<PAGE>
Annual Report
PERSONAL
STRATEGY
FUNDS
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May 31, 1997
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[LOGO OF T. ROWE PRICE APPEARS HERE]
T. ROWE PRICE
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REPORT HIGHLIGHTS
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. The past six months were good to stock investors, but high-quality bonds
turned in lackluster performances as interest rates rose.
. The Personal Strategy Funds provided strong returns, although they trailed
their benchmarks primarily because of an overweighting in foreign stock
holdings, which lagged domestic stocks in dollar terms.
. Because of its heavy component of stocks, Personal Strategy Growth Fund
returned 7.49% for the six months; the Balanced Fund was next with 6.10%; and
the Income Fund third with 4.36%. Annual returns were 19.89%, 17.21%, and
14.70%, respectively.
. The funds' sector weightings shifted slightly toward bonds at the expense of
equities because of full stock valuations.
. We expect a continuation of the favorable environment for stocks and bonds
and will increase stock exposure when values appear more reasonable.
<PAGE>
FELLOW SHAREHOLDERS
The six months ended May 31, 1997, were particularly rewarding for investors in
large-capitalization stocks, while smaller-cap investors experienced volatility
but also realized solid returns. The performance of high-quality bonds was
generally subdued as interest rates rose. The Personal Strategy Growth Fund,
with its high component of equities, posted the strongest return for the period,
with the Balanced and Income Funds following in that order.
MARKET ENVIRONMENT
Despite a setback in March, the stock market continued to
generate stellar returns. Large-cap stocks, measured by the
Standard & Poor's 500 Stock Index, returned 13.15% during the
past six months and 29.42% for the 12 months ended May 31. The
technology-laden Nasdaq Composite was less robust but still
strong, with returns of 8.33% and 12.62% for the respective
periods. Equities continued to be driven by a combination of
favorable factors, including solid economic growth accompanied
by tame inflation and rising corporate profits.
The economy gained momentum in the first quarter of 1997.
Consumer spending was strong, sentiment high, and unemployment
fell below 5% to its lowest level in more than two decades.
The Federal Reserve, fearing a possibly overheating economy,
raised the federal funds rate in March from 5.25% to 5.5% in
hopes of restraining economic growth to a more sustainable
pace. Bond prices fell along with stocks initially but
improved afterward when investors realized inflation
[INTEREST RATE LEVELS CHART APPEARS HERE]
Interest Rate Levels
30-year 5-year 90-day
5/31/96 6.93 6.55 5.03
7.02 6.63 5.10
6.94 6.52 5.20
8/31/96 7.03 6.60 5.07
6.95 6.48 5.18
6.71 6.15 5.04
11/30/96 6.41 5.90 5.03
6.58 6.12 4.92
6.89 6.36 5.06
2/28/97 6.75 6.31 5.01
7.00 6.66 5.26
6.98 6.62 5.22
5/31/97 6.99 6.60 5.03
1
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was still under control. Longer-term interest rates rose on
balance during the past few months, dampening the returns of
high-quality securities in particular, but rates rose only to
their levels of a year ago.
Most international stock markets, with the exception of Japan
and several other Asian countries, posted strong results in
local currency terms; however, the strength of the U.S. dollar
versus many foreign currencies trimmed results for U.S.
investors. Major international bond markets performed mostly
in line with their U.S. counterparts, while emerging market
bonds retreated from their exuberant pace of the past 18
months.
THE COMMITTEE TOOK A SLIGHTLY DEFENSIVE POSTURE IN FEBRUARY. . .
PERFORMANCE AND STRATEGY REVIEW
The funds' investment committee meets monthly to adjust the
weightings of stocks, bonds, and money market securities
within the appropriate ranges for each fund, based on market
conditions and economic fundamentals. The committee took a
slightly defensive posture in February by trimming the
allocation to stocks and increasing exposure to bonds. It
continued to overweight international and domestic growth
stocks while underweighting domestic value stocks. In the bond
area, the committee underweighted fund exposure to foreign
bonds, while slightly overweighting both high-yield (which
have been outperforming high-quality bonds) and investment-
grade bonds. The committee maintained a minimal position in
cash equivalents.
PERSONAL STRATEGY INCOME FUND
This fund's investment goal is to generate the highest total
return consistent with an emphasis on income first and capital
appreciation second. The typical mix of securities for the
fund is 40% bonds, 40% stocks, and 20% money market
securities, although these figures can vary by as much as 10
percentage points above or below these levels.
We slightly changed the mix of securities in the portfolio
during the past six months, raising the bond allocation one
percentage point to 49%, reducing stock exposure from 42% to
40%, and moving from a 10% to an 11% weighting in money market
securities -- just above the minimum amount allowed. In the
fixed income area, we held a fairly high level of both
high-yield and investment-grade securities and
2
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[ASSET ALLOCATION PIE CHART APPEARS HERE]
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ASSET ALLOCATION
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Personal Strategy Income Fund
<TABLE>
<S> <C>
Bonds 49%
Stocks 40%
Money Markets 11%
</TABLE>
Based on net assets as of 5/31/97.
underweighted foreign bonds, since we believe the U.S. dollar
may resume its upward march against foreign currencies. The
portfolio's component of domestic high-yield bonds helped
performance, since lower-rated securities outperformed
high-quality bonds during the past year.
In the equity arena, we maintained the fund's heavy allocation
to foreign stocks. We have a positive outlook regarding the
potential for growth in international markets, which we expect
to more than offset any losses due to a strong dollar.
European economies continue on the upswing, and we believe the
Japanese economy has seen its worst. Among domestic stocks we
favored growth over value companies, as we have for the past
several months in the belief that the former offer the best
potential for capital appreciation at this stage of the
economic cycle.
[PERFORMANCE COMPARISON CHART APPEARS HERE]
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PERFORMANCE COMPARISON
- ----------------------
<TABLE>
<CAPTION>
Periods Ended 5/31/97 6 Months 12 Months
- --------------------------------------------------------------------
<S> <C> <C>
Personal Strategy
Income Fund 4.36% 14.70%
....................................................................
Combined Index Portfolio* 6.11 15.89
....................................................................
</TABLE>
* An unmanaged portfolio composed of 40% stocks (S&P 500), 40% bonds
(Lehman Brothers Aggregate Bond Index), and 20% money market
securities (90-day Treasury Bills).
Your fund's returns were respectable for the 6- and 12-month
periods ended May 31, although they trailed the benchmark
because of the fund's underweighting in domestic stocks and
overweighting in foreign stocks.
PERSONAL STRATEGY BALANCED FUND
The objective of this fund is to provide the highest total
return consistent with an emphasis on both income and capital
appreciation. The typical asset mix is 60% stocks, 30% bonds,
and 10% cash -- with 10-percentage-point variations permitted
for each asset class. This asset allocation structure offers
higher risk but also a higher potential return than the Income
Fund.
3
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[ASSET ALLOCATION PIE CHART APPEARS HERE]
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ASSET ALLOCATION
- ----------------
Personal Strategy Balanced Fund
<TABLE>
<S> <C>
Stocks 58%
Bonds 38%
Money Markets 4%
</TABLE>
Based on net assets as of 5/31/97.
On May 31, your fund had 58% of its assets in stocks compared
with 61% at the end of November, 38% in bonds (three
percentage points more than in November), and the remaining 4%
in cash reserves. We overweighted both investment-grade and
high-yield bonds and underweighted foreign bonds, for the
reasons mentioned previously. Our preference for growth stocks
over value stocks in the domestic equities market is reflected
in our top five stock holdings, which include Great Lakes
Chemical, Dow Chemical, and SBC Communications.
On the international equities front, we maintained a maximum
exposure to foreign stocks, which unfortunately did not
perform as well as their domestic counterparts in U.S.
currency terms during the past six months.
Your fund's returns for the 6- and 12-month periods ended May
31, 1997, were reasonably strong but lagged the Combined Index
Portfolio shown in the table because of the fund's lower
component of domestic stocks and relatively high foreign stock
allocation.
[PERFORMANCE COMPARISON CHART APPEARS HERE]
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PERFORMANCE COMPARISON
- ----------------------
<TABLE>
<CAPTION>
Periods Ended 5/31/97 6 Months 12 Months
- --------------------------------------------------------------------------------
<S> <C> <C>
Personal Strategy
Balanced Fund 6.10% 17.21%
................................................................................
Combined Index Portfolio * 8.39 20.43
................................................................................
</TABLE>
* An unmanaged portfolio composed of 60% stocks (S&P 500), 30% bonds (Lehman
Brothers Aggregate Bond Index), and 10% money market securities (90-Day
Treasury Bills).
PERSONAL STRATEGY GROWTH FUND
Your fund seeks capital appreciation by investing primarily in
common stocks. The typical asset mix is 80% stocks and 20%
bonds and money market securities, with 10-percentage-point
variations permitted. As of
4
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[ASSET ALLOCATION PIE CHART APPEARS HERE]
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ASSET ALLOCATION
- ----------------
Personal Strategy Growth Fund
<TABLE>
<S> <C>
Stocks 77%
Bonds and 23%
Money Markets 38%
</TABLE>
Based on net assets as of 5/31/97.
May 31, 1997, the fund's allocation was 77% stocks and 23%
bonds and cash equivalents.
The allocation shown in the chart represents a
two-percentage-point shift away from stocks and toward fixed
income securities since November. The fund's five largest
stock holdings include Standard & Poor's Depository Receipts,
otherwise known as SPDR Trust or "Spiders," which are a
publicly traded proxy for S&P 500 stocks. Rounding out the top
five are Delta, Great Lakes Chemical, Dow Chemical, and St.
Paul Companies, reflecting our bias toward growth over value
stocks at this advanced stage of the economic cycle.
As in the other funds, we maintained a relatively high
exposure to investment-grade and high-yield securities and low
exposure to foreign bonds. We also held a high component of
foreign stocks at the expense of domestic stocks. Since
international equities failed to keep pace with their domestic
brethren in U.S. dollar terms, fund performance trailed the
benchmark portfolio shown in the table during the last six and
12 months. However, your fund's absolute returns were
respectable, and we continue to believe that our foreign stock
holdings have good potential for capital growth in the months
ahead.
[PEFORMANCE COMPARISON CHART APPEARS HERE]
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PERFORMANCE COMPARISON
- ----------------------
<TABLE>
<CAPTION>
Periods Ended 5/31/97 6 Months 12 Months
- --------------------------------------------------------------------------------
<S> <C> <C>
Personal Strategy
Growth Fund 7.49% 19.89%
................................................................................
Combined Index Portfolio * 10.67 25.05
................................................................................
</TABLE>
* An unmanaged portfolio composed of 80% stocks (S&P 500) and 20% bonds
(Lehman Brothers Aggregate Bond Index).
OUTLOOK
Strong economic growth motivated the Federal Reserve to raise
the federal funds rate a quarter-point in March. Since then,
the Fed has
5
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held rates steady, possibly anticipating slower growth ahead.
The bond market has stabilized, with the 30-year Treasury bond
yield under 7%. The possibility remains that the Fed will
tighten further, but we do not expect a significant shift in
bond yields from current levels. The domestic stock market
continued to climb through the end of May, and even with the
labor market as tight as it has been, corporations have yet to
experience the higher labor costs that could hurt earnings.
. . . WE WOULD LIKE TO CAUTION INVESTORS THAT THERE COULD BE SIGNIFICANT
CORRECTIONS . . .
Although we believe many stocks are highly valued, the
domestic market appears on track to generate solid returns for
the year. However, once again we would like to caution
investors that there could well be significant corrections
along the way. Overseas, world economies continue to recover,
and Japan seems to have emerged from its long period of
stagnation. A possible postponement of EMU or an easing of the
financial restraints required for membership could bolster
growth in some European economies. Overall, we expect
international markets to provide sound investment
opportunities in coming months.
The Personal Strategy Funds are carefully diversified, which
should serve investors well over time. We anticipate a
continuation of the favorable environment for stocks and bonds
and will look for opportunities to increase each fund's equity
exposure when valuations appear more reasonable, in our view.
Respectfully submitted,
/s/ Peter Van Dyke
Peter Van Dyke
President and Chairman of the Investment Advisory Committee
June 20, 1997
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T. ROWE PRICE PERSONAL STRATEGY FUNDS
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PORTFOLIO HIGHLIGHTS
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PORTFOLIO OVERVIEW
<TABLE>
<CAPTION>
Percent of Percent of
Net Assets Net Assets
5/31/97 5/31/97
Personal Strategy Income Fund
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Securities 11.1% Stocks 39.9%
.................................................................................................
Five Largest Holdings:
Bonds 49.0% Delta 0.5
.................................................................................................
Treasuries/Agencies 5.1 Great Lakes Chemical 0.5
.................................................................................................
Mortgage-Backed 13.2 Dow Chemical 0.5
.................................................................................................
Corporate 26.5 Corning 0.5
.................................................................................................
Foreign 4.2 St. Paul Companies 0.5
.................................................................................................
Personal Strategy Balanced Fund
- -------------------------------------------------------------------------------------------------
Money Market Securities 4.1% Stocks 58.6%
.................................................................................................
Five Largest Holdings:
Bonds 37.3% Delta 0.8
.................................................................................................
Treasuries/Agencies 3.0 Great Lakes Chemical 0.8
.................................................................................................
Mortgage-Backed 12.5 Dow Chemical 0.7
................................................................................................
Corporate 18.4 SBC Communication 0.7
................................................................................................
Foreign 3.4 St. Paul Companies 0.7
................................................................................................
Personal Strategy Growth Fund
- -------------------------------------------------------------------------------------------------
Money Market Securities 2.3% Stocks 77.1%
.................................................................................................
Five Largest Holdings:
Bonds 20.6% SPDR Trust 3.0
...............................................................................................
Treasuries/Agencies 2.1 Delta 1.1
...............................................................................................
Mortgage-Backed 4.9 Great Lakes Chemical 1.0
...............................................................................................
Corporate 11.7 Dow Chemical 1.0
...............................................................................................
Foreign 1.9 St. Paul Companies 0.9
...............................................................................................
</TABLE>
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T. ROWE PRICE PERSONAL STRATEGY FUNDS
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PERFORMANCE COMPARISON
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These charts show the value of a hypothetical $10,000 investment in each fund
over the past 10 fiscal year periods or since inception (for funds lacking 10-
year records). The result is compared with a broad-based average or index. The
index return does not reflect expenses, which have been deducted from the fund's
return.
[LINE GRAPH APPEARS HERE]
PERSONAL STRATEGY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Combined Index Portfolio $14,809
(40% Stocks, 40% Bonds, Personal Strategy
20% Money Markets) Income Fund $14,741
<S> <C> <C>
7/29/94 10,000 10,000
11/94 9,973 9,939
5/95 11,239 11,290
11/95 12,214 12,338
5/96 12,779 12,852
11/96 13,956 14,125
5/97 14,809 14,741
</TABLE>
[LINE GRAPH APPEATS HERE]
PERSONAL STRATEGY BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Combined Index Portfolio $16,376
(60% Stocks, 30% Bonds, Personal Strategy
10% Money Markets) Balanced Fund $15,812
<S> <C> <C>
7/29/94 10,000 10,000
11/94 9,974 9,969
5/95 11,484 11,435
11/95 12,728 12,710
5/96 13,599 13,490
11/96 15,109 14,904
5/97 16,376 15,812
</TABLE>
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T. Rowe Price Personal Strategy Funds
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PERFORMANCE COMPARISON
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PERSONAL STRATEGY GROWTH FUND
- --------------------------------------------------------------------------------
As of 5/31/97
<TABLE>
<CAPTION>
Combined Index Personal Strategy
Portfolio Growth Fund
<S> <C> <C>
7/29/94 10,000 10,000
11/94 9,974 10,010
5/95 11,732 11,565
11/95 13,258 13,111
5/96 14,464 14,205
11/96 16,344 15,844
5/97 18,087 17,030
</TABLE>
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AVERAGE ANNUAL COMPOUND TOTAL RETURN
- ------------------------------------
This table shows how each fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
<TABLE>
<CAPTION>
Since Inception
Periods Ended 5/31/97 1 Year Inception Date
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Personal Strategy Income Fund 14.70% 14.65% 7/29/94
.............................................................................................
Personal Strategy Balanced Fund 17.21 17.52 7/29/94
.............................................................................................
Personal Strategy Growth Fund 19.89 20.63 7/29/94
.............................................................................................
</TABLE>
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
9
<PAGE>
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days a
week, call Tele*Access(R):
1-800-638-2587 toll free
For assistance with your
existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Personal Strategy Funds.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
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T. Rowe Price Investment Services, Inc., Distributor.
