<PAGE>
- --------------------------------------------------------------------------------
Fellow Shareholders
- --------------------------------------------------------------------------------
Vigorous economic growth and Federal Reserve tightening dominated the fixed-
income markets in 1994. Real growth of 4% last year exceeded the historical
trend of approximately 2.5%. The target for the fed funds rate climbed with the
economy's strong pace, rising from 3% at the beginning of last year to 6% after
the most recent tightening on February 1, 1995. The Federal Reserve pursued its
monetary policy to slow economic growth to a level that will contain inflation.
Future Fed action will reflect its goal of preventing excessive inflation
without spurring significantly higher unemployment.
Rising yields characterized the tax-exempt market during most of 1994.
The yield on one-year AAA General Obligation (GO) bonds peaked in December at
4.9%, up from 3% at the end of February 1994. However, as the market
strengthened over the last several months, the one-year yield retreated to 4.4%
by the funds' fiscal year-end. The five-year AAA GO bond yield ended this
quarter at 5%, 70 basis points higher than a year ago but 50 basis points lower
than at the end of November (100 basis points equal one percent). On the long
end, the yield on 30-year AAA GO bonds was almost 6%, up from 5.6% a year
earlier but down from its November peak of 6.8%.
Yields declined after the Fed's sixth tightening of the year in
November. Anticipation of a slowing economy, good news on inflation, and
- --------------------------------------------------------------------------------
Municipal Bond and Note Yields
- --------------------------------------------------------------------------------
[CHART APPEARS HERE]
limited supply of tax-exempt bonds all contributed to the recent drop in yields.
Issuance fell to a four-year low last year and could be even lower in 1995.
TAX-EXEMPT MONEY FUND
Last year's rise in interest rates was bad news for bond investors but good
news for money market investors as current yields rose substantially during
the past 12 months. Your fund's seven-day compound yield stood at 3.57% at
the end of the fiscal year, compared with 2.21% a year ago.
During the past 12 months, the municipal short-term yield curve has
steepened substantially. For example, the difference in yield between an
overnight investment and a one-year security averaged 1.21 percentage points
over the past year, compared with an average difference of 0.48 of a percentage
point during the preceding 12-month period. The long end of the money market
curve followed the rate rise orchestrated by the Fed, while very short-term
yields stayed low, responding to light supply and strong investor demand in a
tightening environment.
Issuance of short-term securities fell to $34.1 billion from $45.4
billion during the fiscal year, the lowest level in five years, the result of
more long-term bonds being sold in 1992 and 1993 to lock in historically low
borrowing costs. At the moment, we see nothing on the horizon that will
increase short-term supply.
Your fund closed the fiscal year with a weighted average maturity of 44
days, modestly longer than our peer group average of 40 days, but significantly
shorter than the fund's 55-day average at the beginning of the year. We expect
the short-term market to remain sensitive to further rate hikes. However, the
light supply of new issues, low dealer inventories, and solid demand induce us
to keep maturities slightly longer than the average for our peer group to gain
extra yield.
Your fund's performance was in line with its peer group during the
past three months, and above the average for the entire fiscal year.
<PAGE>
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/28/95
3 Mos. 12 Mos.
-------- ---------
<S> <C> <C>
Tax-Exempt Money Fund 0.80% 2.63%
IBC/Donoghue Money Fund
Report Average* 0.80 2.56
- --------------------------------------------------------------------------------
</TABLE>
*Stockbroker and General Purpose Funds.
TAX-FREE SHORT-INTERMEDIATE FUND
In the past year we maintained a relatively short, defensive portfolio
duration, focusing on high-quality securities and avoiding bonds with low
coupons selling at deep discounts, which do not perform well when interest
rates are going up. Duration, which measures price sensitivity to changes in
interest rates, dipped as low as 2.2 years in mid-October, but lengthened to
2.5 by year-end.
We extended duration for several reasons. First, short-term yields
seemed to have overshot reasonable expectations of Fed tightening. Second,
although new issuance was low, secondary supply was high, providing more
investment choices. Third, we anticipated increasing demand for tax-free bonds
in January 1995 with coupon payments due and older bonds maturing.
Our investment strategy resulted in an increase in your fund's
annualized yield for the quarter to 4.5% from 4% a year ago. We intend to
proceed with caution in the months ahead, maintaining a neutral duration
combined with a defensive high credit quality and high coupon structure. Your
fund's objective is to provide a higher yield than money market funds offer,
with small share price fluctuation.
Our strategy served us well through 1994, allowing the fund to
significantly outperform the peer group average for both the quarter and the
fiscal year ended February 28.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/28/95
3 Mos. 12 Mos.
-------- ---------
<S> <C> <C>
Tax-Free Short-Intermediate
Fund 2.68% 2.91%
Lipper Short Municipal
Debt Fund Average 2.38 2.10
- --------------------------------------------------------------------------------
</TABLE>
TAX-FREE INSURED INTERMEDIATE BOND FUND
Our investment strategy for the fund was similar to that of the Short-
Intermediate Fund. Essentially, we maintained a short or defensive duration,
focused on securities with relatively high credit quality, and stayed away from
low coupon bonds selling at significant discounts, which decline in value more
than high coupon bonds when rates are rising.
When bonds looked particularly attractive in November, we extended
maturities to take advantage of low prices and high yields. We raised your
portfolio's duration to 5.4 years by the end of December, after it had fallen as
low as 4.9 years in mid-October.
Federal Reserve Chairman Alan Greenspan has recently given the market
mixed signals on the direction of monetary policy. Signs that the economy could
be slowing from its strong pace prompted him to suggest that the Fed may have
finished tightening, at least for a while. However, he also warned that further
rate hikes could lie ahead if the weakness of the U.S. dollar leads to higher
inflation. Accordingly, we will continue to maintain a neutral duration and a
defensive posture with high credit quality and high coupons in the near term.
Our strategy resulted in a stronger performance than our peer group
average during the fiscal year. Fourth quarter performance was robust, although
slightly behind the average for similar funds.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/28/95
3 Mos. 12 Mos.
-------- ---------
<S> <C> <C>
Tax-Free Insured Intermediate
Bond Fund 5.47% 2.65%
Lipper Intermediate Municipal
Debt Fund Average 5.66 1.65
- --------------------------------------------------------------------------------
</TABLE>
TAX-FREE INCOME FUND
With last year's strong economy, the Federal Reserve's tightening, and poor
cash flow into municipal funds, we believed rates would likely rise, driving
bond prices down. In this environment, we managed your fund conservatively
for most of the last 12 months.
First and foremost, we attempted to dampen the fund's sensitivity to
changing interest rates
2
<PAGE>
by reducing the weighted average maturity and duration. Throughout most of
1993, we kept the fund's average maturity in the 18- to 20-year range and
effective duration to around eight years. During the first three quarters of
1994, the average maturity was less than 18 years and we attempted to keep
duration under 7.5 years. (Duration, a time-weighted measure of a bond's cash
flow expressed in years, shows a bond or bond fund's price sensitivity to a
change in interest rates.)
Second, we attempted to make the fund less sensitive to rising rates
by swapping lower coupon bonds for those with higher coupons. Low coupon
bonds selling at a discount usually decline in price more than high coupon
bonds when rates rise. Also, a change in the 1993 tax law subjected some
gains realized from sales of market discount bonds to ordinary income taxes,
rendering these securities less desirable to some investors. Finally, we
gradually increased the reserves portion of the portfolio from the beginning
of the year through October.
As rates rose steeply in the fall, and investors anticipated some
slowing in economic growth in 1995, we felt the fund would benefit from a
more aggressive strategy. Therefore, we extended average maturity closer to
18 years from 16.3 years in October, increased duration to 7.8 years from a
low of about 7 years, and reduced reserves to less than 5% of the portfolio
from more than 10%. We took these actions to allow the fund to perform in
line with the rally in municipal bonds. However, we did not see sufficient
evidence of a slowdown to warrant a fully aggressive strategy.
Last year saw major changes in interest rates, and the fund's
performance reflects this movement. While results were modest for the fiscal
year, we are pleased that your fund provided an excellent three-month return and
outperformed its peer group average during both reporting periods.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/28/95
3 Mos. 12 Mos.
-------- ---------
<S> <C> <C>
Tax-Free Income Fund 8.76% 1.90%
Lipper General Municipal
Debt Fund Average 8.60 0.64
- --------------------------------------------------------------------------------
</TABLE>
TAX-FREE HIGH YIELD FUND
The high yield sector of the municipal market was not immune to last year's
volatility. For the most part, we sought to maintain a neutral to somewhat
defensive stance for your fund versus the overall market. This meant keeping
duration in a range of 7.25 to 7.75 years, with cash levels averaging between
5% and 6%. We also maintained a weighted average maturity of 19 to 20 years,
down from 22 years during the strong markets of 1993.
Our aim was to provide a cushion against rising interest rates and to
maintain sufficient liquidity, balanced against our constant goal of generating
high yields. To meet the last objective, we kept a minimum of 82% of holdings in
maturities exceeding 10 years.
Although low issuance presented a challenge for all municipal investors,
reduced supply was even more pronounced in the high yield area. While credit
spreads widened in selected sectors, particularly health care, this was offset
at times by a limited supply of new high yield issues. Despite these challenges,
we were still able to select lower quality issues that brought value to the
fund. Overall credit quality was unchanged at BBB+.
Despite the market's volatility, your fund outperformed its peer group
for the fiscal year, and performed strongly in the quarter, although it lagged
the competition. The fund has exceeded the average performance of other tax-free
high yield funds for the past seven years, and for eight of its 10 complete
fiscal years since inception.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/28/95
3 Mos. 12 Mos.
-------- ---------
<S> <C> <C>
Tax-Free High Yield Fund 7.05% 1.26%
Lipper High Yield Municipal
Debt Fund Average 7.55 1.06
- --------------------------------------------------------------------------------
</TABLE>
OUTLOOK
The U.S. economy should continue to grow, although at a lower rate than in 1994.
To date, the Fed's actions appear to be starting to slow the pace of growth,
keeping inflation in check.
3
<PAGE>
However, in the near term, we do expect some acceleration in inflation based on
tight labor markets and relatively high capacity utilization. This may result in
somewhat higher interest rates over the next few months, but most likely lower
than the levels reached in the fall. Moreover, light new issuance combined with
continued strong demand for tax-exempt bonds could result in better overall
returns in the municipal bond market in 1995.
It is worth noting that 1994 was tumultuous for fixed income
investors because of rising interest rates, widespread misuse of derivatives,
and a large municipal bankruptcy. We want to assure you that we will continue
to make investments that are appropriate for each fund's risk profile. In those
funds that can purchase derivatives, our exposure has been modest and has not
introduced undue risk for shareholders. In addition, our avoidance of the Orange
County crisis reinforces the value of thorough, independent credit research.
We appreciate the continued trust our shareholders have placed in us.
Respectfully submitted,
/s/ William T. Reynolds
William T. Reynolds
Director, Fixed Income Division
March 17, 1995
- --------------------------------------------------------------------------------
Financial Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value Dividend Per Share/+/ Dividend Yield*
Per Share 3 Months Ended 3 Months Ended
------------------ ---------------------- --------------------
11/30/94 02/28/95 11/30/94 02/28/95 11/30/94 02/28/95
<S> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money $ 1.00 $ 1.00 $ 0.007 $ 0.008 3.12% 3.57%
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate 5.17 5.25 0.06 0.06 4.28 4.52
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Insured Intermediate Bond 9.93 10.35 0.12 0.12 4.68 4.86
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Income 8.63 9.25 0.13 0.13 6.02 6.01
- --------------------------------------------------------------------------------------------------------------------
Tax-Free High Yield 11.03 11.62 0.18 0.18 6.46 6.61
</TABLE>
* 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.
Money Fund reports seven-day compound yield.
+ Taxability of dividends. 100% of the dividends paid for the 12 months ended
2/28/95 were exempt from federal income tax.
- --------------------------------------------------------------------------------
Quality Diversification
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quality Ratings* Weighted Average Quality*
-------------------------------------- ---------------------------
1 2 3 4 5-10 11/30/94 02/28/95
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money 12% 86% 2% 0% 0% 1.9 1.9
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate 42 40 17 1 0 1.9 1.8
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Insured Intermediate Bond 34 57 9 0 0 2.0 1.8
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Income 10 53 25 12 0 2.4 2.4
- -----------------------------------------------------------------------------------------------------------------
Tax-Free High Yield 4 19 17 36 24 3.6 3.6
</TABLE>
* On a T. Rowe Price scale of 1 to 10, with Grade 1 representing highest
quality.
4
<PAGE>
- --------------------------------------------------------------------------------
Duration and Maturity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Effective Duration (years) Maturity (years)
-------------------------- ---------------------
11/30/94 02/28/95 11/30/94 02/28/95
<S> <C> <C> <C> <C>
Tax-Exempt Money -- -- 43.0* 44.0*
- ---------------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate 2.5 2.5 3.1 3.1
- ---------------------------------------------------------------------------------------------------
Tax-Free Insured Intermediate Bond 5.5 5.1 7.4 7.0
- ---------------------------------------------------------------------------------------------------
Tax-Free Income 7.9 7.8 17.2 17.9
- ---------------------------------------------------------------------------------------------------
Tax-Free High Yield 7.7 7.3 19.0 19.9
</TABLE>
* Maturity is in days.
- --------------------------------------------------------------------------------
Fiscal-Year Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/28/95
----------------------------------------------------------
1 Year 5 Years 10 Years Since Inception
<S> <C> <C> <C> <C> <C>
Tax-Exempt Money 2.63% 3.18% 4.06% 4.73% (4/81)
- ----------------------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate 2.91 5.56 5.90 6.02 (12/83)
- ----------------------------------------------------------------------------------------------------------
Tax-Free Insured Intermediate Bond 2.65 N/A N/A 6.69 (11/92)
- ----------------------------------------------------------------------------------------------------------
Tax-Free Income 1.90 8.08 8.59 7.18 (10/76)
- ----------------------------------------------------------------------------------------------------------
Tax-Free High Yield 1.26 8.16 -- 9.73 (3/85)
</TABLE>
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
- --------------------------------------------------------------------------------
Fiscal-Year Performance Comparison --
Tax-Free Insured Intermediate Bond Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
5
<PAGE>
- --------------------------------------------------------------------------------
Fiscal-Year Performance Comparison -- Tax-Free Short-Intermediate Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
Fiscal-Year Performance Comparison -- Tax-Free Income Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
Fiscal-Year Performance Comparison -- Tax-Free High Yield Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
6
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Services
- --------------------------------------------------------------------------------
To help shareholders monitor their current investments and make decisions
that accurately reflect their financial goals, T. Rowe Price offers a wide
variety of information and services--at no extra cost.
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE--Shareholder service representatives are available from 8:00 a.m. to
10:00 p.m., Monday - Friday, and weekends from 9:00 a.m. to 5:00 p.m., ET. Call
1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
IN PERSON--Visit one of our investor center locations to meet with a
representative who will be able to assist you with your accounts. While there,
you can drop off applications or obtain prospectuses and other literature.
AUTOMATED 24-HOUR SERVICES
Tele*Access/(R)/ (1-800-638-2587) provides information such as account
balance, date and amount of your last transaction, latest dividend payment, and
fund prices and yields. Additionally, you have the ability to request
prospectuses, statements, and account and tax forms; reorder checks; and
initiate purchase, redemption, and exchange orders for identically registered
accounts.
PC*Access/(R)/ provides the same information as Tele*Access, but on a
personal computer via dial-up modem.
ACCOUNT SERVICES
Checking--Write checks for $500 or more on any money market and bond
fund accounts (except the High Yield Fund and Emerging Markets Bond Fund).
Automatic Investing--Build your account over time by investing directly
from your bank account or paycheck with Automatic Asset Builder. Additionally,
Automatic Exchange enables you to set up systematic investments from one fund
account into another, such as from a money fund into a stock fund. A low, $50
minimum makes it easy to get started.
Automatic Withdrawal--If you need money from your fund account on a
regular basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options--Reinvest all or some of your
distributions, or take them in cash. We give you maximum flexibility and
convenience.
INVESTMENT INFORMATION
Combined Statement--A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your earnings by tax category, provides total
portfolio value, and lists your investments by type--stock, bond, and money
market. Detail pages itemize account transactions by fund.
Quarterly Shareholder Reports--Portfolio managers review the performance
of the funds in plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report--A quarterly newsletter with relevant articles
on market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Insights--A library of information that includes reports on mutual fund
tax issues, investment strategies, and financial markets.
Detailed Investment Guides--Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Retirees Financial Guide, Retirement Planning Kit (also
available on disk for PC use), and Guide to Risk-Adjusted Performance can help
you determine and reach your investment goals.
DISCOUNT BROKERAGE
You can trade stocks, bonds, options, precious metals, and other securities at a
substantial savings over regular commission rates. Call a shareholder service
representative for more information.
7
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
T. Rowe Price
- -------------
TAX-FREE FUNDS
FEBRUARY 28, 1995
FOR YIELD, PRICE, LAST TRANSACTION,
AND CURRENT BALANCE, 24 HOURS,
7 DAYS A WEEK, CALL:
1-800-638-2587 toll free
625-7676 Baltimore area
FOR ASSISTANCE WITH YOUR EXISTING
FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
T. ROWE PRICE
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to shareholders and to others
who have received a copy of the prospectus of the T. Rowe Price Tax-Free Funds.
T. Rowe Price
Invest With Confidence(R)
TFF
<PAGE>
- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
TAX-FREE HIGH YIELD FUND
February 28, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investment Record
- --------------------------------------------------------------------------------
The table below shows the investment record of one share of the T. Rowe Price
Tax-Free High Yield Fund, purchased at the original offering price of $10.00.
Over this time, interest rates have been volatile. The results shown should not
be considered a representation of the dividend income or capital gain or loss
which may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
With Dividends
Fiscal Capital With and Capital
Year Net Asset Income Gain Dividends Gains Total
Ended Value Dividends Distributions/2/ Reinvested Reinvested Return
--------- --------- --------- ---------------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
2/28/86/1/ $11.43 $0.87 $ -- $12.42 $12.42 24.24%
- ---------------------------------------------------------------------------------------------------------------
1987 12.21 0.87 -- 14.29 14.29 15.04
- ---------------------------------------------------------------------------------------------------------------
1988 11.19 0.83 0.25 14.12 14.41 0.83
- ---------------------------------------------------------------------------------------------------------------
1989 11.25 0.83 -- 15.28 15.60 8.27
- ---------------------------------------------------------------------------------------------------------------
1990 11.39 0.84 0.06 16.66 17.09 9.54
- ---------------------------------------------------------------------------------------------------------------
1991 11.40 0.83 0.03 17.93 18.45 7.93
- ---------------------------------------------------------------------------------------------------------------
1992 11.65 0.81 0.10 19.65 20.40 10.56
- ---------------------------------------------------------------------------------------------------------------
1993 12.33 0.78 0.10 22.21 23.24 13.94
- ---------------------------------------------------------------------------------------------------------------
1994 12.26 0.74 0.23 23.43 24.98 7.49
- ---------------------------------------------------------------------------------------------------------------
1995 11.62 0.73 0.04 23.65 25.30 1.26
- ---------------------------------------------------------------------------------------------------------------
TOTAL $8.13 $0.81
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ From inception 3/1/85 to 2/28/86.
/2/ Includes short-term capital gains of $0.04 on 12/11/91; $0.01 on 3/18/92;
$0.04 on 12/11/92; $0.02 on 3/29/93; $0.12 on 12/10/93.
TFH
<PAGE>
- --------------------------------------------------------------------------------
Sector Diversification / February 28, 1995
T. Rowe Price Tax-Free High Yield Fund
- --------------------------------------------------------------------------------
Percent of
Net Assets
----------
Hospital Revenue 25%
Housing Finance Revenue 13
Industrial & Pollution
Control Revenue 10
Nuclear Revenue 9
Life Care/Nursing Home Revenue 8
Solid Waste Revenue 6
Ground Transportation Revenue 5
Pre-refunded Bonds 5
Percent of
Net Assets
----------
General Obligation-Local 4%
Lease Revenue 4
General Obligation-State 3
Electric Revenue 2
Dedicated Tax Revenue 2
Miscellaneous Revenue 2
Water & Sewer Revenue 1
Air & Sea Transportation Revenue 1
- --------------------------------------------------------------------------------
Statement of Net Assets
T. Rowe Price Tax-Free High Yield Fund / February 28, 1995
- --------------------------------------------------------------------------------
(amounts in thousands, except capital stock information)
<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
ALABAMA -- 3.7%
Baldwin County Eastern Shore Hosp. Auth., Thomas Hosp., 8.50%, 4/1/16................... $ 4,000 $ 4,249
Birmingham, GO, VRDN (Currently 4.15%).................................................. 2,000 2,000
Courtland IDB, Solid Waste Disposal, Champion Int'l, 5.90%, 2/1/17...................... 8,000 7,235
Marshall County Health Care Auth., Guntersville-Arab Medical Center,
7.00%, 10/1/13.................................................................. 2,100 2,057
10.25%, 10/1/13................................................................. 6,750 8,061
Mobile, Capital Improvement Warrants, GO, (MBIA Insured),
Zero Coupon, 2/15/18............................................................ 1,030 234
Zero Coupon, 8/15/18............................................................ 4,550 999
Zero Coupon, 2/15/19............................................................ 905 192
Zero Coupon, 8/15/19............................................................ 4,675 956
Zero Coupon, 2/15/20............................................................ 770 152
Zero Coupon, 8/15/20............................................................ 4,810 915
Mobile Airport Auth., 8.875%, 10/1/15 *................................................. 2,000 2,215
Shelby County, GO, (MBIA Insured), 7.40%, 8/1/07........................................ 2,000 2,136
7.70%, 8/1/17................................................................... 1,000 1,067
- ---------------------------------------------------------------------------------------------------------------------------
ALASKA -- 0.6%
Alaska HFC, VRDN (Currently 4.10%)...................................................... 5,000 5,000
- ---------------------------------------------------------------------------------------------------------------------------
ARIZONA -- 1.0%
Salt River, Agricultural Improvement & Power Dist., 5.50%, 1/1/28....................... 5,000 4,524
Scottsdale IDA, Westminster Village, 10.00%, 6/1/07 (Pre-refunded 6/1/97+).............. 1,285 1,458
10.00%, 6/1/17 (Pre-refunded 6/1/97+)........................................... 750 851
Tempe IDA, Friendship Village of Tempe, 6.75%, 12/1/13.................................. 1,950 1,803
- ---------------------------------------------------------------------------------------------------------------------------
ARKANSAS -- 0.4%
Independence County, PCR, Mississippi Power & Light, Floating Rate,
7/1/12 (Currently 7.625%)....................................................... 3,000 3,114
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
CALIFORNIA -- 6.4%
California HFFA, Daughters of Charity Health Systems
(St. Francis Medical Center), 5.75%, 10/1/23........................................ $ 6,515 $ 5,883
California Public Works Board, Univ. of California, 5.50%, 6/1/14....................... 5,000 4,516
Fresno Joint Powers Fin. Auth., 6.55%, 9/2/12........................................... 2,000 1,957
Inglewood Redev. Agency, Century Redev., 6.125%, 7/1/23................................. 3,440 3,118
Los Angeles County, Marina del Rey, COP, 6.50%, 7/1/08.................................. 3,250 3,210
San Diego, IDR, San Diego Gas & Electric, (AMBAC Insured), 5.90%, 6/1/18................ 7,000 6,826
San Joaquin Hills Transportation Corridor Agency, Toll Road,
Zero Coupon, 1/1/03............................................................. 5,600 2,971
Zero Coupon, 1/1/10............................................................. 13,100 3,863
Zero Coupon, 1/1/19............................................................. 23,425 4,277
Zero Coupon, 1/1/25............................................................. 25,000 2,985
Zero Coupon, 1/1/28............................................................. 15,000 1,005
7.00%, 1/1/30................................................................... 2,250 2,247
6.75%, 1/1/32................................................................... 2,775 2,676
San Jose Redev. Agency, Tax Allocation, (MBIA Insured), 5.25%, 8/1/16................... 4,000 3,623
Southern California Public Power Auth.,
Floating rate, 7/1/12 (Currently 5.858%)........................................ 3,800 3,739
Southern Transmission, 5.75%, 7/1/21................................................ 3,000 2,822
- ---------------------------------------------------------------------------------------------------------------------------
COLORADO -- 2.6%
Boulder County, Longmont United Hosp., 8.20%, 12/1/20
(Pre-refunded 12/1/00+)............................................................. 1,540 1,784
Boulder County, IDR, Boulder Medical Center, 8.625%, 1/1/07 *........................... 820 868
8.75%, 1/1/12 *................................................................. 1,205 1,272
8.875%, 1/1/17 *................................................................ 1,190 1,255
Colorado Housing Fin. Auth., 9.60%, 8/1/01 *............................................ 735 775
8.65%, 8/1/03................................................................... 965 1,002
9.00%, 8/1/03................................................................... 945 977
9.40%, 8/1/03 *................................................................. 815 848
8.70%, 11/1/04 *................................................................ 1,575 1,638
Denver City & County, Airport System, United Air Lines, 6.875%, 10/1/32 *............... 5,000 4,771
Sisters of Charity of Leavenworth Health Services, 5.00%, 12/1/23................... 4,000 3,317
El Paso County, School Dist. No. 20, GO, TAN, 6.35%, 12/15/06........................... 3,000 2,995
Westminster, Special Improvement Dist., 9.25%, 12/1/03.................................. 1,475 1,515
- ---------------------------------------------------------------------------------------------------------------------------
DELAWARE -- 2.1%
Delaware Economic Dev. Auth., Delmarva Power & Light, (FGIC Insured),
7.15%, 7/1/18................................................................... 2,500 2,676
Peninsula United Methodist Homes, 8.50%, 5/1/22..................................... 2,500 2,665
Delaware HFA, Beebe Medical Center, 6.75%, 6/1/14....................................... 3,975 3,928
8.50%, 6/1/16 (Pre-refunded 6/1/00+)............................................ 5,600 6,547
Wilmington Osteopathic Hosp. Assoc. of Delaware, Riverside Hosp.,
10.20%, 10/1/18 (Pre-refunded 10/1/98+)......................................... 2,000 2,374
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</TABLE>
3
<PAGE>
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T. Rowe Price Tax-Free High Yield Fund / Statement of Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
DISTRICT OF COLUMBIA -- 0.2%
Dist. of Columbia, American Geophysical Union, 5.875%, 9/1/23........................... $ 1,750 $ 1,454
- ---------------------------------------------------------------------------------------------------------------------------
FLORIDA -- 3.0%
Brevard County Tourist Dev., Florida Marlins Spring Training Fac.,
6.875%, 3/1/13.................................................................. 1,520 1,538
Broward County Resource Recovery, Broward Waste Energy, L.P. North,
7.95%, 12/1/08.................................................................. 4,830 5,279
Broward Waste Energy, L.P. South, 7.95%, 12/1/08.................................... 4,910 5,367
Charlotte County, IDR, Beverly Enterprises, 10.00%, 6/1/11.............................. 1,000 1,155
Collier County IDA, Beverly Enterprises, 10.75%, 3/1/03................................. 905 1,053
Escambia County, IDR, Beverly Enterprises, 9.80%, 6/1/11................................ 485 549
Florida, Board of Ed. (Public Ed. Capital Outlay), GO, 6.70%, 6/1/22.................... 2,000 2,093
Hernando County, IDR, Beverly Enterprises, 10.00%, 9/1/11............................... 960 1,111
Jacksonville, IDR, Beverly Enterprises, 9.75%, 10/1/11.................................. 965 1,091
Leon County, IDR, Beverly Enterprises, 9.80%, 6/1/11.................................... 485 550
Manatee County Housing Fin. Auth., Capital Appreciation,
Zero Coupon, 10/1/15............................................................ 10,105 1,197
Orange County IDA, Beverly Enterprises, 9.25%, 8/1/10................................... 475 530
Santa Rosa County HFA, Gulf Breeze Hosp., 8.60%, 10/1/02................................ 1,000 1,080
St. John's County IDA, Vicar's Landing, 6.75%, 2/15/12.................................. 4,000 3,733
- ---------------------------------------------------------------------------------------------------------------------------
GEORGIA -- 1.7%
Fulco Hosp. Auth., Georgia Baptist Health Care System, 6.25%, 9/1/13.................... 7,200 6,406
6.375%, 9/1/22.................................................................. 2,500 2,162
Putnam County Dev. Auth., PCR, Georgia Power, (FGIC Insured),
7.25%, 7/1/21................................................................... 3,000 3,119
Rockdale County Dev. Auth., Solid Waste Disposal, Visy Paper, Inc.,
7.50%, 1/1/26 *................................................................. 3,500 3,470
- ---------------------------------------------------------------------------------------------------------------------------
GUAM -- 0.3%
Guam Power Auth., 6.75%, 10/1/24........................................................ 3,000 3,030
- ---------------------------------------------------------------------------------------------------------------------------
IDAHO -- 0.6%
Gem County, PCR, Boise Cascade, Floating Rate, 1/5/97 (Currently 5.94%)................. 333 333
Idaho Housing Agency, Single Family Mortgage, 7.80%, 1/1/23 *........................... 2,370 2,491
Idaho Student Loan Marketing Assoc., 6.70%, 10/1/07 *................................... 2,500 2,502
- ---------------------------------------------------------------------------------------------------------------------------
ILLINOIS -- 6.0%
Aurora, Dreyer Medical Clinic, 8.75%, 7/1/14............................................ 4,485 4,936
Chicago - O'Hare Int'l. Airport, American Airlines, 7.875%, 11/1/25 *................... 2,500 2,576
Illinois Dev. Fin. Auth., Palos Community Hosp., VRDN (Currently 4.00%)................. 4,000 4,000
Illinois HFA, Covenant Retirement Community, 7.60%, 12/1/12............................. 2,665 2,723
Glen Oaks Medical Center, 9.50%, 11/15/15........................................... 2,240 2,584
Hinsdale Health System, 9.00%, 11/15/15............................................. 4,855 5,473
Holy Cross Hosp., 6.75%, 3/1/24..................................................... 4,000 3,727
</TABLE>
4
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<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
ILLINOIS (cont'd)
Illinois HFA (cont'd)
Memorial Hosp., 7.25%, 5/1/22....................................................... $ 9,500 $ 9,410
Morris Hosp., 6.125%, 12/1/23....................................................... 3,500 3,000
Northwestern Memorial Hosp., 6.00%, 8/15/24......................................... 2,000 1,882
Wabash General Hosp. Dist., 11.35%, 9/1/05 (Pre-refunded 9/1/95+)................... 1,770 1,883
Robbins Village, Resource Recovery, 9.25%, 10/15/14 *................................... 7,500 7,977
Southwestern Illinois Dev. Auth., Anderson Hosp., 7.00%, 8/15/22........................ 2,500 2,267
- ---------------------------------------------------------------------------------------------------------------------------
INDIANA -- 1.1%
Evansville Hosp. Auth., Daughters of Charity Health Systems
(St. Mary's Medical Center), 10.125%, 11/1/15....................................... 5,000 5,258
Hammond, Sewage & Solid Waste Disposal, American Maize Products,
8.00%, 12/1/24 *................................................................ 4,000 4,290
- ---------------------------------------------------------------------------------------------------------------------------
KENTUCKY -- 3.3%
Ashland, Sewage & Solid Waste, 7.125%, 2/1/22 *......................................... 3,000 3,032
Florence Housing Fac., Bluegrass RHF Housing, 9.50%, 7/1/17............................. 1,965 2,065
Jefferson County, Louisville Gas & Electric, 7.45%, 6/15/15............................. 4,250 4,596
Jefferson County HFA, Beverly Enterprises, 9.75%, 8/1/07................................ 900 1,008
Kenton County Airport Board, Delta Airlines, 7.50%, 2/1/12 *............................ 3,600 3,644
7.50%, 2/1/20 *................................................................. 5,000 5,048
6.125%, 2/1/22 *................................................................ 3,000 2,603
Kentucky Dev. Fin. Auth., Berea Hosp., 8.375%, 7/1/12................................... 2,860 2,962
St. Claire Medical Center, 7.125%, 9/1/21 (Pre-refunded 9/1/01+).................... 3,600 4,026
- ---------------------------------------------------------------------------------------------------------------------------
LOUISIANA -- 4.1%
Lake Charles Harbor & Terminal Dist., 7.75%, 8/15/22.................................... 5,000 5,332
Louisiana Offshore Terminal Auth., LOOP, 7.60%, 9/1/10.................................. 8,500 9,141
Louisiana PFA, IDR, Beverly Enterprises, 8.25%, 9/1/08.................................. 1,425 1,500
St. James Place of Baton Rouge, 10.00%, 11/1/21..................................... 4,500 5,046
New Orleans Aviation Board, (MBIA Insured), VRDN (Currently 3.95%)...................... 2,000 2,000
Plaquemines Parish IDB, PCR, AMAX Inc., 7.25%, 10/1/09.................................. 1,280 1,281
Saint Charles Parish, Louisiana Power & Light, 8.00%, 12/1/14........................... 6,865 7,405
West Feliciana Parish, PCR, Gulf States Utilities, 8.00%, 12/1/24....................... 4,000 4,229
- ---------------------------------------------------------------------------------------------------------------------------
MAINE -- 0.6%
Maine HHEFA, Waterville Osteopathic Hosp., 9.875%, 7/1/13
(Pre-refunded 7/1/97+).............................................................. 4,370 4,967
- ---------------------------------------------------------------------------------------------------------------------------
MARYLAND -- 3.6%
Baltimore County, Stella Maris, 7.50%, 3/1/21........................................... 1,000 1,030
Berlin, Atlantic General Hosp., 8.375%, 6/1/22.......................................... 1,980 2,086
Gaithersburg, Asbury Methodist Home, 7.85%, 1/1/20 (Pre-refunded 1/1/00+)............... 2,000 2,264
Maryland CDA, Single Family, 7.25%, 4/1/19.............................................. 2,500 2,615
Zero Coupon, 4/1/29 *........................................................... 25,695 1,760
</TABLE>
5
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T. Rowe Price Tax-Free High Yield Fund / Statement of Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
MARYLAND (cont'd)
Maryland HHEFA, Doctor's Community Hosp., 5.50%, 7/1/24................................. $ 3,200 $ 2,475
Kennedy Kreiger Institute, VRDN (Currently 4.05%)................................... 1,000 1,000
Mercy Medical Center, VRDN (Currently 3.90%)........................................ 4,500 4,500
Union Hosp. of Cecil County, 6.70%, 7/1/22.......................................... 2,725 2,535
Maryland Ind. Dev. Fin. Auth., Associated Catholic Charities, 9.00%, 1/1/10............. 1,650 1,811
Economic Dev., American Association of Blood Banks, 7.25%, 8/1/13................... 2,700 2,725
Economic Dev., Georgetown Bakery Management Corp. Fac.,
9.25%, 9/1/04 *................................................................. 1,575 1,681
Maryland-National Capital Park & Planning Commission,
Little Bennett Golf Fac., 8.25%, 10/1/11............................................ 2,380 2,517
Montgomery County Housing Opportunities Commission, Multifamily,
Strathmore Court at White Flint, 8.75%, 7/1/27...................................... 2,000 2,047
Single Family, 7.50%, 7/1/17........................................................ 695 735
- ---------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS -- 2.6%
Massachusetts, GO, 7.50%, 6/1/04........................................................ 2,750 3,210
Massachusetts Bay Transportation Auth., General Transportation System,
7.00%, 3/1/19................................................................... 2,500 2,840
7.00%, 3/1/21................................................................... 2,000 2,282
Massachusetts HEFA, New England Deaconess Hosp., 7.20%, 4/1/22.......................... 3,535 3,611
Massachusetts Housing Fin. Agency, Capital Asset Pool, (MBIA Insured),
6.375%, 4/1/21.................................................................. 2,000 1,991
Massachusetts Ind. Fin. Agency, Nevins Home, 7.875%, 7/1/23............................. 5,515 5,480
New England Memorial Hosp., 8.875%, 7/1/13 (Pre-refunded 7/1/98+)................... 2,795 3,176
- ---------------------------------------------------------------------------------------------------------------------------
MICHIGAN -- 3.5%
Dickinson County, Economic Dev., Champion Int'l, 5.85%, 10/1/18......................... 5,000 4,494
Meridian Economic Dev. Corp., Burcham Hills Retirement Center III,
9.625%, 7/1/19.................................................................. 2,850 3,096
Michigan HDA, 6.50%, 12/1/17............................................................ 4,000 4,022
7.75%, 12/1/19 *................................................................ 1,175 1,256
Michigan Hosp. Fin. Auth., Bay Medical Center, 8.25%, 7/1/12............................ 2,000 2,117
Daughters of Charity Health Systems (St. Mary's Hosp.), 10.00%, 11/1/15............. 1,480 1,555
Saratoga Community Hosp., 8.75%, 6/1/10............................................. 2,800 2,924
Sisters of Mercy Health Corp., 7.50%, 2/15/18....................................... 1,650 1,865
Midland County Economic Dev. Corp., Midland Cogeneration,
9.50%, 7/23/09 *............................................................... 4,000 4,287
Monroe County, PCR, Detroit Edison, 10.125%, 9/1/05 *................................... 920 963
Waterford Township Economic Dev., Canterbury Health Care, Inc.,
8.375%, 7/1/23.................................................................. 4,000 4,129
- ---------------------------------------------------------------------------------------------------------------------------
MINNESOTA -- 0.4%
Minnesota Housing Fin. Agency, Single Family Mortgage, 6.70%, 1/1/18.................... 2,000 2,057
9.00%, 8/1/18................................................................... 1,000 1,069
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
MISSISSIPPI -- 2.1%
Adams County, Jefferson Davis Memorial Hosp., 8.00%, 10/1/16............................ $ 3,805 $ 3,940
Claiborne County, PCR, Systems Energy Resources, 9.50%, 12/1/13......................... 2,000 2,262
9.875%, 12/1/14................................................................. 6,100 6,975
Mississippi Home Corp., Single Family Mortgage, (FGIC Insured),
9.25%, 3/1/12................................................................... 340 369
Mississippi Hosp. Equipment & Fac. Auth., Magnolia Hosp., 7.375%, 10/1/21............... 3,000 2,756
Rush Memorial Foundation, 8.75%, 1/1/16............................................. 2,000 2,163
- ---------------------------------------------------------------------------------------------------------------------------
MISSOURI -- 2.1%
Hannibal IDA, Hannibal Medical Center, 9.50%, 3/1/22.................................... 4,000 4,695
Joplin IDA, Tri-State Osteopathic Hosp. Assoc., 8.25%, 12/15/14......................... 1,205 1,214
Lees Summit IDA, John Knox Village, 7.125%, 8/15/12..................................... 1,500 1,531
Missouri HEFA, Bethesda Health Group, 7.50%, 8/15/12.................................... 1,250 1,269
St. Anthony's Medical Center, VRDN (Currently 4.05%)................................ 3,600 3,600
Still Regional Medical Center, 7.70%, 2/1/13........................................ 2,250 2,307
Ray County, Ray County Memorial Hosp., 9.625%, 11/15/13................................. 3,200 3,574
- ---------------------------------------------------------------------------------------------------------------------------
MONTANA -- 1.6%
Montana Board of Housing, (FHA Insured), 7.85%, 10/1/04................................. 860 903
9.20%, 10/1/01 *................................................................ 645 668
8.50%, 10/1/02.................................................................. 810 841
8.525%, 10/1/02................................................................. 775 802
8.95%, 10/1/02 *................................................................ 805 839
8.40%, 10/1/03 *................................................................ 860 889
Montana Board of Investments, Yellowstone Energy Limited Partnership,
7.00%, 12/31/19 *............................................................... 9,500 8,967
- ---------------------------------------------------------------------------------------------------------------------------
NEBRASKA -- 1.0%
Douglas County Hosp. Auth., Immanuel Medical Center, (AMBAC Insured),
7.00%, 9/1/21................................................................... 5,500 5,843
Nebraska Investment Fin. Auth., Single Family Mortgage, (GNMA Insured),
Residual Interest Bond/Inverse Floater, 3/15/22 (Currently 10.476%) *............... 800 876
9/10/30 (Currently 10.923%) *................................................... 1,600 1,774
- ---------------------------------------------------------------------------------------------------------------------------
NEVADA -- 1.2%
Clark County, IDR, Southwest Gas, 7.30%, 9/1/27......................................... 3,000 3,097
6.50%, 12/1/33 *................................................................ 5,000 4,711
Nevada Housing Division, Sub Lien, 9.375%, 10/1/00 *.................................... 535 556
9.35%, 10/1/02 *................................................................ 490 503
9.65%, 10/1/02 *................................................................ 715 757
(FGIC Insured), 9.45%, 10/1/03 *.................................................... 745 776
- ---------------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE -- 0.5%
New Hampshire HHEFA, Catholic Medical Center, 8.25%, 7/1/13............................. 2,000 2,095
New Hampshire Housing Fin. Auth., 8.625%, 7/1/13 *...................................... 1,885 1,985
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
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T. Rowe Price Tax-Free High Yield Fund / Statement of Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
NEW JERSEY -- 2.9%
Atlantic City Utilities Auth., Solid Waste Systems, 7.125%, 3/1/16...................... $ 2,150 $ 2,038
New Jersey Economic Dev. Auth., Holt Hauling & Warehouse System,
10.25%, 9/15/14................................................................. 500 544
9.75%, 12/15/16 *............................................................... 1,000 1,088
Keswick Pines, 8.75%, 1/1/24........................................................ 6,000 6,129
New Jersey HFFA, Raritan Bay Medical Center, 7.25%, 7/1/27.............................. 4,000 3,728
New Jersey Sports & Exposition Auth., Monmouth Park, 8.00%, 1/1/25...................... 5,250 5,482
New Jersey Turnpike Auth., 6.50%, 1/1/16................................................ 6,000 6,302
- ---------------------------------------------------------------------------------------------------------------------------
NEW YORK -- 6.9%
Babylon IDA, Babylon Community Waste Management, 7.875%, 7/1/06
(Pre-refunded 7/1/99+).......................................................... 1,000 1,129
Babylon Recycling Center, 8.875%, 3/1/11 *++........................................ 1,895 853
Ogden Martin Systems, 8.50%, 1/1/19................................................. 1,015 1,100
Dormitory Auth. of the State of New York, City Univ., 6.00%, 7/1/14..................... 5,230 5,027
Metropolitan Transportation Auth., Contract Transit Fac., 7.125%, 7/1/09................ 4,000 4,230
New York City, GO, 7.50%, 2/1/02........................................................ 1,000 1,069
6.00%, 8/1/06................................................................... 5,675 5,426
6.20%, 8/1/07................................................................... 5,000 4,824
5.625%, 10/1/12................................................................. 2,500 2,225
7.625%, 2/1/15.................................................................. 3,000 3,161
7.75%, 8/15/15.................................................................. 2,500 2,647
7.00%, 2/1/18................................................................... 7,100 7,188
New York State Environmental Fac. Corp., PCR, 5.875%, 6/15/14........................... 7,000 6,822
New York State Local Gov't. Assistance Corp., 6.25%, 4/1/18............................. 3,650 3,655
New York State Mortgage Agency, Capital Appreciation, Home Ownership,
Zero Coupon, 4/1/20............................................................. 11,800 1,650
Homeowner Mortgage, 6.45%, 10/1/17.................................................. 2,400 2,397
7.50%, 4/1/26 *................................................................. 3,000 3,204
New York State Urban Dev. Corp., Correctional Capital Fac.,
Zero Coupon, 1/1/08............................................................. 5,000 2,163
Syracuse IDA, Parking Fac., 7.70%, 6/1/15 (Pre-refunded 6/1/99+)........................ 1,000 1,119
- ---------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA -- 0.4%
North Carolina Medical Care Commission, Stanley Memorial Hosp.,
7.80%, 10/1/19.................................................................. 1,000 1,046
Valdese General Hosp., 8.75%, 10/1/16............................................... 2,140 2,282
- ---------------------------------------------------------------------------------------------------------------------------
OHIO -- 4.1%
Cambridge, Guernsey Memorial Hosp., 8.00%, 12/1/11...................................... 1,500 1,565
Cleveland Parking Fac., 8.10%, 9/15/22.................................................. 12,000 12,575
Marion County Health Care Fac., United Church Homes, 8.875%, 12/1/12
(Pre-refunded 12/1/99+)............................................................. 3,225 3,814
Middleburg Heights, Southwest General Hosp., 7.20%, 8/15/19............................. 2,000 2,095
Ohio Air Quality Dev. Auth., PCR, Toledo Edison, 8.00%, 5/15/19......................... 2,750 2,842
</TABLE>
8
<PAGE>
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
OHIO (cont'd)
Ohio Housing Fin. Agency, Single Family Mortgage,
Residual Interest Bond/Inverse Floater, 3/31/31 (Currently 9.327%) *................ $ 750 $ 774
Ohio Water Dev. Auth., PCR, Cleveland Electric, 9.75%, 11/1/22 *........................ 2,000 2,188
Toledo Edison, 7.55%, 6/1/23........................................................ 4,500 4,519
8.00%, 10/1/23.................................................................. 5,700 5,862
- ---------------------------------------------------------------------------------------------------------------------------
OKLAHOMA -- 3.3%
Jackson County Memorial Hosp. Auth., 7.30%, 8/1/15...................................... 4,300 4,090
LeFlore County Hosp. Auth., Eastern Oklahoma Medical Center,
9.40%, 5/1/06................................................................... 2,000 2,144
Oklahoma County IDA, Epworth Villa, 10.25%, 4/1/19...................................... 3,000 3,310
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 3,105
Tulsa Municipal Airport, American Airlines, 9.375%, 6/1/04.............................. 3,000 3,136
7.375%, 12/1/20 *............................................................... 2,000 2,003
7.60%, 12/1/30 *................................................................ 5,000 5,075
Washington County Medical Auth., Jane Phillips Episcopal Hosp.,
8.50%, 11/1/10.................................................................. 5,200 5,517
- ---------------------------------------------------------------------------------------------------------------------------
OREGON -- 0.3%
Oregon, Veterans' Welfare, GO, VRDN (Currently 4.05%)................................... 1,000 1,000
Western Generation Agency, Wauna Cogeneration, 7.25%, 1/1/09 *.......................... 2,000 2,045
- ---------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA -- 3.9%
Allegheny County Hosp. Dev. Auth., Health and Ed. Rehabilitation
Institute of Pittsburgh, 7.00%, 6/1/22.............................................. 2,000 1,950
Beaver County, PCR, Toledo Edison, 12.25%, 9/15/15...................................... 1,000 1,056
Berks County IDA, Lutheran Home at Topton, 6.875%, 1/1/23............................... 5,000 4,653
Blair County Hosp. Auth., Mercy Hosp., 8.125%, 2/1/14................................... 2,700 2,790
Butler County IDA, Herr-Voss, 8.60%, 11/1/99 *.......................................... 600 627
Clarion IDA Health Fac., Beverly Enterprises, 10.125%, 5/1/07........................... 900 1,016
Greene County IDA, Greene Health Care Assoc., Beverly Enterprises,
6.875%, 3/1/13.................................................................. 2,430 2,313
Montgomery County Higher Ed. and Health Auth., Brittany Pointe,
8.50%, 1/1/22................................................................... 2,500 2,618
Redeemer Long Term Care & Elder Services, 8.20%, 6/1/06............................. 925 962
8.00%, 6/1/22................................................................... 5,755 5,836
Pennsylvania Higher Ed. Fac. Auth., Medical College of Pennsylvania,
8.375%, 3/1/11.................................................................. 2,200 2,311
Pennsylvania Housing Fac. Auth., Residual Interest Bond/Inverse Floater,
10/03/23 (Currently 9.306%) *................................................... 1,500 1,579
Schuylkill County IDA, Schuylkill Energy Resources, Inc., 6.50%, 1/1/10 *............... 7,000 6,497
- ---------------------------------------------------------------------------------------------------------------------------
PUERTO RICO -- 1.2%
Puerto Rico Aqueduct & Sewer Auth., GO, 7.90%, 7/1/07................................... 2,500 2,717
</TABLE>
9
<PAGE>
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T. Rowe Price Tax-Free High Yield Fund / Statement of Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
PUERTO RICO (cont'd)
Puerto Rico Housing Bank & Fin. Agency, 4.375%, 12/1/97................................. $ 5,000 $ 4,818
Puerto Rico Infrastructure Fin. Auth., 7.50%, 7/1/09.................................... 2,365 2,515
- ---------------------------------------------------------------------------------------------------------------------------
RHODE ISLAND -- 1.4%
Rhode Island Health & Ed. Building Corp., Rhode Island Hosp.,
(FGIC Insured), Residual Interest Bond/Inverse Floater,
8/15/21 (Currently 9.36%)....................................................... 1,000 1,079
Rhode Island Housing & Mortgage Fin. Corp., 8.05%, 4/1/22 *............................. 5,000 5,331
Residual Interest Bond/Inverse Floater, 4/1/24 (Currently 9.607%) *................. 1,000 1,035
Homeownership Opportunity, 6.70%, 10/1/14........................................... 5,000 5,121
- ---------------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA -- 0.6%
South Carolina Public Service Auth., (FGIC Insured), 5.875%, 1/1/23..................... 5,000 4,850
- ---------------------------------------------------------------------------------------------------------------------------
SOUTH DAKOTA -- 0.8%
South Dakota Building Auth., 7.50%, 12/1/16............................................. 4,400 4,602
South Dakota HDA, Homeownership Mortgage, 6.65%, 5/1/14................................. 2,500 2,557
- ---------------------------------------------------------------------------------------------------------------------------
TENNESSEE -- 1.6%
Chattanooga-Hamilton County Hosp. Auth., Erlanger Medical Center,
VRDN (Currently 3.85%).......................................................... 5,100 5,100
Health & Ed. Fac. Board of the Metropolitan Gov't. of Nashville & Davidson
County, Metropolitan Nashville Teachers' Nursing Fac., 10.25%, 10/1/19.............. 2,250 2,126
Tennessee, GO, BAN, VRDN (Currently 4.00%).............................................. 2,600 2,600
Tennessee Housing Dev. Agency, 7.625%, 7/1/22 *......................................... 1,900 2,013
5.95%, 7/1/28................................................................... 2,500 2,279
- ---------------------------------------------------------------------------------------------------------------------------
TEXAS -- 7.6%
Bell County Health Fac. Dev. Corp., King's Daughter Hosp., 9.25%, 7/1/08................ 3,445 3,853
Brazos River Auth., Houston Lighting & Power, (MBIA Insured),
6.375%, 4/1/12.................................................................. 10,000 10,329
Texas Utilities, 8.25%, 12/1/16 *................................................... 1,000 1,047
9.875%, 10/1/17 *............................................................... 2,130 2,371
Denison Hosp. Auth., Texoma Medical Center, 7.10%, 8/15/24.............................. 3,650 3,575
Gainesville IDC, Valenite, 8.90%, 5/15/11 *............................................. 3,360 3,622
Gulf Coast Waste Disposal Auth., Houston Lighting & Power,
Floating Rate, 6/1/98 (Currently 5.10%)............................................. 5,000 4,988
Harris County, Toll Road, (MBIA Insured), 6.375%, 8/15/24............................... 2,500 2,550
Harris County Health Fac. Dev. Corp., Memorial Hosp., 7.125%, 6/1/15.................... 5,000 5,175
Texas Medical Center, (MBIA Insured), 7.375%, 5/15/20............................... 2,350 2,515
Houston Independent School Dist., Cap. Appreciation, Zero Coupon, 8/15/12............... 1,900 655
Matagorda County Navigation Dist. Number One, PCR, Central Power & Light,
7.50%, 12/15/14................................................................. 2,000 2,134
Paris Health Fac. Dev. Corp., McCuistion Regional Medical Center,
7.60%, 2/1/12................................................................... 4,500 4,658
Texas, Veterans' Housing Assistance, GO, 6.25%, 12/1/15................................. 3,940 4,055
</TABLE>
10
<PAGE>
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
TEXAS (cont'd)
Texas PFA, (AMBAC Insured), 5.75%, 2/1/15............................................... $ 6,270 $ 6,103
Tomball Hosp. Auth., Tomball Regional Hosp., 6.10%, 7/1/08.............................. 5,000 4,625
Weslaco Health Fac. Dev. Corp., Knapp Medical Center, 10.375%, 6/1/16
(Pre-refunded 6/1/98+).............................................................. 3,500 4,085
- ---------------------------------------------------------------------------------------------------------------------------
UTAH -- 1.7%
Davis County, Solid Waste Management & Energy Recovery Special
Service Dist., 6.125%, 6/15/09...................................................... 6,000 5,555
Utah Housing Fin. Agency, 8.65%, 7/1/04................................................. 780 803
7.60%, 7/1/05................................................................... 1,015 1,066
7.75%, 7/1/05................................................................... 995 1,050
Sub Lien, 9.875%, 1/1/99 *.......................................................... 160 169
10.50%, 1/1/99 *................................................................ 155 162
10.625%, 7/1/99 *............................................................... 155 165
9.30%, 7/1/00 *................................................................. 145 150
8.70%, 7/1/01................................................................... 330 339
9.25%, 7/1/01................................................................... 415 435
9.60%, 7/1/02 *................................................................. 100 103
9.75%, 7/1/02................................................................... 160 164
9.85%, 7/1/02 *................................................................. 330 338
8.55%, 7/1/04................................................................... 465 479
6.25%, 7/1/05................................................................... 835 857
7.50%, 7/1/05................................................................... 1,000 1,036
8.40%, 7/1/08 *................................................................. 295 309
9.00%, 1/1/19 *................................................................. 735 782
7.75%, 1/1/23 *................................................................. 550 588
- ---------------------------------------------------------------------------------------------------------------------------
VERMONT -- 0.2%
Vermont Ed. and Health Buildings Fin. Agency, Medical Center Hosp. of
Vermont, (FGIC Insured), 7.45%, 9/1/23.............................................. 1,400 1,419
- ---------------------------------------------------------------------------------------------------------------------------
VIRGINIA -- 1.7%
Henrico County IDA, Bon Secours Health System (Maryview Hosp.),
7.50%, 9/1/11................................................................... 1,825 2,055
Norfolk Port & Ind. Auth., Henson Aviation, 9.625%, 8/1/12 *............................ 950 1,057
Virginia HDA, 6.25%, 7/1/11............................................................. 2,500 2,505
7.10%, 1/1/22................................................................... 4,000 4,148
7.10%, 1/1/25................................................................... 5,000 5,182
Zero Coupon, 7/1/29 *........................................................... 870 62
- ---------------------------------------------------------------------------------------------------------------------------
WASHINGTON -- 1.6%
Washington, GO, 6.00%, 3/1/16........................................................... 5,000 4,924
Washington HFA, Sisters of Providence, VRDN (Currently 3.95%)........................... 5,700 5,700
Washington Public Power Supply System, 7.25%, 7/1/09.................................... 1,000 1,093
6.30%, 7/1/12................................................................... 2,000 1,995
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free High Yield Fund / Statement of Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Amount Value
----------- ---------
<S> <C> <C>
WEST VIRGINIA -- 0.2%
West Virginia Hosp. Fin. Auth., West Virginia Univ. Hosp., (MBIA Insured),
Residual Interest Bond/Inverse Floater, 1/1/18 (Currently 9.70%).................... $ 2,000 $ 1,849
- ---------------------------------------------------------------------------------------------------------------------------
WISCONSIN -- 1.1%
Wisconsin HFA, Villa Clement, 8.75%, 6/1/12............................................. 1,500 1,533
Wisconsin Housing and Economic Dev. Auth., 7.75%, 9/1/17................................ 4,460 4,766
8.00%, 3/1/21 *................................................................. 3,475 3,692
- ---------------------------------------------------------------------------------------------------------------------------
WYOMING -- 1.9%
Sweetwater County, Solid Waste Disposal, FMC Corp., 6.90%, 9/1/24 *..................... 5,000 4,969
Wyoming Community Dev. Auth., Single Family Mortgage, 6.70%, 6/1/17..................... 3,500 3,580
6.00%, 6/1/23................................................................... 9,000 8,376
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES -- 99.7% OF NET ASSETS (COST -- $843,355).............. 870,633
- ---------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES ......................................................... 2,913
--------
NET ASSETS CONSIST OF: Value
--------
Accumulated net investment income - net of distributions................................ $ 47
Accumulated net realized gain/loss - net of distributions............................... (16,828)
Net unrealized gain (loss).............................................................. 27,278
Paid-in-capital applicable to 75,190,989 shares of $0.01 par value capital
stock outstanding; 1,000,000,000 shares authorized................................. 863,049
--------
NET ASSETS.............................................................................. $873,546
========
NET ASSET VALUE PER SHARE............................................................... $11.62
======
</TABLE>
* - Interest subject to alternative minimum tax
+ - Used in determining portfolio maturity
++ - Non-income producing
AMBAC - AMBAC Indemnity Corp.
BAN - Bond Anticipation Note
CDA - Community Development Administration
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
HFC - Housing Finance Corp.
HFFA - Health Facility Financing Authority
HHEFA - Health & Higher Educational Facility Authority
IDA - Industrial Development Authority
IDB - Industrial Development Bond
IDC - Industrial Development Corporation
IDR - Industrial Development Revenue
MBIA - Municipal Bond Investors Assurance Corp.
PCR - Pollution Control Revenue
PFA - Public Facility Authority
TAN - Tax Anticipation Note
VRDN - Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free High Yield Fund / Year Ended February 28, 1995
(in thousands)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest income.................................................................... $ 61,136
--------
Expenses
Investment management............................................................ 5,561
Shareholder servicing............................................................ 721
Custody and accounting........................................................... 251
Prospectus and shareholder reports............................................... 97
Registration..................................................................... 71
Legal and audit.................................................................. 57
Proxy and annual meeting......................................................... 31
Directors........................................................................ 17
Miscellaneous.................................................................... 20
--------
Total expenses................................................................... 6,826
--------
Net investment income.............................................................. 54,310
--------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Securities....................................................................... (16,038)
Futures.......................................................................... (188)
--------
Net realized gain (loss)......................................................... (16,226)
Change in net unrealized gain or loss on securities................................ (31,366)
--------
Net realized and unrealized gain (loss)............................................ (47,592)
--------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS.................................. $ 6,718
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free High Yield Fund
(in thousands)
<TABLE>
<CAPTION>
Year Ended February 28,
1995 1994
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income.................................................. $ 54,310 $ 54,721
Net realized gain (loss)............................................... (16,226) 17,384
Change in net unrealized gain or loss.................................. (31,366) (6,992)
--------- ---------
Increase (decrease) in net assets from operations...................... 6,718 65,113
--------- ---------
Distributions to shareholders
Net investment income.................................................. (54,310) (54,721)
Net realized gain...................................................... (2,999) (17,058)
--------- ---------
Decrease in net assets from distributions.............................. (57,309) (71,779)
--------- ---------
Capital share transactions*
Shares sold............................................................ 258,095 358,379
Distributions reinvested............................................... 40,053 53,067
Shares redeemed........................................................ (315,306) (316,670)
--------- ---------
Increase (decrease) in net assets from capital share transactions...... (17,158) 94,776
--------- ---------
Increase (decrease) in net assets ....................................... (67,749) 88,110
NET ASSETS
Beginning of period.................................................... 941,295 853,185
--------- ---------
End of period.......................................................... $ 873,546 $ 941,295
========= =========
- ---------------------------------------------------------------------------------------------------------------
*Share information
Shares sold.......................................................... 22,361 28,847
Distributions reinvested............................................. 3,474 4,275
Shares redeemed...................................................... (27,429) (25,510)
--------- ---------
Increase (decrease) in shares outstanding............................ (1,594) 7,612
========= =========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free High Yield Fund / February 28, 1995
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) 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.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the officers
of the fund, as authorized by the Board of Directors.
B) Premiums and Discounts - Premiums and discounts on municipal securities
are accounted for in accordance with federal income tax regulations, which
require the amortization of all premiums and discounts except market
discounts. Market discounts are included in the gain or loss recorded on
disposition of the security for financial reporting purposes and ordinary
income for tax purposes.
C) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on 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 and may differ from
those determined in accordance with generally accepted accounting principles.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks and enhance performance. The
investment objective, policies, program, risk factors and following practices of
the fund are described 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) Other - Purchases and sales of portfolio securities, other than short-term
securities, aggregated $490,853,000 and $485,407,000, respectively, for the
period ended February 28, 1995.
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 $11,104,000 which expire in 2003. 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, $7,000 of
undistributed net investment income and $20,000 of undistributed net realized
gains were reclassified as a $13,000 increase to paid-in-capital during the
period ended February 28,
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (Cont'd)
- --------------------------------------------------------------------------------
1995. The results of operations and net assets were not affected by the
reclassifications.
At February 28, 1995, the aggregate cost of investments for federal
income tax and financial reporting purposes was $843,355,000 and net
unrealized gain aggregated $27,278,000, of which $37,130,000 related to
appreciated investments and $9,852,000 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 $420,000 was payable at February 28, 1995. The fee is computed
daily and paid monthly, and consists 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. At February 28, 1995, and for the period then ended, the
effective annual Group Fee rate was 0.34%. The fund pays a pro rata share of
the Group Fee based on the ratio of its net assets to those of the Group.
In addition, the fund has entered into agreements with the Manager
and a wholly-owned subsidiary of the Manager, pursuant to which the fund
receives certain other services. The Manager computes the daily share price
and maintains the financial records of the fund. T. Rowe Price Services, Inc.
(TRPS) 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
$647,000 for the period ended February 28, 1995, of which $66,000 was payable
at period end.
16
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
T. Rowe Price Tax-Free High Yield Fund
<TABLE>
<CAPTION>
For a share outstanding throughout each period
------------------------------------------------------------------------
Year Ended
Feb. 28, Feb. 28, Feb. 28, Feb. 29, Feb. 28,
1995 1994 1993 1992 1991
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................ $12.26 $12.33 $11.65 $11.40 $11.39
------ ------ ------ ------ ------
Investment Activities
Net investment income........................... 0.73 0.74 0.78 0.81 0.83
Net realized and unrealized gain (loss)......... (0.60) 0.16 0.78 0.35 0.04
------ ------ ------ ------ ------
Total from Investment Activities................ 0.13 0.90 1.56 1.16 0.87
------ ------ ------ ------ ------
Distributions
Net investment income........................... (0.73) (0.74) (0.78) (0.81) (0.83)
Net realized gain............................... (0.04) (0.23) (0.10) (0.10) (0.03)
------ ------ ------ ------ ------
Total Distributions............................. (0.77) (0.97) (0.88) (0.91) (0.86)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD...................... $11.62 $12.26 $12.33 $11.65 $11.40
====== ====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return........................................ 1.26% 7.49% 13.94% 10.56% 7.93%
Ratio of Expenses to Average Net Assets............. 0.79% 0.79% 0.81% 0.83% 0.85%
Ratio of Net Investment Income
to Average Net Assets........................... 6.29% 5.95% 6.58% 7.01% 7.30%
Portfolio Turnover Rate............................. 59.6% 59.3% 34.7% 51.0% 51.2%
Net Assets, End of Period (in thousands)............ $873,546 $941,295 $853,185 $623,877 $505,025
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
T. Rowe Price Tax-Free High Yield Fund
We have audited the accompanying statement of net assets of T. Rowe
Price Tax-Free High Yield Fund as of February 28, 1995, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five 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.
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, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our 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 High Yield Fund as of February 28, 1995, the
results of its operations, 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 17, 1995
18
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Services
- --------------------------------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information and services--at no extra cost.
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE--Shareholder Service Representatives are available from 8:00 a.m. to
10:00 p.m., Monday - Friday, and weekends from 9:00 a.m. to 5:00 p.m., E.T. Call
1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
IN PERSON--Visit one of our investor center locations to meet with a
representative who will be able to assist you with your accounts. While there,
you can drop off applications or obtain prospectuses and other literature.
AUTOMATED 24-HOUR SERVICES
Tele*Access/(R)/ (1-800-638-2587) provides information such as account
balance, date and amount of your last transaction, latest dividend payment, and
fund prices and yields. Additionally, you have the ability to request
prospectuses, statements, account and tax forms; reorder checks; and initiate
purchase, redemption, and exchange orders for identically registered accounts.
PC*Access/(R)/ provides the same information as Tele*Access, but on a
personal computer via dial-up modem.
ACCOUNT SERVICES
Checking--Write checks for $500 or more on any money market and bond
fund accounts.
Automatic Investing--Build your account over time by investing directly
from your bank account or paycheck with Automatic Asset Builder. Additionally,
Automatic Exchange enables you to set up systematic investments from one fund
account into another, such as from a money fund into a stock fund. A low, $50
minimum makes it easy to get started.
Automatic Withdrawal--If you need money from your fund account on a
regular basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options--Reinvest all or some of your
distributions, or take them in cash. We give you maximum flexibility and
convenience.
INVESTMENT INFORMATION
Combined Statement--A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your earnings by tax category, provides total
portfolio value, and lists your investments by type--stock, bond, and money
market. Detail pages itemize account transactions by fund.
Quarterly Shareholder Reports--Portfolio managers review the performance
of the funds in plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report--A quarterly newsletter with relevant articles
on market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Insights--A library of information that includes reports on mutual fund
tax issues, investment strategies, and financial markets.
Detailed Investment Guides--Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Retirees Financial Guide, Retirement Planning Kit (also
available on disk for PC use), and Guide to Risk-Adjusted Performance can help
you determine and reach your investment goals.
DISCOUNT BROKERAGE
You can trade stocks, bonds, options, precious metals, and other securities at a
substantial savings over regular commission rates. Call a shareholder service
representative for more information.
19
<PAGE>
- --------------------------------------------------------------------------------
T. Rowe Price No-Load Mutual Funds
- --------------------------------------------------------------------------------
STABILITY
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money
Market
Tax-Exempt Money
CONSERVATIVE INCOME
Adjustable Rate
U.S. Government
Short-Term Bond
Short-Term Global Income
Summit Limited-Term Bond
U.S. Treasury Intermediate
Florida Insured Intermediate
Tax-Free
Maryland Short-Term
Tax-Free Bond
Summit Municipal
Intermediate
Tax-Free Insured
Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term
Tax-Free Bond
INCOME
Global Government Bond
GNMA
New Income
Spectrum Income
Summit GNMA
U.S. Treasury Long-Term
California Tax-Free Bond
Georgia Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Tax-Free Income
Virginia Tax-Free Bond
AGGRESSIVE INCOME
Emerging Markets Bond
High Yield
International Bond
Tax-Free High Yield
CONSERVATIVE GROWTH
Balanced
Capital Appreciation
Dividend Growth
Equity Income
Equity Index
Growth & Income
Spectrum Growth
Value
GROWTH
Blue Chip Growth
European Stock
Growth Stock
International Stock
Japan
Mid-Cap Growth
New Era
Small-Cap Value
AGGRESSIVE GROWTH
Capital Opportunity
Emerging Markets Stock
International Discovery
Latin America
New America Growth
New Asia
New Horizons
OTC
Science & Technology
PERSONAL STRATEGY FUNDS
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
Call if you want to know about any T. Rowe Price Fund. We'll send you a
prospectus with more complete information, including management fees and other
expenses. Read it carefully before you invest or send money.
20
