<PAGE>
Annual Report
PERSONAL
STRATEGY
FUNDS
------------
MAY 31, 1998
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[LOGO OF T. ROWE PRICE APPEARS HERE]
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REPORT HIGHLIGHTS
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Personal Strategy Funds
. Both stocks and bonds were strong during the past six and 12 months, resulting
in attractive returns for investors in the Personal Strategy Funds.
. The funds maintained their lower exposure to domestic equities and emphasis on
U.S. corporate bonds.
. Personal Strategy Growth Fund returned 22.02% for the fiscal year ended May
31, the Balanced Fund 19.15%, and the Income Fund 16.61%, reflecting their
relative exposure to the booming equities market.
. European stocks were outstanding during the past six months and provide
good diversification for the funds.
. The current economic environment should favor bonds, while select foreign
stock markets offer appealing valuations.
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Fellow Shareholders
Despite a slide in May from record highs, stocks posted strong returns for the
6- and 12-month periods ended May 31, 1998, with large-cap issues leading the
way. European shares were even more robust during the most recent half year.
Interest rates declined sharply from a year ago, pushing bond prices higher and
generating attractive returns for fixed income investors as well. All three
Personal Strategy Funds produced solid results for shareholders.
MARKET REVIEW
The domestic economy kept sailing along with strong growth and extremely low
inflation, an ideal environment for both equities and bonds. The Federal Reserve
left the key fed funds rate unchanged since March 1997, and bond yields fell
considerably from year-ago levels. As a result, high-grade bonds enjoyed good
returns overall, but their performance was once again overshadowed by the
high-yield sector, which usually does well in times of robust economic growth.
International bonds of developed countries disappointed U.S. investors because
of the strength of the dollar versus major foreign currencies.
The 30-year Treasury bond yield fell from a height of 6.99% a year ago all the
way to 5.83% at the end of May. The five-year note yield also declined, but not
as far, from 6.60% to 5.57% during the same period. Money market rates were
stable by comparison, with the 90-day Treasury bill yield ending at 5.09%,
precisely where it was a year earlier, although it fluctuated between 4.98% and
5.40% along the way. (See chart.)
For the first time in years, some foreign stock markets have outpaced the S&P
500 so far this year, although overseas results
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Interest Rate Levels
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[LINE GRAPH APPEARS HERE]
INTEREST RATE LEVELS
30-Year 5-Year 90-Day
Treasury Treasury Treasury
Date Bond Note Bill
- ---- ---- ---- ----
5/31/97 6.99 6.60 5.09
6.72 6.31 5.10
6.38 6.00 5.25
8/31/97 6.63 6.22 5.26
6.35 5.94 4.98
6.22 5.78 5.18
11/30/97 6.08 5.82 5.27
5.93 5.71 5.40
5.89 5.48 5.22
2/28/98 5.84 5.60 5.16
5.92 5.62 5.19
6.02 5.72 5.05
5/31/98 5.83 5.57 5.09
1
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were mixed. Turmoil in Asia failed to dim the luster of European bourses,
but most of Asia and Latin America was sharply lower.
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
maintained its defensive tilt by underweighting the stock allocation and
slightly overweighting the bond holdings in all three portfolios. It continued
to favor international stocks over domestic and adopted a slight bias toward
growth as opposed to value stocks. In the bond area, the committee maintained
the funds' low exposure to foreign bonds and focused on both investment-grade
and high-yield bonds in the domestic market because of falling interest rates
and the continuing strong economy.
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 altered the mix of securities slightly during the past six months, reducing
the bond allocation one percentage point to 49% and slightly raising stock
exposure from 37% to 39%, with the remaining 12% in money market securities. We
continued to underweight domestic stocks, which we believe are fully valued, and
will look for opportunities to increase this exposure when valuations become
more attractive. We currently favor growth over value stocks, and the fund's
largest stock position was SPDR Trust, a proxy for the S&P 500 Index. Among
bonds, we
[PIE CHART APPEARS HERE]
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Asset Allocation
- -------------------------------------
Personal Strategy Income Fund
Bonds 49%
Money Markets 12%
Stocks 39%
Based on net assets as of 5/31/98.
2
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maintained a fairly heavy allotment of both domestic investment-grade and high-
yield bonds. We still believe foreign bonds are relatively unappealing, since we
expect continuing strength in the U.S. dollar.
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Performance Comparison
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Periods Ended 5/31/98 6 Months 12 Months
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Personal Strategy
Income Fund 8.22% 16.61%
...........................................................................
Combined Index Portfolio * 8.12 17.48
...........................................................................
*An unmanaged portfolio composed of 40% stocks (S&P500), 40% bonds (Lehman
Brothers Aggregate Bond Index), and 20% money market securities (90-Day Treasury
Bills).
Your fund's returns were solid during the 6- and 12-month periods ended May 31,
leading the benchmark for the shorter term because of fund exposure to
high-yield bonds and longer maturities, but trailing it for the year because of
our lower exposure to the robust domestic equity market.
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.
On May 31, your fund had 58% of its assets in stocks, the same as at the end of
May and November 1997, and 42% in bonds and money market securities. We favored
both high-yield and investment-grade domestic securities and underweighted
foreign bonds, for the reasons mentioned previously. Our preference for growth
over value stocks in the portfolio is reflected in our top five stock holdings,
which include Mobil, Philip Morris, and GE.
Your fund's returns for the 6- and 12-month periods ended May 31, 1998, were
[PIE CHART APPEARS HERE]
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Asset Allocation
- ----------------------------------------------
Personal Strategy Balanced Fund
Bonds and Money Markets 42%
Stocks 58%
Based on net assets as of 5/31/98.
3
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robust. Our defensive posture dampened relative returns versus the Combined
Index Portfolio for both periods, and our heavier exposure to foreign securities
trimmed gains for the fiscal year as well. However, we continue to believe
foreign equities offer very good value at this time (as evidenced by the
performance of European shares in the last six months) and provide greater
diversification for the fund.
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Performance Comparison
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Periods Ended 5/31/98 6 Months 12 Months
- -------------------------------------------------------------------------
Personal Strategy
Balanced Fund 10.03% 19.15%
.........................................................................
Combined Index Portfolio * 10.48 22.03
.........................................................................
*An unmanaged portfolio composed of 60% stocks (S&P500), 30% bonds (Lehman
Brothers Aggregate Bond Index), and 10% money market securities (90-Day
Treasury Bills).
PERSONAL STRATEGY GROWTH
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 May 31, 1998, the fund's
stock allocation was 73%, one percentage point higher than six months ago, and
27% was in bonds and cash equivalents.
This allocation, shown in the pie chart, represents a four-percentage-point
shift away from stocks and toward fixed income securities since May 1997. The
fund's five largest stock holdings include SPDR Trust, a publicly traded proxy
for S&P 500 stocks. Rounding out the top five are Philip Morris, Mobil, GE, and
British Petroleum. As in the other funds, the portfolio reflects a bias toward
growth stocks whose more consistent earnings pattern help them perform
relatively well in a slowing economy.
The fund's returns have been strong for the last six and 12 months, but lagged
the benchmark for both periods because of our
[PIE CHART APPEARS HERE]
- ----------------
Asset Allocation
- -------------------------------------------
Personal Strategy Growth Fund
Bonds and Money Markets 27%
Stocks 73%
Based on net assets as of 5/31/98.
4
<PAGE>
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Performance Comparison
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Periods Ended 5/31/98 6 Months 12 Months
- -------------------------------------------------------------------------
Personal Strategy
Growth Fund 11.73% 22.02%
.........................................................................
Combined Index Portfolio * 12.85 26.66
.........................................................................
*An unmanaged portfolio composed of 80% stocks (S&P500) and 20% bonds (Lehman
Brothers Aggregate Bond Index).
lower exposure to stocks, especially in the U.S. market. Heavier holdings in
foreign securities hindered the fund's return for the last 12 months in
particular. We believe the current diversification of the fund will continue to
benefit shareholders over the long term.
OUTLOOK
Economic growth remains robust with few hints of inflation on the horizon. We
believe a period of stable to slightly lower rates may lie ahead as the economy
remains on a positive track, but cools from its heated performance of 1997 and
the first quarter of 1998. As events play out in Asia and ripple across to
Europe and Latin America, we will look for opportunities to add value in
appropriate sectors of the fixed income market. Barring a dramatic slowdown in
the economy, leading to significant credit concerns and falling prices for
lower-quality bonds--something we do not expect to occur--fixed income
securities should continue to provide sound investment returns in the months
ahead.
In the equity area, the stock market dropped in May from its highs of earlier
this year. Is this the beginning of a long-anticipated correction or will the
market rebound as in recent years? We have believed for some time that U.S.
stocks are fully valued and overdue for a pause. While many foreign stock
markets have been volatile and returns have varied from region to region, we
still think foreign markets provide a good opportunity to find undervalued
securities. The diversified strategies available through the Personal Strategy
Funds should continue to offer investors attractive returns over the long term.
Respectfully submitted,
/s/ Peter Van Dyke
Peter Van Dyke
President and Chairman of the Investment Advisory Committee
June 19, 1998
5
<PAGE>
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
5/31/98 5/31/98
Personal Strategy Income Fund
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Securities 11.6% Stocks 38.9%
.................................................... .....................................................
Bonds 49.5% Five Largest Holdings:
.................................................... SPDR Trust 1.1
.................................................
Treasuries/Agencies 15.0 Philip Morris 0.5
................................................ .................................................
Mortgage-Backed 9.1 British Petroleum 0.5
................................................ .................................................
Corporate 23.2 GE 0.4
................................................ .................................................
Foreign 2.2 Mobil 0.4
................................................ .................................................
<CAPTION>
Personal Strategy Balanced Fund
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Securities 4.1% Stocks 57.6%
.................................................... ....................................................
Bonds 38.3% Five Largest Holdings:
.................................................... Mobil 0.7
................................................
Treasuries/Agencies 6.4 Philip Morris 0.7
................................................ ................................................
Mortgage-Backed 11.5 GE 0.6
................................................ ................................................
Corporate 18.4 British Petroleum 0.6
................................................ ................................................
Foreign 2.0 Banc One 0.6
................................................ ................................................
<CAPTION>
Personal Strategy Growth Fund
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Securities 2.5% Stocks 73.3%
.................................................... ....................................................
Bonds 24.2% Five Largest Holdings:
....................................................
SPDR Trust 1.9
................................................
Treasuries/Agencies 3.4 Philip Morris 0.9
................................................ ................................................
Mortgage-Backed 9.1 Mobil 0.9
................................................ ................................................
Corporate 10.9 GE 0.8
................................................ ................................................
Foreign 0.8 British Petroleum 0.8
................................................ ................................................
</TABLE>
<PAGE>
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.
PERSONAL STRATEGY INCOME FUND
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Combined Personal
Index Strategy
Date Portfolio Income Fund
---- --------- -----------
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
11/97 16,090 15,883
5/98 17,397 17,189
PERSONAL STRATEGY BALANCED FUND
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Combined Personal
Index Strategy
Date Portfolio Balanced Fund
---- --------- --------------
7/29/94 10,000 10,000
11/94 9,974 9,969
5/95 11,484 11,435
11/95 12,778 12,710
5/96 13,599 13,490
11/96 15,109 14,904
5/97 16,376 15,812
11/97 18,089 17,124
5/98 19,985 18,841
7
<PAGE>
T. ROWE PRICE PERSONAL STRATEGY FUNDS
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- ----------------------
Performance Comparison
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PERSONAL STRATEGY GROWTH FUND
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
As of 5/31/98
Personal Strategy Combined Index
Date Growth Fund Portfolio
7/29/94 10,000.00 10,000.00
11/94 9,974.00 10,010.00
5/95 11,732.00 11,565.00
11/95 13,258.00 13,111.00
5/96 14,404.00 14,205.00
11/96 16,344.00 15,844.00
5/97 18,087.00 17,030.00
11/97 20,203.00 18,598.00
5/98 22,910.00 20,781.00
- ------------------------------------
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 5/31/98 1 Year 3 Years Inception Date
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Personal Strategy Income Fund 16.61% 15.04% 15.15% 7/29/94
............................................................................
Personal Strategy Balanced Fund 19.15 18.11 17.94 7/29/94
............................................................................
Personal Strategy Growth Fund 22.02 21.57 20.99 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.
8
<PAGE>
T. ROWE PRICE SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
INVESTMENT SERVICES AND INFORMATION
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
Checking Available on most fixed income funds ($500 minimum).
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Distribution Options Reinvest all, some, or none of your
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Rowe Price Web site on the Internet. Address: www.troweprice.com
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INVESTMENT INFORMATION
Combined Statement Overview of all your accounts with T. Rowe
Price.
Shareholder Reports Fund managers' reviews of their strategies
and results.
T. Rowe Price Report Quarterly investment newsletter discussing
markets and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund
results.
Insights Educational reports on investment strategies and
financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit,
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Personal Strategy Planner, Retirees Financial Guide, and
Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc.
Member NASD/SIPC.
9
<PAGE>
For yield, price, last transaction, Investor Centers:
current balance, or to conduct 101 East Lombard St.
transactions, 24 hours, 7 days Baltimore, MD 21202
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For assistance 10090 Red Run Blvd.
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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.
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor. C11-050 5/31/98
