T. Rowe Price Spectrum Income Fund NCSR Certified annual shareholder report (management investment company)

Item 1: Report to Shareholders

Spectrum Funds

December 31, 2006

The views and opinions in this report were current as of December 31, 2006. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund’s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.

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Fellow Shareholders

The year 2006 was a banner year for global financial markets, which generated considerable momentum in the last six months after a sluggish start. The strong results reflected the supportive environment for economic and corporate profit growth worldwide. As the performance of the Spectrum Funds illustrates, both international and domestic stocks enjoyed double-digit returns, while bonds posted more muted gains.

MARKET ENVIRONMENT

Global economies continued to expand in 2006, though the most significant increases in the rate of growth occurred outside the U.S. European economies showed significant improvement, while India and China led the robust growth in Asia. The main exceptions were Japan, where an apparent economic turnaround stalled in the second half of the year, and the U.S., which saw economic growth decelerate after several years of expansion. While central banks around the world continued to raise interest rates throughout the year, the Federal Reserve ended its program of rate hikes in June, holding rates steady during the last six months after 17 rate increases between June 2004 and June 2006.

The rising economic tide lifted corporate profit growth around the world. Even in the U.S., where economic growth slowed markedly, corporate earnings consistently exceeded expectations. Another global trend was a sharp increase in mergers and acquisitions; globally, M&A deals totaled a record-high $4 trillion in 2006. Private-equity firms played a substantial role in some of the largest transactions.

HIGHLIGHTS

• International and domestic stocks enjoyed double-digit returns in 2006, while bonds posted more muted gains.

• Each of the three Spectrum Funds performed better than its benchmark in the second half of the year. The Spectrum Growth and Spectrum Income funds also outperformed their benchmarks for the entire year.

• Broad diversification among multiple T. Rowe Price funds is at the heart of each fund’s long-term investment strategy.

• Economic conditions remain favorable for global equity markets. An easing of inflationary pressures should augur well for bonds, while overseas markets could benefit from a weaker U.S. dollar.

The combination of strong corporate earnings growth, record-setting merger activity, and a stable Fed monetary policy provided the backdrop for a solid rally in the U.S. stock market. As the accompanying table shows, most of the gains occurred in the second half of the year, when energy prices fell and the Fed was on hold. Based on Russell indexes, small-cap stocks outperformed large-company issues for the year, while value shares won out over growth by a substantial margin.

International stocks posted higher returns than the domestic market. The same factors supporting U.S. stocks also contributed to outsized returns in overseas markets. Nearly every region produced gains in excess of 25% for the year, with emerging markets leading the way, especially in Latin America. Among developed countries, European and Asian markets delivered very similar returns, gaining more than 30% for the year. The laggard was Japan, which posted single-digit gains amid a softer-than-expected economy.

U.S. bonds also produced positive results in 2006, though returns were more modest than in the equity markets. Bonds declined during the first half of the year, but the decelerating economic environment and the shift in Fed rate policy helped set the stage for a bond market rally in the last six months. For the year, the broad Lehman Brothers U.S. Aggregate Index returned 4.33%. High-yield corporate bonds were the best performers, benefiting from strong investor demand for higher-yielding investments. Mortgage-backed securities also posted strong gains, while Treasury bonds lagged.

International bonds outperformed domestic fixed-income securities for the year; returns were enhanced by the U.S. dollar’s weakness versus European and some Asian currencies. The J.P. Morgan Non-U.S. Dollar Government Bond Index returned 6.84% in 2006, while the J.P. Morgan Emerging Markets Bond Index Plus returned 10.49%.

SPECTRUM GROWTH FUND

In 2006, your fund posted a double-digit gain and outperformed its benchmark. As shown in the accompanying table, Spectrum Growth returned 16.37% for the year, surpassing the performance of both the S&P 500 Stock Index and the fund’s Lipper peer group index. The fund’s 12.78% return in the last six months was also better than the performance of the S&P 500 and Lipper benchmarks. The portfolio’s strong results in 2006 resulted primarily from its exposure to foreign issues and value stocks.

Every holding in the portfolio produced positive returns during the year. The fund’s underlying international stock portfolios, which composed about 20% of the fund as of December 31, 2006, were the top performers. The smallest position in the portfolio, Emerging Markets Stock, posted the best return, gaining more than 30%. We maintained neutral weightings in foreign stocks throughout the year and are optimistic about their prospects in 2007.

On the domestic side, the fund’s value holdings—Mid-Cap Value, Value, and Equity Income (a dividend-oriented holding with a value element)—also performed well, benefiting from the broad outperformance of value stocks. We shuffled some assets among our value holdings, trimming our position in Equity Income and adding to our position in Value, in order to achieve greater balance in this segment of the portfolio.

The growth components of the portfolio lagged, particularly Blue Chip Growth and New Horizons, which were the only holdings to post single-digit gains for the year. We continued to overweight large-cap growth stocks, adding to our positions in Growth Stock and Blue Chip Growth throughout the year. In an environment of solid but slower earnings growth, high-quality large-cap companies could benefit if they are able to produce more dependable earnings growth. The underperformance of large-cap growth stocks in 2006 reinforced their attractive valuations.

We cut back on our position in New Horizons, the lone small-cap holding in the portfolio. Small-cap valuations remain high relative to large-cap issues, and small-cap stocks may face a more challenging profit environment in an economic slowdown.

SPECTRUM INCOME FUND

As the accompanying table indicates, your fund delivered a solid return in 2006. Spectrum Income’s 8.38% return for the year was ahead of both the Lehman Brothers U.S. Aggregate Index and its Lipper peer group average. The fund’s 6.89% return for the last six months also outpaced the index and peer group. Spectrum Income continued to benefit from its broad diversification, as the fund’s positions in high-yield corporate bonds, dividend-paying stocks, and international bonds were all top contributors to performance in 2006.

All portfolio holdings gained ground for the year. The best performer was Equity Income, which derives its income from dividend-paying stocks. Equity Income gained nearly 20% as the stock market staged a strong rally in 2006. High Yield and Emerging Markets Bond were also top contributors; both benefited from strong investor demand for the highest yields available in the bond market. Rising interest rates weighed on U.S. Treasury Long-Term, which has the greatest sensitivity to interest rate fluctuations. However, it was also one of the smallest positions in the portfolio.

We reallocated some assets during the year to take advantage of valuation disparities and broaden our diversification. With the Fed on hold, we shifted assets from Summit Cash Reserves to Short-Term Bond. We also reduced our positions in areas that have outperformed in recent years—including Equity Income (value stocks), New Income (investment-grade bonds), and Corporate Income (primarily investment-grade corporate bonds)—and added to holdings that have lagged, such as U.S. Treasury Long-Term.

Earlier in the period, we increased our weighting in High Yield, as the sector benefited from strong fundamentals thanks to strong corporate profit growth and low default levels. Toward the end of the year, we began to lower our exposure as the difference between yields of high-and low-quality bonds narrowed to historically low levels following several years of strong returns.

SPECTRUM INTERNATIONAL FUND

Despite a very strong return in 2006, your fund lagged its benchmark and peer group average. As the accompanying table shows, Spectrum International’s 22.60% return for the year came up short of its combined index benchmark and Lipper peer group average. All of the underperformance occurred in the first half of the year—Spectrum International returned 16.79% for the six months ended December 31, 2006, well ahead of the combined benchmark and Lipper group returns. A meaningful position in Japan and a reduction in emerging markets exposure contributed to the portfolio’s underperformance for the year.

The portfolio’s best performer in 2006 was New Asia, which gained more than 35% as Asian markets surged during the year. European Stock, one of the largest positions in the portfolio, also produced strong results. We added International Growth & Income to the portfolio early in the year to provide further diversification, and it ended up being a noteworthy contributor to performance. By the end of the year, we had increased our position in International Growth & Income to 10% of the portfolio.

Our two emerging markets holdings, Emerging Markets Stock and Emerging Europe & Mediterranean, continued to be strong performers. However, given the outperformance of emerging markets in recent years, we reduced our holdings in 2006, eliminating Emerging Europe & Mediterranean entirely from the portfolio in the last six months of the year. We shifted the assets into New Asia and International Growth & Income.

The only holding in the portfolio to decline was Japan, reflecting the weakness in the Japanese stock market in 2006. International Stock, the fund’s largest holding, also underperformed the broad international stock indexes. We lowered our weighting in International Stock during the year from 46% to 40% of the portfolio to make room for International Growth & Income. We also scaled back our position in International Discovery following several years of outperformance in small-cap stocks worldwide.

OUTLOOK

Looking ahead to 2007, we expect global economic growth to moderate as the year progresses. Central banks around the world are likely to follow the Federal Reserve’s lead and bring an end to their recent cycle of interest rate increases, while the Fed itself looks ahead to the possibility of cutting interest rates in the second half of the year.

Despite the expected slowdown, economic conditions remain favorable for the global financial markets. Corporate profit growth, although slowing from the torrid pace of recent years, is still expected to be above the long-term historical average and the strength of corporate balance sheets should be supportive for stock prices. An easing of inflationary pressures should augur well for bonds, while overseas markets could benefit from a weaker U.S. dollar and improving productivity.

Nonetheless, a host of unforeseen challenges—from an unexpectedly sharp economic downturn to a commodity price spike to an adverse geopolitical event—could lead to a dramatic change in the market environment. As a result, broad diversification remains a critical investment precept—one that we follow adamantly in the Spectrum Funds.

Respectfully submitted,

Edmund M. Notzon III
President of the Spectrum Funds and chairman of the Investment Advisory Committee

January 23, 2007

The committee has day-to-day responsibility for managing the portfolios and works with committee members in developing and executing the funds’ investment program.

RISKS OF INVESTING

As with all stock and bond mutual funds, each fund’s share price can fall because of weakness in the stock or bond markets, a particular industry, or specific holdings. Stock markets can decline for many reasons, including adverse political or economic developments, changes in investor psychology, or heavy institutional selling. The prospects for an industry or company may deteriorate because of a variety of factors, including disappointing earnings or changes in the competitive environment. In addition, the investment manager’s assessment of companies held in a fund may prove incorrect, resulting in losses or poor performance even in rising markets.

Bonds are subject to interest rate risk, the decline in bond prices that usually accompanies a rise in interest rates, and credit risk, the chance that any fund holding could have its credit rating downgraded or that a bond issuer will default (fail to make timely payments of interest or principal), potentially reducing the fund’s income level and share price. High-yield corporate bonds could have greater price declines than funds that invest primarily in high-quality bonds. Companies issuing high-yield bonds are not as strong financially as those with higher credit ratings, so the bonds are usually considered speculative investments.

Funds that invest overseas may carry more risk than funds that invest strictly in U.S. assets. Risks can result from varying stages of economic and political development, differing regulatory environments, trading days, and accounting standards, and higher transaction costs of non-U.S. markets. Non-U.S. investments are also subject to currency risk, or a decline in the value of a foreign currency versus the U.S. dollar, which reduces the dollar value of securities denominated in that currency.

GLOSSARY

J.P. Morgan Non-U.S. Dollar Government Bond Index: An unmanaged index that tracks the performance of major non-U.S. bond markets.

J.P. Morgan Emerging Markets Bond Index: An unmanaged index that tracks dollar-denominated bonds issued by emerging-market countries.

Lehman Brothers U.S. Aggregate Index: An unmanaged index that tracks investment-grade corporate and government bonds.

MSCI EAFE Index: An unmanaged index that tracks the stocks of more than 1,000 companies in Europe, Australasia, and the Far East (EAFE).

MSCI Emerging Markets Index: An unmanaged index that tracks stocks in 25 emerging-market countries.

Russell 2000 Index: An unmanaged index that tracks the smallest 2,000 of the largest 3,000 U.S. stocks.

S&P 500 Stock Index: An unmanaged index that tracks the stocks of 500 U.S. primarily large-cap companies.

GROWTH OF $10,000

This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.

AVERAGE ANNUAL COMPOUND TOTAL RETURN

This table shows how the fund would have performed each year if its actual (or cumulative) returns had been earned at a constant rate.

GROWTH OF $10,000

AVERAGE ANNUAL COMPOUND TOTAL RETURN

This table shows how the fund would have performed each year if its actual (or cumulative) returns had been earned at a constant rate.

GROWTH OF $10,000

AVERAGE ANNUAL COMPOUND TOTAL RETURN

This table shows how the fund would have performed each year if its actual (or cumulative) returns had been earned at a constant rate.

FUND EXPENSE EXAMPLE

As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period.

Actual Expenses
The first line of the following table (“Actual”) provides information about actual account values and expenses based on the fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes
The information on the second line of the table (“Hypothetical”) is based on hypothetical account values and expenses derived from the fund’s actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund’s actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Note: T. Rowe Price charges an annual small-account maintenance fee of $10, generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $25,000 or more, accounts employing automatic investing, and IRAs and other retirement plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although a separate custodial or administrative fee may apply to such accounts). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds.

You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.