tax-Free High Yield Fund
Statement of Changes in Net Assets (Unaudited)

<TABLE> 
<CAPTION> 
                                                                                         Amounts in Thousands
                                                                            -------------------------------------------
                                                                              Six Months Ended              Year Ended
                                                                               Aug. 31, 1994              Feb. 28, 1994
                                                                            ------------------            ------------- 
<S>                                                                           <C>                         <C> 
INCREASE (DECREASE) IN NET ASSETS
Operations
  Net investment income...........................................          $    27,211                   $   54,721
  Net realized gain (loss) on investments.........................               (6,046)                      17,384
  Change in unrealized appreciation or depreciation of investments              (31,503)                      (6,992)
                                                                             ----------                    ---------
  Increase (decrease) in net assets from operations...............              (10,338)                      65,113
                                                                             ----------                    ---------
Distributions to shareholders
  Net investment income...........................................              (27,211)                     (54,721)
  Net realized gain on investments................................               (2,998)                     (17,058)
                                                                             ----------                    ---------
  Decrease in net assets from distributions to shareholders.......              (30,209)                     (71,779)
                                                                             ----------                    ---------
Capital share transactions
  Sold 11,275 and 28,847 shares...................................              132,520                      358,379
  Distributions reinvested of 1,826 and 4,275 shares..............               21,393                       53,067
  Redeemed 12,973 and 25,510 shares...............................             (152,783)                    (316,670)
                                                                             ----------                    ---------
  Increase in net assets from capital share transactions..........                1,130                       94,776
                                                                             ----------                    ---------

Total increase (decrease).........................................              (39,417)                      88,110

NET ASSETS
  Beginning of period.............................................              941,295                      853,185
                                                                             ----------                    ---------
  End of period...................................................          $   901,878                 $    941,295
                                                                             ==========                    =========
</TABLE> 




The accompanying notes are an integral part of these financial statements.  

                                                                              13
<PAGE>
 
T. Rowe Price Tax-Free High Yield Fund
Notes to Financial Statements/August 31, 1994 (Unaudited)


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

T. Rowe Price Tax-Free High Yield Fund (the Fund) is registered under the 
Investment Company Act of 1940 as a diversified, open-end management 
investment company.

A) Security valuation - Debt securities are generally traded in the 
over-the-counter market. Investments in securities with remaining 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 remaining maturities less than one year are 
stated at fair value which is determined by using a matrix system that 
establishes a value for each security based on money market yields.  
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 on municipal securities are amortized 
for both financial and tax reporting purposes.  Discounts, other than 
original issue, are not amortized for financial reporting 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 an 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 which may differ from generally accepted accounting principles.  
Payments ("variation margin") made or received by the Fund, dependent on the 
daily fluctuations in the value of the futures contracts, are recorded as 
unrealized gains or losses until the contracts are closed.

NOTE 2 - INVESTMENT TRANSACTIONS

As a part of its investment program, the Fund engages in the following 
activities, the nature and risk of which are set forth more fully in the 
Fund's Prospectus and Statement of Additional Information.

A) Non-Investment Grade Debt Securities - The Fund has investments in 
non-investment grade debt securities, commonly referred to as "high yield" or 
"junk bonds".  A real or perceived economic downturn or higher interest 
rates could adversely affect the liquidity or value, or both, of such 
securities, because such events could lessen the ability of issuers to make 
principal and interest payments.

B) Futures - A futures contract provides for the future sale by one party and 
purchase by another party of a specified amount of a specific financial 
instrument at a specified price, date, time and place designated at the time 
the contract is made. Risks arise from the possible illiquidity of the 
futures market and from movements in security values.  At August 31, 1994, 
the Fund had a short position in 100 U. S. Treasury Bond futures contracts 
which expire in September, 1994, and which have a contract value of 
$10,372,000.  Net unrealized depreciation of $92,000 on these contracts at 
August 31, 1994, is included in the accompanying financial statements. 
Municipal  securities having a market value of $1,367,000 were pledged as 
initial margin on these contracts.

C) Other - Purchases and sales of portfolio securities, other than short-term 
securities, aggregated $250,153,000 and $233,932,000, respectively, for the 
six months ended August 31, 1994.


14
<PAGE>
 
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.  

        At August 31, 1994, the aggregate cost of investments for federal 
income tax and financial reporting purposes was $865,226,000 and net 
unrealized appreciation aggregated $27,233,000, of which $38,349,000 related 
to appreciated investments and $11,116,000 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, computed daily and paid monthly, consisting of an Individual Fund Fee 
equal to 0.30% 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 0.31% for assets in 
excess of $34 billion. The effective annual Group Fee rate at August 31, 
1994, and for the six months then ended was 0.34%.  The Fund pays a pro rata 
portion of the Group Fee based on the ratio of the Fund's net assets to those 
of the Group. 

        T. Rowe Price Services, Inc. (TRPS) is a wholly owned subsidiary of 
the Manager.  TRPS provides transfer and dividend disbursing agent functions 
and shareholder services for all accounts.  The Manager, under a separate 
agreement, calculates the daily share price and maintains the financial 
records of the Fund.   For the six months ended August 31, 1994, the Fund 
incurred fees totalling approximately $359,000 for these services provided by 
related parties.  At August 31, 1994, investment management and service fees 
payable were $581,000.


                                                                              15
<PAGE>
 
T. Rowe Price Tax-Free High Yield Fund
Financial Highlights (Unaudited)

<TABLE> 
<CAPTION> 
                                                                For a share outstanding throughout each period 
                                                      ---------------------------------------------------------------------
                                                      Six Months                           Year Ended               
                                                        Ended      --------------------------------------------------------
                                                       Aug. 31,     Feb. 28,     Feb. 28,    Feb. 29,    Feb. 28,   Feb. 28,
                                                         1994         1994         1993        1992        1991       1990
                                                      ---------------------------------------------------------------------
<S>                                                   <C>           <C>          <C>         <C>         <C>        <C> 
NET ASSET VALUE, BEGINNING OF PERIOD.........           $12.26       $12.33       $11.65      $11.40      $11.39     $11.25
                                                        ------       ------       ------      ------      ------     ------
Investment Activities
    Net investment income....................             0.36         0.74         0.78        0.81        0.83       0.84
    Net realized and unrealized gain (loss)..            (0.49)        0.16         0.78        0.35        0.04       0.20
                                                        ------       ------       ------      ------      ------     ------
Total from Investment Activities.............            (0.13)        0.90         1.56        1.16        0.87       1.04
                                                        ------       ------       ------      ------      ------     ------
Distributions                                        
    Net investment income....................            (0.36)       (0.74)       (0.78)      (0.81)      (0.83)     (0.84)
    Net realized gain........................            (0.04)       (0.23)       (0.10)      (0.10)      (0.03)     (0.06)
                                                        ------       ------       ------      ------      ------     ------
Total Distributions..........................            (0.40)       (0.97)       (0.88)      (0.91)      (0.86)     (0.90)
                                                        ------       ------       ------      ------      ------     ------
NET ASSET VALUE, END OF PERIOD...............           $11.73       $12.26       $12.33      $11.65      $11.40     $11.39
                                                        ======       ======       ======      ======      ======     ======

- ---------------------------------------------------------------------------------------------------------------------------

RATIOS/SUPPLEMENTAL DATA
Total Return.................................          (1.01)%        7.49%       13.94%      10.56%       7.93%      9.54%
Ratio of Expenses to Average Net Assets......            0.79%+       0.79%        0.81%       0.83%       0.85%      0.88%
Ratio of Net Investment Income
    to Average Net Assets....................            6.09%+       5.95%        6.58%       7.01%       7.30%      7.38%
Portfolio Turnover Rate......................            56.0%+       59.3%        34.7%       51.0%       51.2%      72.4%
Net Assets, End of Period (in thousands).....         $901,878     $941,295     $853,185    $623,877    $505,025   $443,372
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE> 
+ Annualized.

16


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