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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act File Number: 811-4998

T. Rowe Price Spectrum Fund, Inc.

(Exact name of registrant as specified in charter)

100 East Pratt Street, Baltimore, MD 21202

(Address of principal executive offices)

David Oestreicher

100 East Pratt Street, Baltimore, MD 21202

(Name and address of agent for service)

Registrant’s telephone number, including area code: (410) 345-2000

Date of fiscal year end: December 31

Date of reporting period: December 31, 2009

Item 1: Report to Shareholders

Spectrum Funds

December 31, 2009

The views and opinions in this report were current as of December 31, 2009. 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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Manager’s Letter

Fellow Shareholders

Global financial markets continued to improve over the past six months, with emerging markets leading the way. Substantial stimulus measures enacted by governments and multiple efforts by central banks to ease monetary policy enabled companies and consumers to repair balance sheets. Corporate earnings surprised on the upside, and while consumer spending in the developed world, particularly in the U.S., continued to wane, unmistakable signs of growth appeared. However, many economies remain fragile, with high unemployment likely to persist for much of the year. Each of the Spectrum Funds posted strong gains in both periods.

MARKET ENVIRONMENT

In contrast to the steady drumbeat of bad economic news into early 2009, the past several quarters have seen a resurgence of confidence among investors that economic growth is at hand. The global downturn is hardly a thing of the past. In its wake, deficit spending has accelerated; unemployment is at extraordinary levels; and lending, which is essential to economic growth, remains anemic. At least, that’s the story in much of the developed world. Meanwhile, emerging economies are in a different zone. From Brazil to China, economic conditions have improved markedly since the collapse in confidence that wrecked stock markets a short time ago. They have rebounded sharply in the last year, with some emerging markets stock indexes having climbed more than 100% since their March 2009 lows.

U.S. stocks gained in the second half of 2009 amid improved investor sentiment. Large-cap shares slightly trailed their small-cap peers, but mid-cap stocks trumped both segments. As measured by various Russell indexes, value stocks narrowly outpaced growth among large-cap shares, but growth stocks trumped value in the small- and mid-cap universe. In the large-cap universe, shares of information technology companies produced superior returns, thanks to attractive valuations, aggressive cost-cutting, cash-rich balance sheets, and better-than-expected revenues. Consumer discretionary and industrials and business services stocks also did very well, as investors anticipated that these sectors would benefit substantially from an economic recovery while materials stocks climbed with commodity prices. Utilities and telecommunication services—two sectors often perceived as safe havens in an economic downturn—lagged with modest gains.

Foreign stocks in developed markets slightly trailed U.S. shares in the second half of 2009, as a late-year rally in the U.S. dollar versus other currencies dampened returns in dollar terms. Shares in Europe fared well, but Japanese shares trailed significantly. Emerging markets outperformed developed markets, led by equities in Latin America and emerging Europe.

U.S. bonds produced positive returns in the last six months, as credit market conditions continued to improve and money market yields near 0% prompted yield-hungry investors to seek riskier securities with an income advantage. High yield bonds fared best and produced excellent returns as credit spreads narrowed significantly, but investment-grade corporate bonds also gained. Asset-backed securities—which are backed by credit card, auto loan, or other debt payments—benefited from increased demand through the Federal Reserve’s Term Asset-Backed Securities Loan Facility. U.S. Treasury securities were mostly flat as longer-term interest rates rose amid signs of an economic recovery and heavy new issuance.

Non-U.S. bonds produced positive returns in the last six months. Emerging markets debt did very well, as investors seeking higher yields returned to riskier asset classes. High-quality bonds issued in developed countries were tempered by the U.S. dollar’s late-year rally versus other currencies.

SPECTRUM GROWTH FUND

The Spectrum Growth Fund returned 24.61% for the six months ended December 31, 2009, and 40.94% for the full year. The fund outperformed the Russell 3000 Index and the Lipper Multi-Cap Core Funds Index for both periods.

Each of Spectrum Growth’s underlying components posted positive returns in the last six months. The fund’s large-cap holdings—Growth Stock Fund, Value Fund, Equity Income Fund, and Blue Chip Growth Fund—turned in solid gains. The fund remains neutral between growth and value, as the value segment could benefit as corporate earnings prospects begin to improve. We are underweight to small-cap stocks as valuations favor large-cap stocks.

We are modestly overweight in non-U.S. equity markets, both developed and emerging relative to U.S. equities, based on more attractive valuations overseas. We have moved to overweight the emerging markets equity sector based on the promising intermediate- to longer-term outlook for growth. Over a longer investment horizon, greater growth opportunities should offset higher interim volatility.

SPECTRUM INCOME FUND

The Spectrum Income Fund returned 11.17% for the six months ended December 31, 2009, and 20.29% for the full year, outperforming the Barclays Capital U.S. Aggregate Index and the Lipper General Bond Funds Average for both periods (see the accompanying performance table).

While the fund is predominantly a fixed income portfolio, our third-largest holding is the Equity Income Fund, which invests in dividend-paying stocks. We maintain a strong weighting to equities in order to benefit from the long-term appreciation potential of stocks, as well as to lower the portfolio’s sensitivity to changes in interest rates. In the last six months, the Equity Income Fund, which invests in large-cap value stocks, was the top fund performer, as it benefited from the strong rebound in U.S. equity prices over the last six and 12 months.

Among fixed income securities, the High Yield Fund generated outstanding gains amid improving liquidity. High yield bonds have easily outperformed the broad bond market thanks primarily to declining default risk, the improving economic outlook, and ample liquidity. Within the asset class, the lowest-rated credits outperformed higher-quality B and BB rated bonds. Narrowing credit spreads and investor demand for higher income spurred the performance of high yield bonds. The New Income Fund, the fund’s largest position, also produced solid returns due to the strong performance of credit-sensitive investment-grade corporate bonds.

Other positive performers within the portfolio included the International Bond Fund and the Emerging Markets Bond Fund, each of them benefiting from increased appetite for risk, improved liquidity, and positive cash flows. The International Monetary Fund continued to provide much-needed assistance for emerging markets issuers in need of external financing. We remain positive with regard to this asset class.

The Corporate Income Fund produced solid returns due to improved credit conditions and the ability of firms to issue new debt. We have increased our position in the fund as valuations in the corporate bond market have become more attractive. The Short-Term Bond Fund performed well early in the year but lost ground in the second half. Signs of an economic recovery and heavy new issuance pushed U.S. Treasuries’ longer-term rates higher, but Treasuries were mostly flat. The GNMA Fund contributed modestly to fund performance. While the fund produced solid returns early in the year, reflecting the high-quality mortgage-backed securities, it deteriorated late in the period. We reduced our allocation to mortgage-backed securities, which form a significant portion of the domestic bond market. We are concerned about valuations, which have been driven higher by Fed purchases, as well as the prospect of the Fed discontinuing its purchases, which would remove the primary buyer from the market.

SPECTRUM INTERNATIONAL FUND

The Spectrum International Fund returned 24.30% for the six months ended December 31, 2009, and 44.99% for the full year. The fund outperformed the Lipper International Multi-Cap Core Funds Average and was in line with our new primary benchmark, the MSCI All Country World ex-U.S.A. Index for the last six months. For the full year, the fund outperformed its benchmarks. The fund recovered much of the devastating losses of 2008, but it remains below its 2007 highs.

We are also showing the linked performance benchmark, which illustrates a previous index in the fund (please see the performance table for a breakdown of the index) and the MSCI benchmark that became effective on March 1, 2009. The new MSCI benchmark more accurately reflects the investment strategy of the fund, with its emphasis on non-U.S. equities in both developed and emerging markets.

Every component of the portfolio advanced in the last six months. In general, the Spectrum International Fund benefited from the resurgence in global equities following the staggering worldwide collapse that appeared to reach its nadir in March 2009. Bargain hunters scooped up shares of deeply discounted developed markets stocks, as it became clearer that policymakers were intent upon rescuing their financial systems and that the worst economic meltdown since the Great Depression was gradually coming to an end. The story in the emerging world was even more encouraging, and, in this universe, our New Asia Fund and Emerging Markets Stock Fund had exceptional returns. Each of them returned more than 80% for the full year, recovering much of the earlier devastating losses.

Many of the economies in the developing world, from China to Brazil, attacked the financial mess quickly and aggressively with monetary easing and fiscal stimulus. Equally important, these countries rebounded strongly because the myriad problems facing developed markets were in short supply and because these countries have good structural economic engines. Their banks are busy lending, their companies are succeeding at increasing exports, and consumer growth is moving apace. These factors contributed to their ability to rapidly rebound from the economic disaster that struck first in the developed world.

Over the period, we increased our holdings in the Emerging Markets Stock Fund and the New Asia Fund. Despite the enormous gains in 2009, we think the emerging world, and Asia especially, stand to benefit from the healthy economic growth in place over the long term. We also added to our allocation in International Growth & Income, which invests in companies from established countries in developed markets. We believe they are currently undervalued.

OUTLOOK

Markets around the world have amassed huge gains since the first quarter of 2009. The Fed and other central banks, as well as governments, stepped up their efforts to buttress struggling economies. Since then, credit markets have gradually improved, manufacturing has rebounded, and corporate profits have surprised on the upside. That said, this recovery is likely to be long and uneven as corporate profits cannot forever be dependent on cost-cutting measures and a depletion of inventories.

Valuations have rapidly returned to near-normal levels. There are many companies that our managers believe are undervalued and whole sectors or even regions that could benefit from a gradual global economic recovery. But the gains of the past year, even after the devastating losses of 2008 and 2009, are unlikely to be repeated. Going forward, the seeds of recovery should bear fruit. But the headwinds we still face—a continued housing slump in much of the developed world, huge government deficits, and the prospect of rampant inflation—are potentially very serious.

We believe that shareholders will be well served over the long term by the funds’ fundamental commitment to diversification across asset classes as well as our emphasis on strong fundamental research in seeking investment opportunities in the current market environment.

Respectfully submitted,

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

January 20, 2010

The committee chairman 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

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

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

Lipper indexes: Fund benchmarks that consist of a small number of the largest mutual funds in a particular category as tracked by Lipper Inc.

MSCI All Country World ex-U.S.A. Index: An index that measures equity market performance of developed and emerging countries, excluding the U.S.

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

MSCI Emerging Markets Index: An unmanaged index that tracks stocks in 26 emerging market countries.

Russell 2000 Index: An unmanaged index that tracks the stocks of 2,000 small U.S. companies.

Russell 3000 Index: An index that tracks the performance of the 3,000 largest U.S. companies, representing approximately 98% of the investable U.S. equity market.

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

Performance and Expenses

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.