<PAGE>
PROSPECTUS
October 1, 1997, revised to August 16, 1998
Personal Strategy Funds
A family of funds diversified across stocks, bonds, and money market securities
to offer three levels of potential risk and reward.
T. Rowe Price
RAM LOGO
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FACTS AT A GLANCE
Personal Strategy Funds
Investment Goal
Each of the three funds seeks the highest total return over time consistent
with its particular investment strategy and level of potential risk. As with
all mutual funds, these funds may not meet their goals.
Strategies and Risk/Reward
Each fund will invest in a diversified portfolio of stocks, bonds, and money
market securities. The investment mix will be shifted gradually within
specified ranges for each fund according to the manager's outlook for the
economy and the financial markets.
Generally, the higher the fund's stock component, the greater the potential
return and risk of price decline.
Income Fund For income and some appreciation, approximately 50% to 70% of
assets invested in bonds and money market securities, with the balance in
stocks.
Risk/Reward: Lower expected risk and return than the other two funds.
Balanced Fund For both appreciation and income, approximately 50% to 70% of
assets invested in stocks, with the remainder in bonds and money market
securities.
Risk/Reward: Higher expected risk and return than the Income Fund but lower
than the Growth Fund.
Growth Fund For greater appreciation potential, approximately 70% to 90% of
assets invested in stocks, with the balance in bonds and money market
securities.
Risk/Reward: Highest expected risk and return of the three funds.
Investor Profile
Individuals who seek to match their investment goals, time horizon, and risk
tolerance with an investment that diversifies across several asset categories.
Appropriate for both regular and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed approximately $117 billion
for more than five million individual and institutional investor accounts as of
June 30, 1997.
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
funds, dated October 1, 1997, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a
free copy, call 1-800-638-5660.
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T. Rowe Price Personal Strategy Funds, Inc.
Prospectus
October 1, 1997, revised to August 16, 1998
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUNDS
Transaction and Fund Expenses 2
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Financial Highlights 4
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Fund, Market, and Risk Characteristics 6
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2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds 11
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Distributions and Taxes 12
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Transaction Procedures and Special Requirements 14
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3 MORE ABOUT THE FUNDS
Organization and Management 17
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Understanding Performance Information 19
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Investment Policies and Practices 20
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4 INVESTING WITH T. ROWE PRICE
Account Requirements and Transaction Information 30
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Opening a New Account 30
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Purchasing Additional Shares 32
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Exchanging and Redeeming 32
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Shareholder Services 34
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Discount Brokerage 36
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Investment Information 37
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</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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ABOUT THE FUNDS 1
TRANSACTION AND FUND EXPENSES
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o Like all T. Rowe Price funds, the Personal Strategy Funds are 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in a fund goes to work for you, subject to
the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate each fund for a year, based on 1997 fiscal year
expenses (and any applicable expense limitations). These are costs you pay
indirectly because they are deducted from each fund's total assets before the
daily share price is calculated and before dividends and other distributions
are made. In other words, you will not see these expenses on your account
statement.
<TABLE>
Table 1
<CAPTION>
<S> <C> <C> <C> <C>
Shareholder Transaction
Expenses
Income Balanced Growth
Sales charge "load" on
purchases None None None
Sales charge "load" on
reinvested distributions None None None
Redemption fees None None None
Exchange fees None None None
Annual Fund Expenses Percentage of Fiscal 1997 Average Net Assets
Income Balanced Growth
Management fee (after
reduction) 0.07%/a/ 0.53%/a/ 0.22%/a/
Marketing fees (12b-1) None None None
Total other (shareholder
servicing, custodial,
auditing, etc.) 0.88% 0.52% 0.88%
Total fund expenses 0.95%/a/ 1.05%/a/ 1.10%/a/
(after reduction)
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</TABLE>
a Management fees and total expense ratios for the funds would have been 0.48%
and 1.36% for Income; 0.58% and 1.10% for Balanced; and 0.63% and 1.51% for
Growth, had T. Rowe Price not agreed to reduce management fees in accordance
with the expense limitations described in Table 3. Organizational expenses
will be charged to the funds over a period not to exceed 60 months.
Note: A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts when applicable (see
Small Account Fee under Transaction Procedures and Special Requirements).
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ABOUT THE FUNDS 3
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. Each fund's fee comprises a group fee, 0.33% as of May 31, 1997, and
an individual fund fee, as follows: Income 0.15%, Balanced 0.25%, and Growth
0.30%.
. "Other" administrative expenses Primarily the servicing of shareholder
accounts, such as providing statements and reports, disbursing dividends, and
providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2
<CAPTION>
Hypothetical Fund Expenses
Fund 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C> <C>
Income $10 $ 30 $ 53 $ 117
Balanced 11 33 58 128
Growth 11 35 61 134
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</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
Table 3 sets forth expense ratio limitations and the periods for which they
are effective. For each, T. Rowe Price has agreed to waive its fees and bear
any expenses to the extent such fees or expenses would cause the funds' ratio
of expenses to average net assets to exceed the indicated percentage
limitations. Fees waived or expenses paid or assumed are subject to
reimbursement to T. Rowe Price by each fund through the indicated
reimbursement date, but no reimbursement will be made if it would result in
the funds' expense ratios exceeding their specified limits.
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T. ROWE PRICE 4
<TABLE>
Table 3
<CAPTION>
<S> <C> <C> <C> <C>
Expense Ratio Limitations
Expense Ratio
Limitation Period Limitation Reimbursement Date
Income/a/ 6/1/98-5/31/00 0.90% 5/31/02
Balanced/b/ 6/1/96-5/31/98 1.05% 5/31/00
Growth/c/ 6/1/98-5/31/00 1.10% 5/31/02
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</TABLE>
a The Personal Strategy Income Fund previously operated under a 0.95% expense
ratio limitation that expired on May 31, 1996. Effective June 1, 1996, T. Rowe
Price agreed to extend this limitation through May 31, 1998. Any accrued fees
or expenses are subject to reimbursement to T. Rowe Price by the fund whenever
the fund's expense ratio is below 0.95%; however, no reimbursement will be
made after May 31, 1998 (for the first agreement), May 31, 2000 (for the
second agreement), or if it would result in the expense ratio exceeding 0.95%.
b The Personal Strategy Balanced Fund previously operated under a 1.05% expense
ratio limitation that expired on May 31, 1996. Any accrued fees or expenses
under the previous agreement are subject to reimbursement to T. Rowe Price
through May 31, 1998.
c The Personal Strategy Growth Fund previously operated under a 1.10% expense
ratio limitation that expired on May 31, 1996. Effective June 1, 1996, T. Rowe
Price agreed to extend this limitation through May 31, 1998. Any accrued fees
or expenses are subject to reimbursement to T. Rowe Price by the fund whenever
the fund's expense ratio is below 1.10%; however, no reimbursement will be
made after May 31, 1998 (for the first agreement), May 31, 2000 (for the
second agreement), or if it would result in the expense ratio exceeding 1.10%.
FINANCIAL HIGHLIGHTS
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Table 4, which provides information about each fund's financial history, is
based on a single share outstanding throughout each fiscal year. Each fund's
section of the table is part of the financial statements, which are included
in its annual report and are incorporated by reference into the Statement of
Additional Information (available upon request). The financial statements in
each fund's annual report were audited by Coopers & Lybrand L.L.P., the
funds' independent accountants.
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ABOUT THE FUNDS 5
<TABLE>
Table 4 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Asset
Ended Value, Investment & Unrealized Investment Investment Net Realized Total Value,
Beginning Income (Loss) Gain (Loss) on Activities Income (Loss) Gain (Loss) Distributions End of Period
of Period Investments
Income Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $10.00 $0.41b $0.85 $1.26 $(0.32) -- $(0.32) $10.94
1996 10.94 0.50b 0.98 1.48 (0.47) $(0.10) (0.57) 11.85
1997 11.85 0.51/b/ 1.10 1.61 (0.50) (0.98) (1.48) 11.98
Balanced Fund
1995 $10.00 $0.33/b/ $1.08 $1.41 $(0.26) -- $(0.26) $11.15
1996 11.15 0.41/b/ 1.56 1.97 (0.37) $(0.07) (0.44) 12.68
1997 12.68 0.42/b/ 1.69 2.11 (0.40) (0.32) (0.72) 14.07
Growth Fund
1995 $10.00 $0.25/b/ $1.30 $1.55 $(0.11) -- $(0.11) $11.44
1996 11.44 0.30/b/ 2.29 2.59 (0.27) $(0.07) (0.34) 13.69
1997 13.69 0.27/b/ 2.37 2.64 (0.24) (0.89) (1.13) 15.20
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</TABLE>
<TABLE>
Table 4 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net
Ended (Includes Net Assets Average Expenses to Investment Portfolio
Reinvested ($ Thousands) Commission Average Income to Turnover
Distributions) Rate Paid Net Assets Average Rate
Net Assets
Income Fund
<S> <C> <C> <C> <C> <C> <C> <C>
1995 12.90%b $ 20,705 -- 0.95%ab 4.71%ab 50.5%a
1996 13.84b 25,545 $0.0522 0.95b 4.31b 34.1
1997 14.70/b/ 44,368 0.0375 0.95/b/ 4.38/b/ 44.8
Balanced Fund
1995 14.35%b $ 13,336 -- 1.05%ab 3.74%ab 25.8%a
1996 17.97b 116,826 $0.0398 1.05b 3.44b 47.7
1997 17.21/b/ 205,883 0.0369 1.05/b/ 3.20/b/ 54.0
Growth Fund
1995 15.65%b $ 10,748 -- 1.10%/ab/ 2.76%ab 25.7%a
1996 22.83b 24,954 $0.0441 1.10/b/ 2.27b 39.5
1997 19.89/b/ 67,552 0.0378 1.10/b/ 2.24/b/ 39.6
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</TABLE>
a Annualized.
b Excludes expenses in excess of a voluntary expense limitation in effect
through May 31, 1998.
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T. ROWE PRICE 6
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
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To help you decide whether one of these funds is appropriate for you, this
section takes a closer look at each fund's investment objective and approach.
<TABLE>
Table 5
<CAPTION>
<S> <C> <C> <C> <C>
Differences Among Funds
Fund Benchmarks Ranges Relative Risk/Reward
Income 40% Stocks 30 - 50% Lower
40% Bonds 30 - 50%
20% Money markets 10 - 30%
Balanced 60% Stocks 50 - 70% More than Income
30% Bonds 20 - 40% Less than Growth
10% Money markets 0 - 20%
Growth 80% Stocks 70 - 90% Higher
20% Bond and money markets 10 - 30%
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</TABLE>
What are the funds' objectives and investment programs?
. Income Fund The objective is the highest total return over time consistent
with a primary emphasis on income and a secondary emphasis on capital
appreciation. The fund pursues this objective by investing in a diversified
portfolio typically consisting of approximately 40% stocks, 40% bonds, and
20% money market securities.
o Generally, the greater the portion of total return derived from stocks, the
higher the fund's potential return over time and the greater the risk of
price declines.
. Balanced Fund The objective is the highest total return over time consistent
with an emphasis on both capital appreciation and income. The fund pursues
this objective by investing in a diversified portfolio typically consisting
of approximately 60% stocks, 30% bonds, and 10% money market securities.
. Growth Fund The objective is the highest total return over time consistent
with a primary emphasis on capital appreciation; income is expected to play a
secondary role. The fund pursues this objective by investing in a diversified
portfolio typically consisting of approximately 80% stocks and 20% bonds and
money market securities.
. Under normal conditions, allocations for each fund can vary by 10% above or
below the ranges stated in Table 5, based on the fund manager's outlook for
the economy and the financial markets. There is no guarantee the funds will
achieve their objectives.
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ABOUT THE FUNDS 7
o Under unusual market conditions, for temporary defensive purposes, each of
the funds may invest in money market securities without limitation.
What are the general characteristics and risk factors of these major asset
classes?
. Stocks represent ownership in a corporation. Common stock prices fluctuate
with changes in a company's current earnings and future prospects and with
overall stock market conditions. Stocks of many well-established corporations
offer the potential for appreciation and rising dividends. While smaller
companies usually reinvest earnings in their own growth and, therefore, pay
minimal or no dividends, they offer the possibility of even greater
appreciation if their businesses prosper and grow.
Historically, stocks have provided higher returns over time than bonds or
money market securities and, therefore, offer a way to invest for long-term
growth of capital. In addition, stock investments have provided the greatest
protection against the erosion of purchasing power caused by inflation.
Share prices of all companies, even the best managed and most profitable, can
fall for any number of reasons, ranging from lower-than-expected earnings to
changes in investor psychology. Significant trading by large institutional
investors also can lead to price declines. In addition, if our assessment of
company prospects proves incorrect, companies that our managers and analysts
expect to do well may perform poorly. Since 1950, the U.S. stock market has
experienced 10 negative years as well as steep drops of shorter duration. Its
worst calendar quarter return in recent years was -22.5% in 1987's fourth
quarter. For these reasons, equity investors should have a long-term
investment horizon and be willing to wait out bear markets.
o Each fund's share price will fluctuate; when you sell your shares, you may
lose money.
. Bonds are debt securities, meaning the issuer has a contractual obligation
to pay interest at a fixed rate on specified dates and to repay principal
(the bond's face value) upon maturity. Bonds have two main sources of risk.
Credit risk refers to the possibility that a bond's price may fall due to a
credit downgrade or "default," i.e., the issuer failing to make an interest
or principal payment. Interest rate risk refers to a bond's price movement in
response to changes in interest rates. When rates rise, bond prices fall, and
vice versa. Generally, the longer a bond's maturity, the greater its
potential price fluctuation.
The funds expect to invest primarily in bonds with investment-grade credit
ratings. However, the funds may also make investments in more volatile
below-investment-grade (or "junk") bonds, including bonds with the lowest
rating. Investment-grade securities include a range from the highest rated
(AAA) to medium quality (BBB). Securities in the BBB category may be more
susceptible
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T. ROWE PRICE 8
to price declines arising from adverse economic conditions or changing
circumstances and securities at the lower end of the BBB category have
certain speculative characteristics. Prices of junk bonds are usually more
affected by adverse economic conditions or a deterioration in the issuer's
financial circumstances than by overall changes in interest rates. To
compensate investors for higher credit risk exposure, such bonds usually
provide higher income. Please see High-Yield/High-Risk Investing for further
information on these investments.
o For a more detailed discussion of the funds' investments and their risk
factors, please see Investment Policies and Practices.
. Money market securities are debt obligations issued primarily by the U.S.
government, government agencies, and corporations. The high credit
ratings, short maturities, and high liquidity of the funds' money market
securities should minimize their credit and market risk. Their low risk is
usually accompanied by low potential returns relative to other
investments.
How does the portfolio manager try to reduce risk?
Consistent with each fund's objective, the managers of the Personal Strategy
Funds actively seek to reduce risk and increase total return. Risk management
tools include:
. Broad diversification of assets to reduce the impact of a single holding or
asset class on a fund's share price.
. Gradual allocation changes among and within asset classes (stocks, bonds,
etc.) to take advantage of market opportunities and changing economic
conditions.
. Thorough research of stocks, bonds, and other securities by our analysts to
find the most favorable investment opportunities.
o The fund manager regularly reviews the asset allocation and may make
gradual changes, within the defined ranges, based on the outlook for the
economy, interest rates, and the financial markets. The funds will not
attempt to time short-term market moves.
What are the advantages of having three Personal Strategy Funds instead of just
one?
To accommodate a wider range of investor preferences and time horizons than
would be possible with a single fund, these funds offer three different
combinations of the appreciation potential of common stocks, the greater
income of bonds, and the stability of money market securities. These
allocation mixes represent three distinct levels of potential returns and
investment risk.
<PAGE>
ABOUT THE FUNDS 9
Generally, the potential for higher investment returns over time is
accompanied by higher investment risk-the risk of declines in the value of
your principal. Investors respond differently to this risk/reward trade-off;
some are comfortable with higher risk levels, while others are not. An
investor's time horizon should play a major role in the choice of
investments. A fundamental investment principle is that those with a
longer investment horizon, such as 15 years, can pursue a more aggressive
investment program than those with a shorter horizon, such as five
years. Also, investors who seek a more aggressive approach at a particular
stage of their lives may prefer a more balanced or conservative approach
at another stage as their circumstances, investment horizon, or investment
objectives change.
What are the advantages of diversifying across stocks, bonds, and money market
securities?
Diversification is the investment equivalent of not putting all your eggs in
one basket. While there is no guarantee, a fund's overall volatility could be
reduced by spreading investments across several types of assets. Since prices
of stocks and bonds may respond differently to changes in economic conditions
and interest rate levels, a rise in bond prices, for example, could help
offset a fall in stock prices. Money market securities have a stabilizing
influence, since their price fluctuations are very small. In addition, the
steady income provided by bonds and money market securities contributes
positively to a portfolio's total return, cushioning the impact of any price
declines or enhancing price increases.
Diversification among asset classes is intended to reduce the risk associated
with investing in a single asset category; however, there is no guarantee the
strategy will always result in lower overall volatility for any of the funds.
Why include foreign securities?
The funds may invest a portion of their assets in foreign securities. Foreign
stocks and bonds offer advantages to a portfolio but also represent
additional risk. The potential advantages are extra diversification and
enhanced returns. Since foreign stock and bond markets may move independently
from their U.S. counterparts, such investments could reduce a portfolio's
short-term price fluctuations while offering a way to participate in markets
that may generate attractive returns. Of course, if U.S. and foreign markets
move in the same direction, the positive or negative effect on a fund's share
price could be magnified. In addition, a significant decline in foreign
securities' prices would reduce the funds' returns.
o For a discussion of the effects of currency exchange rate fluctuations and
other special risks of foreign investing, please see Investment Policies
and Practices.
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T. ROWE PRICE 10
How can I decide which fund is most appropriate for me?
Review your own financial objectives, investment time horizon, and risk
tolerance. In addition, please see Table 5, which summarizes the funds' main
characteristics, to help you choose a fund (or funds) for your particular
needs.
. The Income Fund is designed for investors who value substantial investments
in income-producing securities but also seek some capital growth. The fund
will invest at least 65% of its total assets in income-producing bonds and
dividend-paying common stocks.
. The Balanced Fund is intended for those seeking a middle-of-the-road
approach that emphasizes stocks for their higher capital appreciation
potential but retains a significant income component to temper volatility.
The fund will invest at least 25% of its total assets in senior fixed income
securities.
. The Growth Fund, with the greatest exposure to stocks, is designed for more
aggressive investors who can withstand the market's inevitable setbacks to
seek its potential long-term rewards. The fund will invest at least 65% of
its total assets in common stocks of companies whose earnings or dividends
are expected by T. Rowe Price to increase.
o The fund or funds you select should not be relied upon as a complete
investment program nor be used for short-term trading purposes.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the funds may
purchase as well as the types of management practices that the funds may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
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Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for each
fund is calculated at 4 p.m. ET each day the New York Stock Exchange is open
for business. To calculate the NAV, a fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
may differ for institutional and employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. ACH is a payment system
supported by over 20,000 banks, savings banks, and credit unions, which
electronically exchanges the transactions primarily through the Federal
Reserve Banks. Proceeds sent by bank wire should be credited to your account
the next business day.
<PAGE>
T. ROWE PRICE 12
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
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o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the fund reserves the right to
reinvest your distribution check in your account at the NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The Balanced and Income Funds declare and pay dividends (if any) quarterly.
. The Growth Fund declares and pays dividends (if any) annually.
. All or part of the funds' dividends will be eligible for the 70% deduction
for dividends received by corporations.
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If the fund has net capital gains for the year (after subtracting any
capital losses), they are usually declared and paid in December to
shareholders of record on a specified date that month. If a second
distribution is necessary, it is usually declared and paid during the first
quarter of the following year.
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ABOUT THE FUNDS 13
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. The fund makes a distribution to your account.
. You sell fund shares, including an exchange from one fund to another.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B, indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For accounts opened new or by exchange in 1983
or later, we will provide you with the gain or loss of the shares you sold
during the year, based on the "average cost" method. This information is not
reported to the IRS, and you do not have to use it. You may calculate the
cost basis using other methods acceptable to the IRS, such as "specific
identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV, indicating the tax status of any
dividend and capital gain distribution made to you. This information will
also be reported to the IRS. All distributions made by the funds are taxable
to you for the year in which they were paid. The only exception is that
distributions declared during the last three months of a calendar year and
paid in January are taxed as though they were paid by December 31. You will
be sent any additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Recent changes in the tax code revised capital gain holding periods for
long-term gains and created a new class of mid-term gains. Short-term (one
year or less) capital gain distributions continue to be taxable at the same
rates as ordinary income. Gains on securities held more than 12 months but
not more than 18 months (mid-term gains) are taxed at the rates formerly
applicable to long-term gains, and gains on securities held for more than 18
months are taxed at a
<PAGE>
T. ROWE PRICE 14
new and lower long-term rate. If you realize a loss on the sale or exchange
of fund shares held six months or less, your short-term loss recognized is
reclassified to long-term to the extent of any net capital gain distribution
received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in the fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends, but will still be included in
your taxable income. However, you may be able to claim an offsetting
deduction on your tax return for your portion of foreign taxes paid by the
fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution.
If you buy shares shortly before or on the "record date"-the date that
establishes you as the person to receive the upcoming distribution-you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date(s)
before investing. Of course, the fund's share price may reflect undistributed
capital gains or income and unrealized appreciation at any time.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
<PAGE>
ABOUT THE FUNDS 15
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. (The 10-day hold
does not apply to the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states that you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds use
reasonable procedures (including shareholder identity verification) to
confirm that instructions given by telephone are genuine and are not liable
for acting on these instructions. If these procedures are not followed, it is
the opinion of certain regulatory agencies that the fund may be liable for
any losses that may result from acting on the instructions given. A
confirmation is sent promptly after the telephone transaction. All
conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses. We define "excessive trading" as
exceeding one purchase and sale involving the same fund within any 120-day
period.
For example, you are in fund A. You can move substantial assets from fund A
to fund B and, within the next 120 days, sell your shares in fund B to return
to fund A or move to fund C.
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds.
<PAGE>
T. ROWE PRICE 16
Three types of transactions are exempt from excessive trading guidelines: 1)
trades solely between money market funds; 2) redemptions that are not part of
exchanges; and 3) systematic purchases or redemptions (see Shareholder
Services).
Keeping Your Account Open
Due to the relatively high cost to the funds of maintaining small accounts,
we ask you to maintain an account balance of at least $1,000. If your balance
is below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the funds' transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUNDS 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How are the funds organized?
T. Rowe Price Personal Strategy Funds, Inc. (the "Corporation") was
incorporated in Maryland in 1994. The Income, Balanced, and Growth Funds were
each organized in 1994 as series of the Corporation and are registered as
diversified, open-end investment companies or mutual funds. Mutual funds pool
money received from shareholders and invest it to try to achieve specified
objectives.
o Shareholders benefit from T. Rowe Price's 60 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and, in order to avoid
unnecessary costs to fund shareholders, do not intend to do so except when
certain matters, such as a change in a fund's fundamental policies, are to be
decided. In addition, shareholders representing at least 10% of all eligible
votes may call a special meeting, if they wish, for the purpose of voting on
the removal of any fund director or trustee. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the fund will send
you proxy materials that explain the issues to be decided and include a
voting card for you to mail back.
<PAGE>
T. ROWE PRICE 18
Who runs the funds?
General Oversight
The Corporation is governed by a Board of Directors that meets regularly to
review the funds' investments, performance, expenses, and other business
affairs. The Board elects the Corporation's officers. The policy of the
Corporation is that a majority of Board members will be independent of T.
Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price-specifically by each fund's portfolio managers.
Portfolio Management
The funds' investments are guided by two committees. An Asset Allocation
Committee meets regularly to determine the asset allocation of the three
funds among stocks, bonds, and money market securities. Committee members
include Peter Van Dyke, Chairman, Stephen W. Boesel, Edmund M. Notzon,
William T. Reynolds, James S. Riepe, Charles P. Smith, and M. David Testa.
The Asset Allocation Committee has been acting in this role for T. Rowe Price
since 1990 and its members bring a wide range of investment experience to
this task.
Day-to-day responsibility for managing the funds' investments lies with an
Investment Advisory Committee comprising Messrs. Van Dyke, Chairman, Boesel,
Notzon, Reynolds, and Testa, Donald J. Peters, Judith B. Ward, and Richard T.
Whitney. The committee chairman works with the committee in developing and
executing the funds' investment programs. Mr. Van Dyke has been managing
investments since joining T. Rowe Price in 1985.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by each fund. In
addition to the management fee, the funds pay for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
<PAGE>
ABOUT THE FUNDS 19
The funds paid the expenses shown in Table 6 for the fiscal year ended May
31, 1997.
<TABLE>
Table 6
<CAPTION>
<S> <C> <C> <C> <C>
Service Fees Paid
Subaccounting
Fund Transfer Agent Services Accounting
Income $29,000 $ 58,000 $70,000
Balanced 72,000 436,000 70,000
Growth 76,000 65,000 70,000
- --------------------------------------------------------------
</TABLE>
The Management Fee
This fee has two parts-an "individual fund fee" (discussed under Transaction
and Fund Expenses), which reflects a fund's particular investment management
costs, and a "group fee." The group fee, which is designed to reflect the
benefits of the shared resources of the T. Rowe Price investment management
complex, is calculated daily based on the combined net assets of all T. Rowe
Price funds (except Equity Index, the Spectrum Funds, and any institutional
or private label mutual funds). The group fee schedule (shown below) is
graduated, declining as the asset total rises, so shareholders benefit from
the overall growth in mutual fund assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16 billion
- ----------------------------------------------------------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30 billion
- ----------------------------------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Thereafter
- ----------------------------------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion
- ----------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
Each fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined Price funds' assets of over $71 billion at June
30, 1997, the group fee was 0.33%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us, in our newsletter, The Price Report, in Insights articles, in T.
Rowe Price advertisements, and in the media.
<PAGE>
T. ROWE PRICE 20
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in each fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced
the actual cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio, provided you held it for the entire period in question.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
funds may hold in their portfolios and the various kinds of investment
practices that may be used in day-to-day portfolio management. The funds'
investment programs are subject to further restrictions and risks described
in the Statement of Additional Information.
Shareholder approval is required to substantively change a fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports. The funds adhere to
applicable
<PAGE>
ABOUT THE FUNDS 21
investment restrictions and policies at the time they make an investment. A
later change in circumstances will not require the sale of an investment if
it was proper at the time it was made.
Each fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, the funds are not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about a fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more impact on a fund's share price than its weighting in the
portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all a fund's other investments.
Changes in each fund's holdings, each fund's performance, and the
contribution of various investments are discussed in the shareholder reports
sent to you.
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the funds achieve their
objectives.
Types of Portfolio Securities
In seeking to meet their investment objectives, the funds may invest in any
type of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the funds' investment programs. The following pages describe
the principal types of portfolio securities and investment management
practices of the funds.
Fundamental policy A fund will not purchase a security if, as a result, with
respect to 75% of the fund's total assets, more than 5% of its total assets
would be invested in securities of a single issuer or more than 10% of the
voting securities of the issuer would be held by the fund.
Bonds
A bond is an interest-bearing security- an IOU-issued by companies or
governmental units. The issuer has a contractual obligation to pay interest
at a stated rate on specific dates and to repay principal (the bond's face
value) on a specified date. An issuer may have the right to redeem or "call"
a bond before maturity, and the investor may have to reinvest the proceeds at
lower market rates.
A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. A bond's price usually
rises when interest rates fall, and vice versa, so its yield stays current.
<PAGE>
T. ROWE PRICE 22
Bonds may be unsecured (backed by the issuer's general creditworthiness only)
or secured (also backed by specified collateral).
Certain bonds have interest rates that are adjusted periodically. These
interest rate adjustments tend to minimize fluctuations in the bonds'
principal values. The maturity of those securities may be shortened under
certain specified conditions.
Bonds may be designated as senior or subordinated obligations. Senior
obligations generally have the first claim on a corporation's earnings and
assets and, in the event of liquidation, are paid before subordinated debt.
Common and Preferred Stocks
Stocks represent shares of ownership in a company. Generally, preferred stock
has a specified dividend and ranks after bonds and before common stocks in
its claim on income for dividend payments and on assets should the company be
liquidated. After other claims are satisfied, common stockholders participate
in company profits on a pro-rata basis; profits may be paid out in dividends
or reinvested in the company to help it grow. Increases and decreases in
earnings are usually reflected in a company's stock price, so common stocks
generally have the greatest appreciation and depreciation potential of all
corporate securities. While most preferred stocks pay a dividend, the funds
may purchase preferred stock where the issuer has omitted, or is in danger of
omitting, payment of its dividend. Such investments would be made primarily
for their capital appreciation potential.
Convertible Securities and Warrants
The funds may invest in debt or preferred equity securities convertible into
or exchangeable for equity securities. Traditionally, convertible securities
have paid dividends or interest at rates higher than common stocks but lower
than nonconvertible securities. They generally participate in the
appreciation or depreciation of the underlying stock into which they are
convertible, but to a lesser degree. In recent years, convertibles have been
developed which combine higher or lower current income with options and other
features. Warrants are options to buy a stated number of shares of common
stock at a specified price anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The funds may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfolio's diversification and may
enhance return, but they also involve some special risks, such as exposure to
potentially adverse local political and economic developments;
nationalization and exchange controls; potentially lower liquidity and higher
volatility; possible problems arising from accounting, disclosure,
settlement, and regulatory practices that differ from U.S. standards; and
<PAGE>
ABOUT THE FUNDS 23
the chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the funds' foreign investments that may be made in such
countries.
Operating policy Each fund may invest up to 35% of its total assets
(excluding reserves) in foreign securities.
Asset-Backed Securities
An underlying pool of assets, such as credit cards or automobile trade
receivables or corporate loans or bonds, backs these bonds and provides the
interest and principal payments to investors. Credit quality depends
primarily on the quality of the underlying assets and the level of credit
support, if any, provided by the issuer. The underlying assets (i.e., loans)
are subject to prepayments, which can shorten the securities' weighted
average life and may lower their return. The value of these securities also
may change because of actual or perceived changes in the creditworthiness of
the originator, servicing agent, or the financial institution providing the
credit support. There is no limit on the portion of the funds' fixed income
investments in these securities.
Mortgage-Backed Securities
The funds may invest in a variety of mortgage-backed securities. Mortgage
lenders pool individual home mortgages with similar characteristics to back a
certificate or bond, which is sold to investors such as the funds. Interest
and principal payments generated by the underlying mortgages are passed
through to the investors. The "big three" issuers are Government National
Mortgage Association (GNMA), the Federal National Mortgage Association
(Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).
GNMA certificates are backed by the full faith and credit of the U.S.
government, while others, such as Fannie Mae and Freddie Mac certificates,
are only supported by the ability to borrow from the U.S. Treasury or
supported only by the credit of the agency. Private mortgage bankers and
other institutions also issue mortgage-backed securities.
Mortgage-backed securities are subject to scheduled and unscheduled principal
payments as homeowners pay down or prepay their mortgages. As these payments
are received, they must be reinvested when interest rates may be higher or
lower than on the original mortgage security. Therefore, mortgage securities
are not an effective means of locking in long-term interest rates. In
addition, when interest rates fall, the pace of mortgage prepayments picks
up. These refinanced mortgages are paid off at face value (par), causing a
loss for any investor who may have purchased the security at a price above
par. In such an environment, this risk limits the potential price
appreciation of these securities and can negatively affect a fund's net asset
value. When rates rise, however, mortgage-backed securities have historically
experienced smaller price declines than comparable quality
<PAGE>
T. ROWE PRICE 24
bonds. In addition, when rates rise, and prepayments slow, the effective
duration of mortgage-backed securities extends, resulting in increased
volatility. There is no limit on the portion of the funds' fixed income
investments in these securities.
Additional mortgage-backed securities in which the funds may invest include:
. Collateralized Mortgage Obligations (CMOs) CMOs are debt securities that are
fully collateralized by a portfolio of mortgages or mortgage-backed
securities. All interest and principal payments from the underlying mortgages
are passed through to the CMOs in such a way as to create, in most cases,
more definite maturities than is the case with the underlying mortgages. CMOs
may pay fixed or variable rates of interest, and certain CMOs have priority
over others with respect to the receipt of prepayments.
. Stripped Mortgage Securities Stripped mortgage securities (a type of
potentially high-risk derivative) are created by separating the interest and
principal payments generated by a pool of mortgage-backed securities or a CMO
to create additional classes of securities. Generally, one class receives
only interest payments (IOs) and one principal payments (POs). Unlike GNMA
securities and POs, the value of IOs tends to move in the same direction as
interest rates. The funds could use IOs as a hedge against falling prepaying
rates (interest rates are rising) and/or a bear market environment. POs can
be used as a hedge against rising prepayment rates (interest rates are
falling) and/or a bull market environment. IOs and POs are acutely sensitive
to interest rate changes and to the rate of principal prepayments.
A rapid or unexpected increase in prepayments can severely depress the price
of IOs, while a rapid or unexpected decrease in prepayments could have the
same effect on POs. These securities are very volatile in price and may have
lower liquidity than most other mortgage-backed securities. Certain
non-stripped CMOs may also exhibit these qualities, especially those which
pay variable rates of interest which adjust inversely with, and more rapidly
than, short-term interest rates. In addition, if interest rates rise rapidly
and prepayment rates slow more than expected, certain CMOs, in addition to
losing value, can exhibit characteristics of longer securities and become
more volatile. There is no guarantee a fund's investment in CMOs, IOs, or POs
will be successful, and a fund's total return could be adversely affected as
a result.
Operating policy Each fund may invest up to 10% of its total assets in
stripped mortgage securities.
<PAGE>
ABOUT THE FUNDS 25
High-Yield/High-Risk Investing
The total return and yield of lower-quality (high-yield/high-risk) bonds,
commonly referred to as "junk" bonds, can be expected to fluctuate more than
the total return and yield of higher-quality bonds. Junk bonds are regarded
as predominantly speculative with respect to the issuer's continuing ability
to meet principal and interest payments. Successful investment in
lower-medium- and low-quality bonds involves greater investment risk and is
highly dependent on T. Rowe Price's credit analysis. A real or perceived
economic downturn or higher interest rates could cause a decline in
high-yield bond prices by lessening the ability of issuers to make principal
and interest payments. These bonds are often thinly traded and can be more
difficult to sell and value accurately than high-quality bonds. Because
objective pricing data may be less available, judgment may play a greater
role in the valuation process. In addition, the entire junk bond market can
experience sudden and sharp price swings due to a variety of factors,
including changes in economic forecasts, stock market activity, large or
sustained sales by major investors, a high-profile default, or just a change
in the market's psychology. This type of volatility is usually associated
more with stocks than bonds, but junk bond investors should be prepared for
it.
Operating policy The Growth, Balanced, and Income Funds may each invest up
to 15%, 20%, and 25%, respectively, of their total assets in
below-investment-grade or junk bonds.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency, or securities index or
another interest rate (each a "benchmark"). Hybrids can be used as an
efficient means of pursuing a variety of investment goals, including currency
hedging, duration management, and increased total return. Hybrids may not
bear interest or pay dividends. The value of a hybrid or its interest rate
may be a multiple of a benchmark and, as a result, may be leveraged and move
(up or down) more steeply and rapidly than the benchmark. These benchmarks
may be sensitive to economic and political events, such as commodity
shortages and currency devaluations, which cannot be readily foreseen by the
purchaser of a hybrid. Under certain conditions, the redemption value of a
hybrid could be zero. Thus, an investment in a hybrid may entail significant
market risks that are not associated with a similar investment in a
traditional, U.S. dollar-denominated bond that has a fixed principal amount
and pays a fixed rate or floating rate of interest. The purchase of hybrids
exposes the funds to the credit risk of the issuer of the hybrid. These risks
may cause significant fluctuations in the net asset value of the funds.
<PAGE>
T. ROWE PRICE 26
o Hybrids can have volatile prices and limited liquidity, and their use by
the funds may not be successful.
Operating policy Each fund may invest up to 10% of its total assets in hybrid
instruments.
Zero Coupon Bonds and Pay-in-Kind Bonds
A zero coupon bond does not make cash interest payments during the life of
the bond. Instead, it is sold at a deep discount to face value, and the
interest consists of the gradual appreciation in price as the bond approaches
maturity. "Zeros" can be an attractive financing method for issuers with
near-term cash-flow problems. Pay-in-kind (PIK) bonds pay interest in cash or
additional securities, at the issuer's option, for a specified period. Like
zeros, they may help a corporation economize on cash. PIK prices reflect the
market value of the underlying debt plus any accrued interest. Zeros and PIKS
can be higher- or lower-quality debt, and both are more volatile than coupon
bonds.
Each fund is required to distribute to shareholders income imputed to any
zero or PIK investments. Such distributions could reduce a fund's reserve
position.
Operating policy Each fund may invest up to 10% of its total assets in zero
coupon and pay-in-kind bonds.
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy Each fund will not invest more than 15% of its net assets in
illiquid securities.
Types of Management Practices
Reserve Position
Each fund will hold a certain portion of its assets in money market reserves.
Each fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, a fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve as a short-term defense during periods of unusual
market volatility.
<PAGE>
ABOUT THE FUNDS 27
Borrowing Money and Transferring Assets
The funds can borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with the funds' investment objectives and programs. Such borrowings may be
collateralized with fund assets, subject to restrictions.
Fundamental policy Borrowings may not exceed 33 1/3% of total fund
assets.
Operating policies Each fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33 1/3% of a
fund's total assets. A fund may not purchase additional securities when
borrowings exceed 5% of total assets.
Futures and Options
Futures (a type of potentially high-risk derivative) are often used to manage
risk because they enable the investor to buy or sell an asset in the future
at an agreed upon price. Options (another type of potentially high-risk
derivative) give the investor the right, but not the obligation, to buy or
sell an asset at a predetermined price in the future. The funds may buy and
sell futures and options contracts for any number of reasons, including: to
manage their exposure to changes in interest rates, stock and bond prices,
and foreign currencies; as an efficient means of adjusting their overall
exposure to certain markets; to enhance income; to protect the value of
portfolio securities; and to adjust portfolio duration. The funds may
purchase, sell, or write call and put options on securities, financial
indices, and foreign currencies.
Futures contracts and options may not always be successful hedges and their
prices can be highly volatile. Using them could lower the fund's total
return, and the potential loss from the use of futures can exceed the fund's
initial investment in such contracts.
Operating policies Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of a fund's net
asset value. Options on securities: The total market value of securities
against which a fund writes call or put options may not exceed 25% of its
total assets. A fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Interest Rate Transactions
The funds may enter into various interest rate transactions (a type of
potentially high-risk derivative investment), such as interest rate swaps and
the purchase or sale of interest rate caps, collars, and floors, to preserve
a return or spread on a particular investment or portion of its portfolio, to
create synthetic securities, or to structure transactions designed for other
purposes.
<PAGE>
T. ROWE PRICE 28
Operating policy Each fund will not invest more than 10% of its total assets
in interest rate transactions.
Managing Foreign Currency Risk
Investors in foreign securities may "hedge" their exposure to potentially
unfavorable currency changes by purchasing a contract to exchange one
currency for another on some future date at a specified exchange rate. In
certain circumstances, a "proxy currency" may be substituted for the currency
in which the investment is denominated, a strategy known as "proxy hedging."
Although foreign currency transactions will be used primarily to protect the
funds' foreign securities from adverse currency movements relative to the
dollar, they involve the risk that anticipated currency movements will not
occur and the funds' total return could be reduced.
Lending of Portfolio Securities
Like other mutual funds, the funds may lend securities to broker-dealers,
other institutions, or other persons to earn additional income. The principal
risk is the potential insolvency of the broker-dealer or other borrower. In
this event, a fund could experience delays in recovering its securities and
possibly capital losses.
Fundamental policy The value of loaned securities may not exceed
33 1/3% of total fund assets.
When-Issued Securities and Forward Commitment Contracts
The funds may purchase securities on a when-issued or delayed delivery basis
or may purchase or sell securities on a forward commitment basis. There is no
limit on the portion of the funds' fixed income investments in these
securities. The price of these securities is fixed at the time of the
commitment to buy, but delivery and payment can take place a month or more
later. During the interim period, the market value of the securities can
fluctuate, and no interest accrues to the purchaser. At the time of delivery,
the value of the securities may be more or less than the purchase or sale
price. To the extent each fund remains fully or almost fully invested (in
securities with a remaining maturity of more than one year) at the same time
it purchases these securities, there will be greater fluctuations in the
fund's net asset value than if the fund did not purchase them.
Portfolio Turnover
The funds will not generally trade in securities (either common stocks or
bonds) for short-term profits, but, when circumstances warrant, securities
may be purchased and sold without regard to the length of time held. A high
portfolio turnover rate may increase transaction costs and result in
additional taxable gains. The portfolio turnover rate for each fund for the
fiscal years ended May 31, 1997, 1996, and 1995, is set forth in Table 7.
<PAGE>
ABOUT THE FUNDS 29
<TABLE>
Table 7
<CAPTION>
<S> <C> <C> <C> <C>
Portfolio Turnover Rates
Fund 1997 1996 1995/a/
Balanced 54.0% 47.7% 25.8%
Growth 39.6 39.5 25.7
Income 44.8 34.1 50.5
- ------------------------------------------------
</TABLE>
a Annualized
Credit-Quality Considerations
The credit quality of most bond issues is evaluated by rating agencies such
as Moody's and Standard & Poor's. Credit quality refers to the issuer's
ability to meet all required interest and principal payments. The highest
ratings are assigned to issuers perceived to be the best credit risks. T.
Rowe Price research analysts also evaluate all portfolio holdings of each
fund, including those rated by outside agencies. The lower the rating on a
bond, the higher the yield, other things being equal.
Table 8 shows the rating scale used by the major rating agencies. T. Rowe
Price considers publicly available ratings, but emphasizes its own credit
analysis when selecting investments.
<TABLE>
Table 8
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratings of Corporate Debt Securities
Moody's Standard & Fitch
Investors Poor's Investors
Service, Inc. Corporation Service, Inc. Definition
Long Term Aaa AAA AAA Highest quality
Aa AA AA High quality
A A A Upper-medium grade
Baa BBB BBB Medium grade
Ba BB BB Low grade
B B B Speculative
Caa, Ca CCC, CC CCC, CC Sub-marginal
Ca C C Income bond, no interest paid
C D DDD, DD, D Probably in default
Moody's S&P Fitch
A-1+ Extremely strong F-1+ Exceptionally strong quality
Commercial Superior A-1 quality F-1 Very strong quality
Paper P-1 quality Strong quality
C
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
C
Acceptable A-3 Adequate quality F-3 Fair credit quality
P-3 quality B Speculative quality F-S Weak credit quality
C Doubtful quality
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts
T. Rowe Price Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
address on the next page. We do not accept third party checks to open new
accounts, except for IRA Rollover checks that are properly endorsed.
<PAGE>
ABOUT THE FUNDS 31
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096
T. Rowe Price [fund name] Account#1004397951
name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed above.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Shareholder Services). The new account will have the
same registration as the account from which you are exchanging. Services for the
new account may be carried over by telephone request if preauthorized on the
existing account. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
Through a Broker
If you buy or sell T. Rowe Price funds through anyone other than T. Rowe Price,
such as broker-dealers or banks, you may be charged transaction or service fees
by those institutions. No such fees are charged by T. Rowe Price Investment
Services or the T. Rowe Price funds for transactions conducted directly with the
fund.
<PAGE>
T. ROWE PRICE 32
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the address shown below with either a fund
reinvestment slip or a note indicating the fund you want to buy and your fund
account number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------
By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>
ABOUT THE FUNDS 33
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see addresses / /under
Opening a New Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
Rights Reserved by the Fund
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, if an account
has been restricted due to excessive trading or fraud) upon notice to the
shareholder within five business days of
<PAGE>
T. ROWE PRICE 34
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500
Investor Services 1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide contains detailed descriptions of these and other services.
If you are a new T. Rowe Price investor, you will receive a Services Guide with
our Welcome Kit.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs (profit sharing, money
purchase pension), 401(k), and 403(b)(7). For information on IRAs, call Investor
Services. For information on all other retirement plans, including our no-load
variable annuity, please call our Trust Company at 1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into
<PAGE>
ABOUT THE FUNDS 35
a state tax-free fund are limited to investors living in states where the fund
is registered.) Some of the T. Rowe Price funds may impose a redemption fee of
0.5% to 2% on shares held for less than six months or one year, as specified in
the prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
T. ROWE PRICE 36
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
This additional service gives you the opportunity to easily consolidate all of
your investments with one company. Through our discount brokerage, you can buy
and sell individual securities - stocks, bonds, options, and others - at
commission savings over full-service brokers. We also provide a wide range of
services, including:
To open an account 1-800-638-5660
For existing discount brokerage investors 1-800-225-7720
Automated telephone and on-line services
You can enter trades, access quotes, and review account information 24 hours a
day, seven days a week. Any trades executed through these programs save you an
additional 10% on commissions.
Note: Discount applies to our current commission schedule, subject to our $35
minimum commission.
<PAGE>
ABOUT THE FUNDS 37
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this
service-free of charge.
/Discount Brokerage is a division of T. Rowe Price Investment / /Services, Inc.,
Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
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 in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587 24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
C11-040 08/16/98
