UNITED VANGUARD FUND INC, 497, 1999-02-04

UNITED VANGUARD FUND INC
497, 1999-02-04

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January 31, 1999

P R O S P E C T U S

UNITED
VANGUARD
FUND, INC.

Class A Shares

- -----------------------------------------------------

This Fund seeks the appreciation of your investment
through a diversified holding of securities issued
primarily by companies that the Fund's investment
manager believes have appreciation possibilities.

[GRAPHIC OMITTED]

[WADDELL & REED LOGO] The Securities and Exchange Commission has not
approved or disapproved the Fund's securities, or
determined whether this Prospectus is accurate or
complete. It is a criminal offense to state
otherwise.

<PAGE>

T A B L E O F C O N T E N T S

<TABLE>
<S> <C>
-------------------------------------------------------------
AN OVERVIEW OF THE FUND 3
-------------------------------------------------------------
PERFORMANCE 5
-------------------------------------------------------------
FEES AND EXPENSES 6
-------------------------------------------------------------
THE INVESTMENT PRINCIPLES
OF THE FUND 7
-------------------------------------------------------------
Investment Goal, Principal Strategies
and Other Investments 7
----------------------------------------------------------
Risk Considerations of Principal
Strategies and Other Investments 8
----------------------------------------------------------
FINANCIAL HIGHLIGHTS 10
-------------------------------------------------------------
YOUR ACCOUNT 11
-------------------------------------------------------------
Ways to Set Up Your Account 11
----------------------------------------------------------
Buying Shares 12
----------------------------------------------------------
Sales Charge Reductions and
Waivers 14
-------------------------------------------------------
Waivers for Certain Investors 14
-------------------------------------------------------
Minimum Investments 15
----------------------------------------------------------
Adding to Your Account 16
----------------------------------------------------------
Selling Shares 16
----------------------------------------------------------
Shareholder Services 18
----------------------------------------------------------
Personal Service 18
-------------------------------------------------------
Reports 19
-------------------------------------------------------
Exchanges 19
-------------------------------------------------------
Automatic Transactions 19
-------------------------------------------------------
Distributions and Taxes 20
----------------------------------------------------------
Distributions 20
-------------------------------------------------------
Taxes 21
-------------------------------------------------------
THE MANAGEMENT OF
THE FUND 23
-------------------------------------------------------------
Portfolio Management 23
----------------------------------------------------------
Management Fee 23
----------------------------------------------------------
</TABLE>

<PAGE>

An
Overview
of the
Fund

Goal

United Vanguard Fund, Inc. (the "Fund") seeks the appreciation of your
investment.

Principal Strategy

The Fund seeks to achieve its goal by investing primarily in a diversified
portfolio of common stocks issued by companies that Waddell & Reed Investment
Management Company ("WRIMCO"), the Fund's investment manager, believes have
appreciation possibilities. The Fund typically emphasizes a blend of value and
growth potential in its selection of stocks. The Fund can invest in companies of
any size.

Principal Risks of Investing in the Fund

Because the Fund owns different types of investments, a variety of factors can
affect its investment performance, such as:

o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;

o an increase in interest rates, which may cause the value of the Fund's
fixed-income securities to decline;

o prepayment of higher-yielding bonds held by the Fund;

o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and

o the skill of WRIMCO in evaluating and selecting securities for the Fund.

Also, the Fund may invest, to a lesser extent, in foreign securities, which
present additional risks such as those relating to currency fluctuations and
political or economic conditions affecting the foreign country.

Market risk for small- or medium-sized companies may be greater than that for
large companies. Smaller companies are more likely to have limited financial
resources and inexperienced management. As well, stock of smaller companies may
experience volatile trading and price fluctuations.

3
<PAGE>

As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

Who May Want to Invest

The Fund is designed for investors seeking long-term investment growth. You
should consider whether the Fund fits with your particular investment
objectives.

4
<PAGE>

Performance

The chart and table below show the past performance of the Fund's Class A
shares:

o The chart presents the annual returns and shows how performance has varied
from year to year over the past ten years.

o The table shows Class A average annual returns and compares them to the
market indicators listed.

o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.

Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Financial Highlights
section of this Prospectus and in the Fund's shareholder reports is based on the
Fund's fiscal year.

CHART OF YEAR-BY-YEAR RETURNS
as of December 31, each year (%)

In the period shown in the chart, the highest quarterly return was 13.72% (the
second quarter of 1997) and the lowest quarterly return was -16.18% (the third
quarter of 1990).

The chart does not reflect any sales charge that you may be required to pay upon
purchase of the Fund's Class A shares. If the sales charge was included, the
returns would be less than those shown.

AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)

<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Class A Shares of the Fund 23.67% 16.10% 13.77%
S&P 500 Composite
Stock Price Index 28.70% 24.08% 19.21%
Lipper Growth Fund
Universe Average 22.86% 18.63% 16.71%
</TABLE>

The indexes shown are broad-based, securities market indexes that are unmanaged.
The Lipper average is a composite of mutual funds with goals similar to the goal
of the Fund.

5
<PAGE>

Fees and
Expenses

This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.

<TABLE>
<CAPTION>
- -----------------------------------------------------------
Shareholder Fees
(fees deducted directly from your investment)
- -----------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 5.75%
- -----------------------------------------------------------
Maximum Deferred Sales Charge (Load) None
- -----------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends and Other Distributions None
- -----------------------------------------------------------
Redemption Fees None
- -----------------------------------------------------------
Exchange Fee None
- -----------------------------------------------------------
Maximum Account Fee None
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- -----------------------------------------------------------
Annual Fund Operating Expenses
(expenses deducted from Fund assets)
- -----------------------------------------------------------
<S> <C>
Management Fees 0.69%
- -----------------------------------------------------------
Distribution and Service (12b-1) Fees (1) 0.22%
- -----------------------------------------------------------
Other Expenses 0.18%
- -----------------------------------------------------------
Total Annual Fund Operating Expenses 1.09%
- -----------------------------------------------------------
</TABLE>

(1) It is possible that long-term shareholders of the Fund may bear 12b-1
distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc.

- --------------------------------------------------------------------------------
Example:
This example is intended to help you compare the cost of investing in the Class
A shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the Fund for each time period
specified, (b) your investment has a 5% return each year, and (c) the Class A
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be:
- --------------------------------------------------------------------------------
1 year $ 680
- --------------------------------------------------------------------------------
3 years $ 902
- --------------------------------------------------------------------------------
5 years $1,141
- --------------------------------------------------------------------------------
10 years $1,827
- --------------------------------------------------------------------------------

Your costs would be the same whether or not you redeemed your shares at the end
of each time period. For a more complete discussion of certain expenses and
fees, see "Management Fee."

6
<PAGE>

The Investment Principles of the Fund

Investment Goal, Principal Strategies and
Other Investments

The goal of the Fund is the appreciation of your investment. The Fund seeks to
achieve this goal through a diversified holding of securities, primarily those
issued by companies that WRIMCO believes have appreciation possibilities. There
is no guarantee that the Fund will achieve its goal.

WRIMCO attempts to select securities with appreciation possibilities by looking
at many factors. These include:

o changes in economic and political conditions;

o the short-term and long-term outlook for the industry being analyzed;

o the management capability of the company being considered; and

o the company's market position, product line, technological position and
prospects for increased earnings.

WRIMCO typically emphasizes a blend of value and growth potential in selecting
stocks. Value stocks are those that WRIMCO believes are currently selling below
their true worth. Growth stocks are those whose earnings WRIMCO believes are
likely to grow faster than the economy. WRIMCO may also analyze the demands of
investors for the security relative to its price. Securities may be chosen when
WRIMCO anticipates a development that might have an effect on the value of a
security. WRIMCO will generally sell a security if it determines that the
security no longer presents sufficient appreciation potential or it believes
there are alternative investment opportunities for the Fund.

The Fund invests primarily in common stock but may also own preferred stocks and
debt securities, typically of investment grade (rated BBB or higher by Standard
and Poor's or Baa and higher by Moody's). The Fund may also own convertible
securities.

7
<PAGE>

The Fund may also invest in and use other types of securities in seeking to
achieve the Fund's goal. For example, the Fund is permitted to invest in
options, futures contracts, asset-backed securities and other derivative
instruments if it is permitted to invest in the type of asset by which the
return on, or value of, the derivative is measured. You will find more
information in the Statement of Additional Information ("SAI") about the Fund's
permitted investments and strategies, as well as the restrictions that apply to
them.

At times, as a temporary defensive measure, the Fund may invest up to all of its
assets in either debt securities (which may include money market instruments
held as cash reserves) or preferred stocks or both. Taking a defensive position
in either or both of these ways might reduce the potential for appreciation in
the Fund's portfolio.

Risk Considerations of Principal Strategies and
Other Investments

Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk.

o Market risk is the possibility of a change in the price of the security
because of market factors. Because of market risk, the share price of the
Fund will likely change as well.

o Financial risk is based on the financial situation of the issuer of the
security. The financial risk of the Fund may depend, for example, on the
earnings performance of the issuer of stock held by the Fund. To the extent
the Fund invests in debt securities, the financial risk of the Fund may also
depend on the credit quality of the securities in which it invests.

o Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid
before its expected maturity date.

Certain types of the Fund's authorized investments and strategies (such as
derivative instruments) involve special risks. Foreign securities and foreign
currencies may involve risks relating to currency fluctuations, political or
economic conditions in the foreign country, and the potentially less stringent
investor protection and disclosure standards of foreign markets. These factors
could make foreign investments, especially those in emerging markets, more
volatile.

8
<PAGE>

Because the Fund owns different types of investments, its performance will be
affected by a variety of factors. In general, the value of the Fund's
investments and the income it generates will vary from day to day, generally
reflecting changes in interest rates, market conditions and other company and
economic news. Performance will also depend on WRIMCO's skill in selecting
investments.

Year 2000 and Euro Issues

Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by WRIMCO and the Fund's other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
WRIMCO is taking steps that it believes are reasonably designed to address year
2000 computer-related problems with respect to the computer systems that it uses
and to obtain assurances that comparable steps are being taken by the Fund's
other, major service providers. Although there can be no assurances, WRIMCO
believes these steps will be sufficient to avoid any adverse impact on the Fund.
Similarly, the companies and other issuers in which the Fund invests could be
adversely affected by year 2000 computer-related problems, and there can be no
assurance that the steps taken, if any, by these issuers will be sufficient to
avoid any adverse impact on the Fund.

Also, the Fund could be adversely affected by the conversion of certain European
currencies into the Euro. This conversion, which is underway, is scheduled to be
completed in 2002. However, problems with the conversion process and delays
could increase volatility in world capital markets and affect European capital
markets in particular.

9
<PAGE>

Financial
Highlights

The following information is to help you understand the financial performance of
the Fund's Class A* shares for the fiscal periods shown. Certain information
reflects financial results for a single Fund share. "Total return" shows how
much your investment would have increased (or decreased) during each period,
assuming reinvestment of all dividends and distributions. This information has
been audited by Deloitte & Touche LLP, whose independent auditors' report, along
with the Fund's financial statements for the fiscal year ended September 30,
1998, are included in the SAI, which is available upon request.

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,

Per-share Data 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.11 $ 8.77 $ 8.97 $ 7.73 $ 7.10
- --------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income 0.01 0.07 0.03 0.07 0.00
Net realized and
unrealized gain on
investments 0.19 1.69 0.26 1.82 0.83
- --------------------------------------------------------------------------------
Total from investment
operations 0.20 1.76 0.29 1.89 0.83
- --------------------------------------------------------------------------------
Less distributions:
Dividends from
net investment
income (0.04) (0.06) (0.04) (0.03) (0.02)
Distributions from
capital gains (1.77) (1.36) (0.45) (0.62) (0.18)
- --------------------------------------------------------------------------------
Total distributions (1.81) (1.42) (0.49) (0.65) (0.20)
- --------------------------------------------------------------------------------
Net asset value, end
of period $ 7.50 $ 9.11 $ 8.77 $ 8.97 $ 7.73
- --------------------------------------------------------------------------------
Total return** 3.76% 23.60% 3.59% 26.82% 11.86%

Ratios/Supplemental Data

Net assets, end of
period (in millions) $1,426 $1,477 $1,291 $1,285 $1,014
Ratio of expenses to
average net assets 1.10% 1.09% 1.09% 1.05% 1.05%
Ratio of net
investment income
to average net assets 0.13% 0.86% 0.36% 0.87% 0.04%
Portfolio turnover
rate 90.51% 139.14% 57.10% 30.01% 36.70%
- --------------------------------------------------------------------------------
</TABLE>

* On August 15, 1995, Fund shares outstanding were designated Class A shares.

** Total return calculated without taking into account the sales load deducted
on an initial purchase.

10
<PAGE>

Your Account

The different ways to set up (register) your account are listed below.

Ways to Set Up Your Account

Individual or Joint Tenants
For your general investment needs

Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).

Business or Organization

For investment needs of corporations, associations, partnerships, institutions
or other groups

Retirement Plans
To shelter your retirement savings from taxes

Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts (other
than Roth IRAs and Education IRAs) may be tax deductible.

o Individual Retirement Accounts (IRAs) allow an individual under age 70-1/2,
with earned income, to invest up to $2,000 per tax year. The maximum for an
investor and his or her spouse is $4,000 ($2,000 for each spouse) or, if
less, the couple's combined earned income for the taxable year.

o IRA Rollovers retain special tax advantages for certain distributions from
employer-sponsored retirement plans.

o Roth IRAs allow certain individuals to make nondeductible contributions up to
$2,000 per year. Withdrawals of earnings may be tax-free if the account is at
least five years old and certain other requirements are met.

o Education IRAs are established for the benefit of a minor, with nondeductible
contributions, and permit tax-free withdrawals to pay the higher education
expenses of the beneficiary.

o Simplified Employee Pension Plans (SEP -- IRAs) provide small business owners
or those with self-employed income (and their eligible employees) with many
of the same advantages as a Keogh Plan, but with fewer administrative
requirements.

11
<PAGE>

o Savings Incentive Match Plans for Employees (SIMPLE Plans) can be established
by small employers to contribute to their employees' retirement accounts and
involve fewer administrative requirements than 401(k) or other qualified
plans generally.

o Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves up to 25% of their annual earned income, with a
maximum of $30,000 per year.

o 401(k) Programs allow employees of corporations and non-governmental
tax-exempt organizations of all sizes to contribute a percentage of their
wages on a tax-deferred basis. These accounts need to be established by the
administrator or trustee of the plan.

o 403(b) Custodial Accounts are available to employees of public school systems
or certain types of charitable organizations.

o 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.

Gifts or Transfers to a Minor
To invest for a child's education or other future needs

These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").

Trust
For money being invested by a trust

The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.

Buying Shares

You may buy shares of the Fund through Waddell & Reed, Inc. and its financial
advisors. To open your account you must complete and sign an application. Your
Waddell & Reed financial advisor can help you with any questions you might have.

The price to buy a share of the Fund, called the offering price, is calculated
every business day.

12
<PAGE>

The offering price of a Class A share (price to buy one Class A share) is the
Fund's Class A net asset value ("NAV") per share plus the sales charge shown in
the table below.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Sales Charge Sales Charge as
as Percent of Approx. Percent of
Size of Purchase Offering Price Amount Invested
- --------------------------------------------------------------------------------
<S> <C> <C>
Under $100,000 5.75% 6.10%
- --------------------------------------------------------------------------------
$100,000 to less than
$200,000 4.75 4.99
- --------------------------------------------------------------------------------
$200,000 to less than
$300,000 3.50 3.63
- --------------------------------------------------------------------------------
$300,000 to less than
$500,000 2.50 2.56
- --------------------------------------------------------------------------------
$500,000 to less than
$1,000,000 1.50 1.52
- --------------------------------------------------------------------------------
$1,000,000 to less than
$2,000,000 1.00 1.01
- --------------------------------------------------------------------------------
$2,000,000 and over 0.00 0.00
- --------------------------------------------------------------------------------
</TABLE>

In the calculation of the Fund's Class A NAV:

o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.

o Bonds are generally valued according to prices quoted by an independent
pricing service.

o Short-term debt securities are valued at amortized cost, which approximates
market value.

o Other investment assets for which market prices are unavailable are valued at
their fair value by or at the direction of the Board of Directors.

The Fund is open for business each day the New York Stock Exchange (the "NYSE")
is open. The Fund normally calculates the NAVs of its shares as of the close of
business of the NYSE, normally 4 p.m. Eastern time, except that an option or
futures contract held by the Fund may be priced at the close of the regular
session of any other securities or commodities exchange on which that instrument
is traded.

The Fund may invest in securities listed on foreign exchanges which may trade on
Saturdays or on U.S. national business holidays when the NYSE is closed.
Consequently, the NAV of Fund shares may be significantly affected on days when
the Fund

13
<PAGE>

does not price its shares and when you are not able to purchase or redeem the
Fund's shares.

When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:

o Orders are accepted only at the home office of Waddell & Reed, Inc.

o All of your purchases must be made in U.S. dollars.

o If you buy shares by check and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.

When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.

Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.

Sales Charge Reductions and Waivers

Lower sales charges are available by:

o Combining additional purchases of Class A shares of any of the funds in the
United Group, except shares of United Cash Management, Inc., unless acquired
by exchange for Class A shares on which a sales charge was paid (or as a
dividend or distribution on such acquired shares), with the NAV of Class A
shares already held ("rights of accumulation");

o Grouping all purchases of Class A shares made during a thirteen-month period
("Statement of Intention"); and

o Grouping purchases by certain related persons.

Additional information and applicable forms are available from Waddell & Reed
financial advisors.

Waivers for Certain Investors

Class A shares may be purchased at NAV by:

o The Directors and officers of the Fund, employees of Waddell & Reed, Inc.,
employees of their affiliates, financial advisors of Waddell & Reed, Inc. and
the spouse, children, parents, children's spouses and spouse's parents of
each;

14
<PAGE>

o Certain retirement plans and certain trusts for these persons; and

o A 401(k) plan or 457 plan having 100 or more eligible employees.

You will find more information about sales charge reductions and waivers in the
SAI.

The Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. Under the Plan, the Fund may pay
Waddell & Reed, Inc. a fee of up to 0.25%, on an annual basis, of the average
daily net assets of the Class A shares. This fee is to reimburse Waddell & Reed,
Inc. for the amounts it spends for distributing the Fund's Class A shares,
providing services to Class A shareholders or maintaining Class A shareholder
accounts. Because the Plan fees are paid out of the Class A assets on an
on-going basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.

Minimum Investments

<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
To Open an Account $500
- --------------------------------------------------------------------------------
For certain exchanges $100
- --------------------------------------------------------------------------------
For certain retirement accounts and accounts opened
with Automatic Investment Service $ 50
- --------------------------------------------------------------------------------
For certain retirement accounts and accounts opened
through payroll deductions for or by employees of
WRIMCO, Waddell & Reed, Inc. and their affiliates $ 25
- --------------------------------------------------------------------------------
To Add to an Account
- --------------------------------------------------------------------------------
For certain exchanges $100
- --------------------------------------------------------------------------------
For Automatic Investment Service $ 25
- --------------------------------------------------------------------------------
</TABLE>

15
<PAGE>

Adding to Your Account

Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.

To add to your account, make your check payable to Waddell & Reed, Inc. Mail the
check along with:

o the detachable form that accompanies the confirmation of a prior purchase or
your year-to-date statement; or

o a letter stating your account number, the account registration and that you
wish to purchase Class A shares of the Fund.

Mail to Waddell & Reed, Inc. at the address printed on your confirmation or
year-to-date statement.

Selling Shares

You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.

The redemption price (price to sell one Class A share) is the Fund's Class A NAV
per share.

To sell shares, your request must be made in writing.

Complete an Account Service Request form, available from your Waddell & Reed
financial advisor, or write a letter of instruction with:

o the name on the account registration;

o the Fund's name;

o the Fund account number;

o the dollar amount or number of shares to be redeemed; and

o any other applicable requirements listed in the table below.

Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:

Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217

Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.

16
<PAGE>

Special Requirements for Selling Shares

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Account Type Special Requirements
<S> <C>
The written instructions must be signed by all
Individual or Joint persons required to sign for transactions, exactly as
Tenant their names appear on the account.
- --------------------------------------------------------------------------------
The written instructions must be signed by the
Sole Proprietorship individual owner of the business.
- --------------------------------------------------------------------------------
The custodian must sign the written instructions
UGMA, UTMA indicating capacity as custodian.
- --------------------------------------------------------------------------------
The written instructions must be signed by a
Retirement Account properly authorized person.
- --------------------------------------------------------------------------------
The trustee must sign the written instructions
indicating capacity as trustee. If the trustee's
Trust name is not in the account registration, provide a
currently certified copy of the trust document.
- --------------------------------------------------------------------------------
At least one person authorized by corporate
Business or Organization resolution to act on the account must sign the
written instructions.
- --------------------------------------------------------------------------------
The written instructions must be signed by the
Conservator, Guardian person properly authorized by court order to act in
or Other Fiduciary the particular fiduciary capacity.
- --------------------------------------------------------------------------------
</TABLE>

When you place an order to sell shares, your shares will be sold at the next NAV
calculated after receipt of a written request for redemption in good order by
Waddell & Reed, Inc. at its home office. Note the following:

o If more than one person owns the shares, each owner must sign the written
request.

o If you hold a certificate, it must be properly endorsed and sent to the Fund.

o If you recently purchased the shares by check, the Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance that
the check has cleared and been honored. If you do not, payment of the
redemption proceeds on these shares will be delayed until the earlier of 10
days or the date the Fund can verify that your purchase check has cleared and
been honored.

o Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the Securities and Exchange Commission.

o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.

17
<PAGE>

The Fund may require a signature guarantee in certain situations such as:

o a redemption request made by a corporation, partnership or fiduciary;

o a redemption request made by someone other than the owner of record; or

o the check is made payable to someone other than the owner of record.

This requirement is to protect you and Waddell & Reed from fraud. You can obtain
a signature guarantee from most banks and securities dealers, but not from a
notary public.

The Fund reserves the right to redeem at NAV all your Fund shares if their
aggregate NAV is less than $500. The Fund will give you notice and a 60-day
opportunity to purchase a sufficient number of additional shares to bring the
aggregate NAV of your shares to $500.

You may reinvest, without charge, all or part of the amount you redeemed by
sending to the Fund the amount you want to reinvest. The reinvested amounts must
be received by the Fund within thirty days after the date of your redemption.
You may do this only once with Class A shares of the Fund.

Payments of principal and interest on loans made pursuant to Waddell & Reed's
401(k) prototype plan may be reinvested, without payment of a sales charge, in
Class A shares of any United Group fund in which the plan may invest.

Shareholder Services

Waddell & Reed provides a variety of services to help you manage your account.

Personal Service

Your local Waddell & Reed financial advisor is available to provide personal
service. Additionally, one toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or TeleWaddell, our automated customer telephone
service. During normal business hours, our Customer Service staff is available
to answer your questions or update your account records. At almost any time of
the day or night, you may access TeleWaddell from a touch-tone phone to:

o obtain information about your accounts;

18
<PAGE>

o obtain price information about other funds in the United Group; or

o request duplicate statements.

Reports

Statements and reports sent to you include the following:

o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange, transfer
or redemption)

o year-to-date statements (quarterly)

o annual and semiannual reports (every six months)

To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one account
with the Fund. Call the telephone number listed above for Customer Service if
you need copies of annual or semiannual reports or account information.

Exchanges

You may sell your Class A shares and buy Class A shares of other funds in the
United Group. You may exchange only into funds that are legally permitted for
sale in your state of residence. Note that exchanges out of the Fund may have
tax consequences for you. Before exchanging into a fund, read its prospectus.

The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.

Automatic Transactions

Flexible withdrawal service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.

Regular Investment Plans allow you to transfer money into your Fund account
automatically. While Regular Investment Plans do not guarantee a profit and will
not protect you against loss in a declining market, they can be an excellent way
to invest for retirement, a home, educational expenses and other long-term
financial goals.

Certain restrictions and fees imposed by the plan custodian may also apply for
retirement accounts. Speak with your Waddell & Reed financial advisor for more
information.

19
<PAGE>

- --------------------------------------------------------------------------------
Regular Investment Plans
- --------------------------------------------------------------------------------
Automatic Investment Service
To move money from your bank account to an existing Fund account
- --------------------------------------------------------------------------------
Minimum Frequency
$25 Monthly
- --------------------------------------------------------------------------------
Funds Plus Service
To move money from United Cash Management, Inc. to the Fund whether in the same
or a different account
- --------------------------------------------------------------------------------

Minimum Frequency
$100 Monthly
- --------------------------------------------------------------------------------

Distributions and Taxes
Distributions

The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year.

Usually the Fund distributes net investment income semiannually in June and
December. Net capital gains (and any net gains from foreign currency
transactions) usually are distributed in December.

Distribution Options. When you open an account, specify on your application how
you want to receive your distributions. The Fund offers three options:

1. Share Payment Option. Your dividends, capital gains and other distributions
will be automatically paid in additional Class A shares of the Fund. If you
do not indicate a choice on your application, you will be assigned this
option.

2. Income-Earned Option. Your capital gains and other distributions will be
automatically paid in Class A shares, but you will be sent a check for each
dividend distribution.

3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions.

For retirement accounts, all distributions are automatically paid in Class A
shares.

20
<PAGE>

Taxes

As with any investment, you should consider how your investment in the Fund will
be taxed. If your account is not a tax-deferred retirement account, you should
be aware of the following tax implications:

Taxes on distributions. Dividends from the Fund's investment company taxable
income generally are taxable to you as ordinary income, whether received in cash
or paid in additional Fund shares. Distributions of the Fund's net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or paid in additional Fund shares and regardless of the
length of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains (if you are a noncorporate shareholder of the Fund) may
be taxable at different rates depending on how long the Fund held the assets
generating the gains, but generally are taxed at a maximum rate of 20%.

The Fund notifies you after each calender year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.

A portion of the dividends paid by the Fund, whether received in cash or paid in
additional Fund shares, may be eligible for the dividends-received deduction
allowed to corporations. The eligible portion may not exceed the aggregate
dividends received by the Fund from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the Federal alternative
minimum tax.

Withholding. The Fund must withhold 31% of all dividends, capital gains
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate from dividends and capital gains
distributions also is required for shareholders subject to backup withholding.

Taxes on transactions. Your redemption of Fund shares will result in taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid for the redeemed shares (which normally includes any
sales charge paid). An exchange of Fund shares for shares of any other fund in
the United Group generally will have similar tax consequences. However, special
rules apply when you dispose of Fund

21
<PAGE>

shares through a redemption or exchange within ninety days after your purchase
and then reacquire Fund shares or acquire shares of another fund in the United
Group without paying a sales charge due to the thirty-day reinvestment privilege
or exchange privilege. See "Your Account." In these cases, any gain on the
disposition of the original Fund shares would be increased, or loss decreased,
by the amount of the sales charge you paid when those shares were acquired, and
that amount will increase the adjusted basis of the shares subsequently
acquired. In addition, if you purchase Fund shares within thirty days before or
after redeeming other Fund shares (regardless of class) at a loss, part or all
of that loss will not be deductible and will increase the basis of the newly
purchased shares.

State and local income taxes. The portion of the dividends paid by the Fund
attributable to interest earned on its U.S. Government securities generally is
not subject to state and local income taxes, although distributions by the Fund
to its shareholders of net realized gains on the sale of those securities are
fully subject to those taxes. You should consult your tax adviser to determine
the taxability of dividends and other distributions by the Fund in your state
and locality.

The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; you will find
more information in the SAI. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.

22
<PAGE>

The Management of the Fund

Portfolio Management

The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. WRIMCO and its predecessors have served as investment
manager to each of the registered investment companies in the United Group of
Mutual Funds, Waddell & Reed Funds, Inc. and Target/United Funds, Inc., since
1940 or the inception of the company, whichever was later. WRIMCO is located at
6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.

Daniel P. Becker is primarily responsible for the management of the portfolio of
the Fund. Mr. Becker has held his Fund responsibilities since July 1, 1997. He
is Vice President of WRIMCO and the Fund. From January 1995 to March 1998, Mr.
Becker was Vice President of, and a portfolio manager for, Waddell & Reed Asset
Management Company, a former affiliate of WRIMCO. Mr. Becker has been an
employee of WRIMCO since October 1989, initially serving as an investment
analyst, and has served as a portfolio manager for WRIMCO since January 1997.

Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to the Fund's investments.

Management Fee

Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.

The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained in the SAI.

23
<PAGE>

The management fee of the Fund is calculated by adding a group fee to a specific
fee. It is accrued and paid to WRIMCO daily. The specific fee is computed on the
Fund's net asset value as of the close of business each day at the annual rate
of .30 of 1% of its net assets. The group fee is determined on the basis of the
combined net asset values of all the funds in the United Group at the annual
rates shown in the following table and then allocated pro rata to the Fund based
on its relative net assets.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Group Fee Rate
Group Net Asset Level Annual Group Fee Rate
(all dollars in millions) For Each Level
- --------------------------------------------------------------------------------
<S> <C>
From $0 to $750 .51 of 1%
- --------------------------------------------------------------------------------
From $750 to $1,500 .49 of 1%
- --------------------------------------------------------------------------------
From $1,500 to $2,250 .47 of 1%
- --------------------------------------------------------------------------------
From $2,250 to $3,000 .45 of 1%
- --------------------------------------------------------------------------------
From $3,000 to $3,750 .43 of 1%
- --------------------------------------------------------------------------------
From $3,750 to $7,500 .40 of 1%
- --------------------------------------------------------------------------------
From $7,500 to $12,000 .38 of 1%
- --------------------------------------------------------------------------------
Over $12,000 .36 of 1%
- --------------------------------------------------------------------------------
</TABLE>

The combined net asset values of all of the funds in the United Group were
approximately $18.9 billion as of September 30, 1998. Management fees for the
fiscal year ended September 30, 1998 were 0.69% of the Fund's average net
assets.

24
<PAGE>

United
Vanguard
Fund, Inc.

Custodian

UMB Bank, n.a.
Kansas City, Missouri

Legal Counsel

Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N. W.
Washington, D. C. 20036

Independent Auditors

Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri 64106-2232

Investment Manager

Waddell & Reed Investment
Management Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465

Underwriter

Waddell & Reed, Inc.
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465

Shareholder Servicing Agent

Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465

Accounting Services Agent

Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
<PAGE>

UNITED
VANGUARD
FUND, INC.

You can get more information about the Fund in--

o its Statement of Additional Information (SAI) dated January 31, 1999, which
contains detailed information about the Fund, particularly its investment
policies and practices. You may not be aware of important information about
the Fund unless you read both the Prospectus and the SAI. The current SAI is
on file with the Securities and Exchange Commission (SEC) and it is
incorporated into this Prospectus by reference (that is, the SAI is legally
part of the Prospectus).

o its Annual and Semiannual Reports to Shareholders, which detail the Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by the
report.

To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below.

Information about the Fund (including its current SAI and most recent Annual and
Semiannual Reports) is available from the SEC's web site at http://www.sec.gov
and from the SEC's Public Reference Room in Washington, D.C. You can find out
about the operation of the Public Reference Room and applicable copying charges
by calling 1-800-SEC-0330.

The Fund's SEC file number is: 811-1806.

- --------------------------------------------------------------------------------
[WADDELL & REED LOGO] Waddell & Reed, Inc.
6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas, 66201-9217
(913) 236-2000, (800) 366-5465

printed on recycled paper NUP2005(1-99)
<PAGE>

January 31, 1999

P R O S P E C T U S

UNITED
VANGUARD
FUND, INC.
Class Y Shares

- -----------------------------------------------------

<PAGE>

T A B L E O F C O N T E N T S

----------------------------------------------------
AN OVERVIEW OF THE FUND 3
----------------------------------------------------
PERFORMANCE 5
----------------------------------------------------
FEES AND EXPENSES 6
----------------------------------------------------
THE INVESTMENT PRINCIPLES
OF THE FUND 7
-------------------------------------------------
Investment Goal, Principal Strategies
and Other Investments 7
-------------------------------------------------
Risk Considerations of Principal
Strategies and Other Investments 8
-------------------------------------------------
FINANCIAL HIGHLIGHTS 10
----------------------------------------------------
YOUR ACCOUNT 11
----------------------------------------------------
Buying Shares 11
-------------------------------------------------
Minimum Investments 13
-------------------------------------------------
Adding to Your Account 13
-------------------------------------------------
Selling Shares 14
-------------------------------------------------
Telephone Transactions 16
-------------------------------------------------
Shareholder Services 16
-------------------------------------------------
Personal Service 16
----------------------------------------------
Reports 17
----------------------------------------------
Exchanges 17
----------------------------------------------
Distributions and Taxes 17
----------------------------------------------------
Distributions 17
----------------------------------------------
Taxes 18
----------------------------------------------
THE MANAGEMENT OF
THE FUND 20
-------------------------------------------------
Portfolio Management 20
-------------------------------------------------
Management Fee 20
-------------------------------------------------

<PAGE>

An
Overview
of the
Fund

Goal

United Vanguard Fund, Inc. (the "Fund") seeks the appreciation of your
investment.

Principal Strategy

The Fund seeks to achieve its goal by investing in a diversified portfolio of
common stocks issued by companies that Waddell & Reed Investment Management
Company ("WRIMCO"), the Fund's investment manager, believes have appreciation
possibilities. The Fund typically emphasizes a blend of value and growth
potential in its selection of stocks. The Fund can invest in companies of any
size.

Principal Risks of Investing in the Fund

Because the Fund owns different types of investments, a variety of factors can
affect its investment performance, such as:

o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds

o an increase in interest rates, which may cause the value of the Fund's
fixed-income securities to decline;

o prepayment of higher-yielding bonds held by the Fund;

o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and

o the skill of WRIMCO in evaluating and selecting securities for the Fund.

Also, the Fund may invest, to a lesser extent, in foreign securities, which
present additional risks such as those related to currency fluctuations and
political or economic conditions which affect the foreign country.

Market risk for small- or medium-sized companies may be greater than that for
large companies. Smaller companies are more likely to have limited financial
resources or inexperienced management. As well, stock of smaller companies may
experience volatile trading and price fluctuations.

3
<PAGE>

As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

Who May Want to Invest

The Fund is designed for investors seeking long-term investment growth. You
should consider whether the Fund fits with your particular investment
objectives.

4
<PAGE>

Performance

The chart and table below show the past performance of the Fund's Class Y
shares:

o The chart presents the annual returns since these shares were first offered
and shows how performance has varied from year to year since the class began
operations.

o The table shows Class Y average annual returns and compares them to the
market indicators listed.

[BAR CHART OMITTED]

CHART OF YEAR-BY-YEAR RETURNS
as of December 31, each year (%)

*For the period September 8, 1995 through December 31, 1995.

In the period shown in the chart, the highest quarterly return was 13.96% (the
second quarter of 1997) and the lowest quarterly return was -1.51% (the fourth
quarter of 1997).

AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year Life of Class*
- --------------------------------------------------------------------------------
<S> <C> <C>
Class Y Shares of the Fund 31.50% 16.31%
- --------------------------------------------------------------------------------
S&P 500 Composite
Stock Price Index 28.70% 28.10%
- --------------------------------------------------------------------------------
Lipper Growth Fund
Universe Average 22.86% 21.07%
- --------------------------------------------------------------------------------
</TABLE>

The index shown is a broad-based, securities market index that is unmanaged. The
Lipper average is a composite of mutual funds with goals similar to the goal of
the Fund.

*Since September 8, 1995. Because the Class commenced operations on a date
other than at the end of a month, and partial month calculations of the
performance of the above indexes (including income) are not available,
investment in the indexes was effected as of September 30, 1995.

5
<PAGE>

Fees and Expenses

This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.

<TABLE>
<CAPTION>
- --------------------------------------------------------
Shareholder Fees
(fees deducted directly from your investment)
- --------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed
on Purchases None
- --------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price) None
- --------------------------------------------------------
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends (and Other
Distributions) None
- --------------------------------------------------------
Redemption Fees None
- --------------------------------------------------------
Exchange Fee None
- --------------------------------------------------------
Maximum Account Fee None
- --------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- --------------------------------------------------------
Annual Fund Operating Expenses
(expenses deducted from Fund assets)
- --------------------------------------------------------
<S> <C>
Management Fees 0.69%
- --------------------------------------------------------
Distribution and Service (12b-1) Fees None
- --------------------------------------------------------
Other Expenses 0.17%
- --------------------------------------------------------
Total Annual Fund Operating Expenses 0.86%
- --------------------------------------------------------
</TABLE>

Example
This example is intended to help you compare the cost of investing in the Class
Y shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the Fund for each time period
specified, (b) your investment has a 5% return each year, and (c) the Class Y
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be:
- --------------------------------------------------------------------------------
1 year $ 88
- --------------------------------------------------------------------------------
3 years $ 274
- --------------------------------------------------------------------------------
5 years $ 477
- --------------------------------------------------------------------------------
10 years $1,061
- --------------------------------------------------------------------------------

Your costs would be the same whether or not you redeemed your shares at the end
of each time period. For a more complete discussion of certain expenses and
fees, see "Management Fee."

6
<PAGE>

The Investment
Principles
of the Fund

Investment Goal, Principal Strategies and
Other Investments

WRIMCO attempts to select securities with appreciation possibilities by looking
at many factors. These include:

o changes in economic and political conditions;

o the short-term and long-term outlook for the industry being analyzed;

o the management capability of the company being considered; and

o the company's market position, product line, technological position and
prospects for increased earnings.

The Fund invests primarily in common stock but may also own preferred stocks and
debt securities, typically of investment grade (rated BBB or higher by Standard
and Poor's or Baa or higher by Moody's). The Fund may also own convertible
securities. The Fund may also invest in and use other types of securities in
seeking to achieve its goal. For example, the Fund is permitted to invest in
options, futures con-

7
<PAGE>

tracts, asset-backed securities and other derivative instruments if it is
permitted to invest in the type of asset by which the return on, or value of,
the derivative is measured. You will find more information in the Statement of
Additional Information ("SAI") about the Fund's permitted investments and
strategies, as well as the restrictions that apply to them.

Risk Considerations of Principal Strategies and
Other Investments

Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk.

o Market risk is the possibility of a change in the price of the security
because of market factors. Because of market risk, the share price of the
Fund will likely change as well.

o Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid
before its expected maturity date.

8
<PAGE>

Performance will also depend on WRIMCO's skill in selecting investments.

Year 2000 and Euro Issues

9
<PAGE>

Financial Highlights

The following information is to help you understand the financial performance of
the Fund's Class Y shares for the fiscal periods shown. Certain information
reflects financial results for a single Fund share. "Total return" shows how
much your investment would have increased (or decreased) during each period,
assuming reinvestment of all dividends and distributions. This information has
been audited by Deloitte & Touche LLP, whose independent auditors' report, along
with the Fund's financial statements for the fiscal year ended September 30,
1998, is included in the SAI, which is available upon request.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the
period
from
For the fiscal year 9/8/95*
ended September 30, through
1998 1997 1996 9/30/95
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per-share Data
Net asset value,
beginning of period $9.12 $8.78 $8.97 $9.05
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment
income 0.03 0.09 0.07 0.00
Net realized and
unrealized gain (loss)
on investments 0.19 1.69 0.24 (0.08)
- --------------------------------------------------------------------------------
Total from
investment
operations 0.22 1.78 0.31 (0.08)
- --------------------------------------------------------------------------------
Less distributions:
From net
investment income (0.05) (0.08) (0.05) (0.00)
From capital gains (1.77) (1.36) (0.45) (0.00)
- --------------------------------------------------------------------------------
Total distributions (1.82) (1.44) (0.50) (0.00)
- --------------------------------------------------------------------------------
Net asset value,
end of period $7.52 $9.12 $8.78 $8.97
- --------------------------------------------------------------------------------
Total return 4.02% 23.87% 3.80% (0.88)%
- --------------------------------------------------------------------------------
Ratios/Supplemental Data

Net assets, end of
period (in millions) $ 5 $ 5 $ 4 $ 2

Ratio of expenses
to average net assets 0.91% 0.90% 0.91% 0.00%

Ratio of net
investment income
to average net assets 0.33% 1.05% 0.69% 0.00%
Portfolio turnover
rate 90.51% 139.14% 57.10% 30.01%**
- --------------------------------------------------------------------------------
</TABLE>

* Commencement of operations.

** Annualized.

10
<PAGE>

Your Account

Class Y shares are designed for institutional investors or others investing
through certain intermediaries. Class Y shares are available for purchase by:

o participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401, including 401(k) plans, of the
Internal Revenue Code of 1986, as amended (the "Code"), when the plan has 100
or more eligible employees and holds the shares in an omnibus account on the
Fund's records;

o banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an omnibus
account on the Fund's records;

o government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more; and

o certain retirement plans and trusts for employees and financial advisors of
Waddell & Reed, Inc. and its affiliates.

Buying Shares

The price to buy a share of the Fund, called the offering price, is calculated
every business day.

The offering price of a Class Y share (price to buy one Class Y share) is the
Fund's Class Y net asset value ("NAV") per share. The Fund's Class Y shares are
sold without a sales charge.

To purchase by wire, you must first obtain an account number by calling
1-800-366-5465, then mail a completed application to Waddell & Reed, Inc., P. O.
Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to 913-236-5044.
Instruct your bank to wire the amount you wish to invest to UMB Bank, n.a., ABA
Number

11
<PAGE>

101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and Account
Number.

To purchase by check, make your check payable to Waddell & Reed, Inc. Mail the
check, along with your completed application, to:

Waddell & Reed, Inc.,
P.O. Box 29217,
Shawnee Mission, Kansas
66201-9217.

You may also buy shares of the Fund indirectly through certain broker-dealers,
banks and other third parties, some of which may charge you a fee. These firms
may have additional requirements to buy shares.

In the calculation of the Fund's Class Y NAV:

o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.

o Bonds are generally valued according to prices quoted by an independent
pricing service.

o Short-term debt securities are valued at amortized cost, which approximates
market value.

o Other investment assets for which market prices are unavailable are valued at
their fair value by or at the direction of the Board of Directors.

When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:

12
<PAGE>

o Orders are accepted only at the home office of Waddell & Reed, Inc.

o All of your purchases must be made in U.S. dollars.

o The Fund does not issue certificates representing Class Y shares of the Fund.

o If you purchase Fund shares from certain broker-dealers, banks or other
authorized third parties, the Fund will be deemed to have received your
purchase order when that third party (or its designee) has received your
order. Your order will receive the offering price next calculated after the
order has been received in proper form by the authorized third party (or its
designee). You should consult that firm to determine the time by which it
must receive your order for you to purchase Fund shares at that day's price.

Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.

Minimum Investments

- --------------------------------------------------------------------------------
To Open an Account
- --------------------------------------------------------------------------------
For a government entity or authority or for a
corporation: (within first twelve months) $10 million
- --------------------------------------------------------------------------------
For other investors: Any amount
- --------------------------------------------------------------------------------

Adding to Your Account

You can make additional investments of any amount at any time.

To add to your account by wire: Instruct your bank to wire the amount you wish
to invest, along with the account number and registration, to UMB Bank, n.a.,
ABA Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer Name
and Account Number.

13
<PAGE>

To add to your account by mail: Make your check payable to Waddell & Reed, Inc.
Mail the check along with a letter stating your account number, the account
registration and that you wish to purchase Class Y shares of the Fund to:

Waddell & Reed, Inc.
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217

If you purchase Fund shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through these firms.

Selling Shares

You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.

The redemption price (price to sell one Class Y share) is the Fund's Class Y NAV
per share.

To sell shares by telephone or fax: If you have elected this method in your
application or by subsequent authorization, call 1-800-366-5465 or fax your
request to 913-236-5044 and give your instructions to redeem shares and make
payment by wire to your pre-designated bank account or by check to you at the
address on the account.

To sell shares by written request: Complete an Account Service Request form,
available from your Waddell & Reed financial advisor, or write a letter of
instruction with:

o the name on the account registration;

o the Fund's name;

o the Fund account number;

o the dollar amount or number of shares to be redeemed; and

o any other applicable requirements listed in the table below.

Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:

Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217

Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.

14
<PAGE>

Special Requirements for Selling Shares

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Account Type Special Requirements
- --------------------------------------------------------------------------------
<S> <C>
The written instructions must be signed by a
Retirement account properly authorized person.
- --------------------------------------------------------------------------------
The trustee must sign the written instructions
indicating capacity as trustee. If the trustee's
Trust name is not in the account registration, provide a
currently certified copy of the trust document.
- --------------------------------------------------------------------------------
At least one person authorized by corporate
Business or Organization resolution to act on the account
must sign the written instructions.
- --------------------------------------------------------------------------------
</TABLE>

o If more than one person owns the shares, each owner must sign the written
request.

o Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted or as permitted by the Securities and Exchange Commission.

o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.

o If you purchased Fund shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms, some
of which may charge you a fee and may have additional requirements to sell
Fund shares. The Fund will be deemed to have received your order to sell
shares when that firm (or its designee) has received your order. Your order
will receive the offering price next calculated after the order has been
received in proper form by the authorized firm (or its designee). You should
consult that firm to determine the time by which it must receive your order
for you to sell Fund shares at that day's price.

15
<PAGE>

The Fund may require a signature guarantee in certain situations such as:

o a redemption request made by a corporation, partnership or fiduciary;

o a redemption request made by someone other than the owner of record; or

o the check is made payable to someone other than the owner of record.

This requirement is to protect you and Waddell & Reed from fraud. You can obtain
a signature guarantee from most banks and securities dealers, but not from a
notary public.

Telephone Transactions

The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identification and providing written
confirmations of transactions effected pursuant to such instructions.

Shareholder Services

Waddell & Reed provides a variety of services to help you manage your account.

Personal Service

o Obtain information about your accounts;

o Obtain price information about other funds in the United Group; or

o Request duplicate statements.

16
<PAGE>

Reports

Statements and reports sent to you include the following:

o confirmation statements (after every purchase, exchange, transfer or
redemption)

o year-to-date statements (quarterly)

o annual and semiannual reports (every six months)

Exchanges

You may sell your Class Y shares and buy Class Y shares of other funds in the
United Group or Class A shares of United Cash Management, Inc. You may exchange
only into funds that are legally permitted for sale in your state of residence.
Note that exchanges out of the Fund may have tax consequences for you. Before
exchanging into a fund, read its prospectus.

The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.

Distributions and Taxes
Distributions

The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year.

Usually the Fund distributes net investment income semiannually in June and
December. Net capital gains (and any net gains from foreign currency
transactions) usually are distributed in December.

Distribution Options. When you open an account, specify on your application how
you want to receive your distributions. The Fund offers three options:

1. Share Payment Option. Your dividends, capital gains and other distributions
will be automatically paid in additional Class Y shares of the Fund. If you
do not indicate a choice on your application, you will be assigned this
option.

2. Income-Earned Option. Your capital gains and other distributions will be
automatically paid in Class Y shares, but you will be sent a check for each
dividend distribution.

17
<PAGE>

3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions.

For retirement accounts, all distributions are automatically paid in Class Y
shares.

Taxes

The Fund notifies you after each calendar year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.

Taxes on transactions. Your redemption of Fund shares will result in taxable
gain or loss to you, depending on whether the

18
<PAGE>

redemption proceeds are more or less than what you paid for the redeemed shares.
An exchange of Fund shares for shares of any other fund in the United Group
generally will have similar tax consequences. In addition, if you purchase Fund
shares within thirty days before or after redeeming other Fund shares
(regardless of class) at a loss, part or all of that loss will not be deductible
and will increase the basis of the newly purchased shares.

19
<PAGE>

The Management of the Fund

Portfolio Management

The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. WRIMCO and its predecessors have served as investment
manager to each of the registered investment companies in the United Group of
Mutual Funds, Waddell & Reed Funds, Inc. and Target/United Funds, Inc. since
1940 or the inception of the company, whichever was later. WRIMCO is located at
6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.

Management Fee

The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained in the SAI.

20
<PAGE>

21
<PAGE>

United
Vanguard
Fund,
Inc.

Custodian

UMB Bank, n.a.
Kansas City, Missouri

Legal Counsel

Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N. W.
Washington, D. C. 20036

Independent Auditors

Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri 64106-2232

Investment Manager

Waddell & Reed Investment
Management Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465

Underwriter

Waddell & Reed, Inc.
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465

Shareholder Servicing Agent

Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465

Accounting Services Agent

Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465

<PAGE>

UNITED
VANGUARD
FUND, INC.

You can get more information about the Fund in--

The Fund's SEC file number is: 811-1806

- --------------------------------------------------------------------------------

[WADDELL & REED LOGO] Waddell & Reed, Inc.

6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas, 66201-9217
(913) 236-2000, (800) 366-5465

printed on recycled paper NUP2005-Y(1-99)

<PAGE>

UNITED VANGUARD FUND, INC.

6300 Lamar Avenue

P. O. Box 29217

Shawnee Mission, Kansas 66201-9217

(913) 236-2000
(800) 366-5465

January 31, 1999

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information (the "SAI") is not a
prospectus. Investors should read this SAI in conjunction with a prospectus
("Prospectus") for the Class A shares or the Class Y shares, as applicable, of
United Vanguard Fund, Inc. (the "Fund"), dated January 31, 1999, which may be
obtained from the Fund or its underwriter, Waddell & Reed, Inc., at the address
or telephone number shown above.

TABLE OF CONTENTS
<TABLE>

<S> <C>
Performance Information .............................. 2

Investment Strategies, Policies and Practices......... 4

Investment Management and Other Services ............. 36

Purchase, Redemption and Pricing of Shares ........... 41

Directors and Officers ............................... 57

Payments to Shareholders ............................. 63

Taxes ................................................ 64

Portfolio Transactions and Brokerage ................. 69

Other Information .................................... 71

Financial Statements ................................. 73
</TABLE>

<PAGE>

United Vanguard Fund, Inc. is a mutual fund; an investment that pools
shareholders' money and invests it toward a specified goal. In technical terms,
the Fund is an open-end, diversified management company organized as a Maryland
corporation on October 7, 1968.

PERFORMANCE INFORMATION

Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from time
to time, publish the Fund's total return information and/or performance
information in advertisements and sales materials.

Total Return

Total return is the overall change in the value of an investment over a
given period of time. An average annual total return quotation is computed by
finding the average annual compounded rates of return over the one- five-, and
ten-year periods that would equate the initial amount invested to the ending
redeemable value. Standardized total return information is calculated by
assuming an initial $1,000 investment and, for Class A shares, deducting the
maximum sales load of 5.75%. All dividends and distributions are assumed to be
reinvested in shares of the applicable class at net asset value for the class as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions on Class A shares. The formula used to
calculate the total return for a particular class of the Fund is:

n
P(1 + T) = ERV

Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment
for the periods shown.

Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.

The average annual total return quotations for Class A shares as of
September 30, 1998, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:

<PAGE>

<TABLE>
<CAPTION>
With Without
Sales Load Sales Load
Deducted Deducted

<S> <C> <C>
One-year period from October 1, 1997 to
September 30, 1998: -2.20% 3.76%

Five-year period from October 1, 1993 to
September 30, 1998: 12.18% 13.51%

Ten-year period from October 1, 1988 to
September 30, 1998: 11.45% 12.11%
</TABLE>

Prior to August 15, 1995, the Fund offered only one class of shares to
the public. Shares outstanding on that date were designated as Class A shares.
Since that date, Class Y shares of the Fund have been available to certain
institutional investors.

The average annual total return quotations for Class Y shares as of
September 30, 1998, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:

One year period from October 1,
1997 to September 30, 1998: 4.02%

Period from September 8, 1995* to
September 30, 1998: 9.64%

*Commencement of operations.

The Fund may also quote unaveraged or cumulative total return for a
class which reflects the change in value of an investment in that class over a
stated period of time. Cumulative total return will be calculated according to
the formula indicated above but without averaging the rate for the number of
years in the period.

Performance Rankings

Waddell & Reed, Inc. or the Fund also may from time to time publish in
advertisements or sales material performance rankings as published by recognized
independent mutual fund statistical services such as Lipper Analytical Services,
Inc., or by publications of general interest such as Forbes, Money, The Wall
Street Journal, Business Week, Barron's, Fortune or Morningstar Mutual Fund
Values. Each class of the Fund may also compare its performance to that of other
selected mutual funds or selected recognized market indicators such as the
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones Industrial
Average. Performance information may be quoted numerically or presented in a
table, graph or other illustration. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
related, the number of funds in the category, the criteria upon which the
ranking is based, and
3
<PAGE>

the effect of sales charges, fee waivers and/or expense reimbursements.

All performance information that the Fund advertises or includes in
sales material is historical in nature and is not intended to represent or
guarantee future results. The value of Fund shares when redeemed may be more or
less than their original cost.

INVESTMENT STRATEGIES, POLICIES AND PRACTICES

This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Fund's investment manager, Waddell & Reed Investment Management Company
("WRIMCO"), may employ and the types of instruments in which the Fund may
invest, in pursuit of the Fund's goal. A summary of the risks associated with
these instrument types and investment practices is included as well.

WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goal. See "Investment
Restrictions" for a listing of the fundamental and non-fundamental (e.g.,
operating) investment restrictions and policies of the Fund.

Securities - General

The Fund may invest in securities including common stock, preferred
stock, debt securities and convertible securities. Although common stocks and
other equity securities have a history of long-term growth in value, their
prices tend to fluctuate in the short term, particularly those of smaller
companies. The Fund may invest in preferred stock that is rated by an
established rating service or, if unrated, judged by WRIMCO to be of equivalent
quality. Debt securities have varying levels of sensitivity to changes in
interest rates and varying degrees of quality. As a general matter, however,
when interest rates rise, the values of fixed-rate securities fall and,
conversely, when interest rates fall, the values of fixed-rate debt rise.
Similarly, long-term bonds are generally more sensitive to interest rate changes
than shorter-term bonds.

Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may decline
significantly in periods of general economic difficulty. The market for
lower-rated debt securities may be thinner and less

4
<PAGE>
active than that for higher-rated debt securities, which can adversely affect
the prices at which the former are sold. Adverse publicity and changing investor
perceptions may decrease the values and liquidity of lower-rated debt
securities, especially in a thinly traded market. Valuation becomes more
difficult and judgment plays a greater role in valuing lower-rated debt
securities than with respect to securities for which more external sources of
quotations and last sale information are available. Since the risk of default is
higher for lower-rated debt securities, WRIMCO's research and credit analysis
are an especially important part of managing securities of this type held by the
Fund. WRIMCO continuously monitors the issuers of lower-rated debt securities in
the Fund's portfolio in an attempt to determine if the issuers will have
sufficient cash flow and profits to meet required principal and interest
payments. The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interests of security holders if it determines this to be in the
best interest of the Fund's shareholders.

The Fund may invest in debt securities rated in any rating category of
the established rating services, including securities rated in the lowest
category (such as those rated D by S&P and C by MIS). Debt securities rated D by
S&P or C by MIS are in payment default or are regarded as having extremely poor
prospects of ever attaining any real investment standing. Debt securities rated
at least BBB by S&P or Baa by MIS are considered to be investment grade debt
securities. Securities rated BBB or Baa may have speculative characteristics. In
addition, the Fund will treat unrated securities judged by WRIMCO to be of
equivalent quality to a rated security having that rating.

While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to time, and the Fund may retain a portfolio security whose rating has been
changed.

The Fund may purchase debt securities whose principal amount at maturity
is dependent upon the performance of a specified equity security. The issuer of
such debt securities, typically an investment banking firm, is unaffiliated with
the issuer of the equity security to whose performance the debt security is
linked. Equity-linked debt securities differ from ordinary debt securities in
that the principal amount received at maturity is not fixed, but is based on the
price of the linked equity security at the time the debt security matures. The
performance of equity-linked debt securities depends primarily on the
performance of the linked equity security and may also be influenced by interest
rate changes. In addition, although the debt securities are typically adjusted
for diluting events

5
<PAGE>

such as stock splits, stock dividends and certain other events affecting the
market value of the linked equity security, the debt securities are not adjusted
for subsequent issuances of the linked equity security for cash. Such an
issuance could adversely affect the price of the debt security. In addition to
the equity risk relating to the linked equity security, such debt securities are
also subject to credit risk with regard to the issuer of the debt security. In
general, however, such debt securities are less volatile than the equity
securities to which they are linked.

The Fund may invest in convertible securities. A convertible security is
a bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or
different issuer within a particular period of time at a specified price or
formula. Convertible securities generally have higher yields than common stocks
of the same or similar issuers, but lower yields than comparable nonconvertible
securities, are less subject to fluctuation in the value that the underlying
stock because they have fixed income characteristics, and provide the potential
for capital appreciation if the market price of the underlying common stock
increases.

The value of a convertible security is influenced by changes in interest
rates, with investment value declining as interest rates increase and increasing
as interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value.

The Fund may also invest in a type of convertible preferred stock that
pays a cumulative, fixed dividend that is senior to, and expected to be in
excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more than
one share of the issuer's common stock at the "call price" that was established
at the time the preferred stock was issued. If the price per share of the
related common stock on the mandatory conversion date is less than the call
price, the holder of the preferred stock will nonetheless receive only one share
of common stock for each share of preferred stock (plus cash in the amount of
any accrued but unpaid dividends). At any time prior to the mandatory conversion
date, the issuer may redeem the preferred stock upon issuing to the holder a
number of shares of common stock equal to the call price of the preferred stock
in effect on the date of redemption divided by the market value of the common
stock, with such market value typically determined one or two trading days prior
to the date notice of redemption is given. The issuer must also pay the holder
of the preferred stock cash in an amount equal to any accrued but unpaid
dividends on the preferred stock. This convertible preferred stock is subject to
the same market risk as the common stock of the issuer, except to the extent
that such risk is mitigated by the higher dividend paid on the preferred stock.
The opportunity for equity appreciation afforded by an investment in such
convertible preferred stock, however, is limited, because in the event the
market value of the issuer's

6
<PAGE>

common stock increases to or above the call price of the preferred stock, the
issuer may (and would be expected to) call the preferred stock for redemption at
the call price. This convertible preferred stock is also subject to credit risk
with regard to the ability of the issuer to pay the dividend established upon
issuance of the preferred stock. Generally, convertible preferred stock is less
volatile than the related common stock of the issuer.

Specific Securities and Investment Practices

U.S. Government Securities

Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities ("U.S. Government securities") are high quality debt
instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date they
are issued), Treasury Notes (which have maturities of one to ten years) and
Treasury Bonds (which generally have maturities of more than 10 years). All such
Treasury securities are backed by the full faith and credit of the United
States.

U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (formerly, the Federal National Mortgage Association), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association.

Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only by
the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment.

U.S. Government securities may include mortgage-backed securities issued
by U.S. Government agencies or instrumentalities including, but not limited to,
the Ginnie Mae, the Freddie Mac and the Fannie Mae. These mortgage-backed

7
<PAGE>

securities include "pass-through" securities, "participation certificates" and
collateralized mortgage obligations. See "Mortgage-Backed Securities" and
"Asset-Backed Securities." Timely payment of principal and interest on Ginnie
Mae pass-throughs is guaranteed by the full faith and credit of the United
States. Freddie Mac and Fannie Mae are both instrumentalities of the U.S.
Government, but their obligations are not backed by the full faith and credit of
the United States. It is possible that the availability and the marketability
(i.e., liquidity) of the securities discussed in this section could be adversely
affected by actions of the U.S. Government to tighten the availability of its
credit.

Money Market Instruments

Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.

Zero Coupon Securities

Zero coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or that specify a
future date when the securities begin to pay current interest; instead, they are
sold at a deep discount from their face value and are redeemed at face value
when they mature. Because zero coupon securities do not pay current income,
their prices can be very volatile when interest rates change and generally are
subject to greater price fluctuations in response to changing interest rates
than prices of comparable maturities that make current distributions of interest
in cash.

The Fund may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of corporate issuers and other
securities that are issued with original issue discount ("OID"). The Federal tax
law requires that a holder of a security with OID accrue a ratable portion of
the OID on the security as income each year, even though the holder may receive
no interest payment on the security during the year. Accordingly, although the
Fund will receive no payments on its zero coupon securities prior to their
maturity or disposition, it will have current income attributable to those
securities and includable in the dividends paid to its shareholders. Those
dividends will be paid from the Fund's cash assets or by liquidation of
portfolio securities, if necessary, at a time when the Fund otherwise might not
have done so.

A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of

8
<PAGE>

Accrual on Treasury Securities), TIGRs (Treasury Investment Growth Receipts),
and TRs (Treasury Receipts) are examples of derivative zeros.

The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. Original
issue zeros are zero coupon securities originally issued by the U.S. Government,
a government agency, or a corporation in zero coupon form.

Mortgage-Backed and Asset-Backed Securities

Mortgage-Backed Securities. Mortgage-backed securities represent direct
or indirect participations in, or are secured by and payable from, mortgage
loans secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.

The U.S. Government mortgage-backed securities in which the Fund may
invest include mortgage-backed securities issued or guaranteed as to the payment
of principal and interest (but not as to market value) by Ginnie Mae, Fannie Mae
or Freddie Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities. Payments of principal and interest (but not the market value)
of such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. Government or one of its agencies or instrumentalities,
or they may be issued without any government guarantee of the underlying
mortgage assets but with some form of non-government credit enhancement. These
credit enhancements do not protect investors from changes in market value.

The Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders, or other
financial institutions. Other types of mortgage-backed securities will likely be
developed in the future, and the Fund may invest in them if WRIMCO determines
they are consistent with the Fund's goal and investment policies.

9
<PAGE>

Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
are created when a U.S. Government agency or a financial institution separates
the interest and principal components of a mortgage-backed security and sells
them as individual securities. The holder of the "principal-only" security
("PO") receives the principal payments made by the underlying mortgage-backed
security, while the holder of the "interest-only" security ("IO") receives
interest payments from the same underlying security.

For example, interest-only ("IO") classes are entitled to receive all or
a portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets underlying
an IO experience greater than anticipated principal prepayments, then the total
amount of interest allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is government guaranteed or considered to be of the highest quality.
Conversely, principal-only ("PO") classes are entitled to receive all or a
portion of the principal payments, but none of the interest, from the underlying
mortgage assets. PO classes are purchased at substantial discounts from par, and
the yield to investors will be reduced if principal payments are slower than
expected. IOs, POs and other CMOs involve special risks, and evaluating them
requires special knowledge.

Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets securing the debt are not first lien mortgage
loans or interests therein, but include assets such as motor vehicle installment
sales contracts, other installment sale contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present. The value of asset-backed securities may also depend on the
creditworthiness of the servicing agent for the loan pool, the originator of the
loans, or the financial institution providing the credit enhancement.

Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying

10
<PAGE>

mortgage loans or other obligations generally may be prepaid at any time.
Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. Generally, however, prepayments on
fixed-rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Similar factors
apply to prepayments on asset-backed securities, but the receivables underlying
asset-backed securities generally are of a shorter maturity and thus are likely
to experience substantial prepayments. Such securities, however, often provide
that for a specified time period the issuers will replace receivables in the
pool that are repaid with comparable obligations. If the issuer is unable to do
so, repayment of principal on the asset-backed securities may commence at an
earlier date.

The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.

Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed-rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Changes in the rate or "speed" of these payments can
cause the value of the mortgage-backed securities to fluctuate rapidly. However,
these effects may not be present, or may differ in degree, if the mortgage loans
in the

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<PAGE>

pools have adjustable interest rates or other special payment terms, such as a
prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.

The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
reduced. These changes can result in volatility in the market value and, in some
instances reduced liquidity, of the CMO class.

Variable or Floating Rate Instruments

Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and may carry
rights that permit holders to demand payment of the unpaid principal balance
plus accrued interest from the issuers or certain financial intermediaries on
dates prior to their stated maturities. Floating rate securities have interest
rates that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for the
instrument that approximates its par value.

Indexed Securities

The Fund may purchase securities the value of which varies in relation
to the value of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators, subject to its
operating policy regarding derivative instruments. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or statistic.
The performance of indexed securities depends to a great extent on the
performance of the security, currency or other instrument to which they are
indexed and may also be influenced by interest rate changes in the United States
and abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security and their values may decline
substantially if the issuer's creditworthiness deteriorates. Indexed securities
may be more volatile than the underlying investments.

Gold-indexed securities, for example, typically provide for a maturity
value that depends on the price of gold, resulting in

12
<PAGE>

a security whose price tends to rise and fall together with gold prices.
Currency-indexed securities typically are short-term to intermediate-term debt
securities whose maturity values or interest rates are determined by reference
to the values of one or more specified foreign currencies, and may offer higher
yields than U.S. dollar-denominated securities of equivalent issuers.
Currency-indexed securities may be positively or negatively indexed; that is,
their maturity value may increase when the specified currency value increases,
resulting in a security that performs similarly to a foreign-denominated
instrument, or their maturity value may decline when foreign currencies
increase, resulting in a security whose price characteristics are similar to a
put on the underlying currency. Currency-indexed securities may also have prices
that depend on the values of a number of different foreign currencies relative
to each other.

Recent issuers of indexed securities have included banks, corporations
and certain U.S. government agencies. WRIMCO will use its judgment in
determining whether indexed securities should be treated as short-term
instruments, bonds, stocks or as a separate asset class for purposes of the
Fund's investment allocations, depending on the individual characteristics of
the securities. Certain indexed securities that are not traded on an established
market may be deemed illiquid.

Foreign Securities and Currency

The Fund may invest in the securities of foreign issuers, including
depositary receipts. In general, depositary receipts are securities convertible
into and evidencing ownership of securities of foreign corporate issuers,
although depositary receipts may not necessarily be denominated in the same
currency as the securities into which they may be converted. American depositary
receipts, in registered form, are dollar-denominated receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. International depositary receipts and European depositary receipts,
in bearer form, are foreign receipts evidencing a similar arrangement and are
designed for use by non-U.S. investors and traders in non-U.S. markets. Global
depositary receipts are more recently developed receipts designed to facilitate
the trading of securities of foreign issuers by U.S. and non-U.S. investors and
traders.

WRIMCO believes that there are investment opportunities as well as risks
in investing in foreign securities. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy or each other in such matters as
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Individual foreign companies
may also differ favorably or unfavorably from domestic companies in the same
industry. Foreign currencies may be stronger or weaker than the U.S. dollar or
than each other. Thus, the value of securities denominated in or indexed to
foreign currencies, and of dividends and interest from such

13
<PAGE>

securities, can change significantly when foreign currencies strengthen or
weaken relative to the U.S. dollar. WRIMCO believes that the Fund's ability to
invest its assets abroad might enable it to take advantage of these differences
and strengths where they are favorable.

However, foreign securities and foreign currencies involve additional
significant risks, apart from the risks inherent in U.S. investments. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial conditions and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions and custodial costs, are generally higher than for U.S.
investments.

Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.

Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be greater possibility of
default by foreign governments or government-sponsored enterprises. Investments
in foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
These is no assurance that WRIMCO will be able to anticipate these potential
events or counter their effects.

The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.

Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they

14
<PAGE>

may be less liquid than foreign securities of the same class that are not
subject to such restrictions.

Currency conversion involves dealer spreads and other costs, although
commissions are not usually charged. See "Options and Futures - Forward Currency
Contracts" below.

Warrants and Rights

Warrants are options to purchase equity securities at specific prices
valid for a specific period of time. The prices do not necessarily move parallel
to the prices of the underlying securities. Rights are similar to warrants, but
normally have a short duration and are distributed directly by the issuer to its
shareholders. Rights and warrants have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer. Warrants and rights
are highly volatile and, therefore, more susceptible to a sharp decline in value
than the underlying security might be. They are also generally less liquid than
an investment in the underlying shares.

Investment Company Securities

The Fund may purchase securities of closed-end investment companies. As
a shareholder in an investment company, the Fund would bear its pro rata share
of that investment company's expenses, which could result in duplication of
certain fees, including management and administrative fees.

Lending Securities

Securities loans may be made on a short-term or long-term basis for the
purpose of increasing the Fund's income. If the Fund lends securities, the
borrower pays the Fund an amount equal to the dividends or interest on the
securities that the Fund would have received if it had not lent the securities.
The Fund also receives additional compensation. The Fund makes loans of its
securities only to parties deemed by WRIMCO to be creditworthy.

Any securities loan that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). This
policy can only be changed by shareholder vote. Under the present Guidelines,
the collateral must consist of cash, U.S. Government securities or bank letters
of credit, at least equal in value to the market value of the securities lent on
each day that the loan is outstanding. If the market value of the lent
securities exceeds the value of the collateral, the borrower must add more
collateral so that it at least equals the market value of the securities lent.
If the market value of the securities decreases, the borrower is entitled to a
return of the excess collateral.

15
<PAGE>

There are two methods of receiving compensation for making loans. The
first is to receive a negotiated loan fee from the borrower. This method is
available for all three types of collateral. The second method, which is not
available when letters of credit are used as collateral, is for the Fund to
receive interest on the investment of the cash collateral or to receive interest
on the U.S. Government securities used as collateral. Part of the interest
received in either case may be shared with the borrower.

The letters of credit that the Fund may accept as collateral are
agreements by banks (other than the borrowers of the Fund's securities), entered
into at the request of the borrower and for its account and risk, under which
the banks are obligated to pay to the Fund, while the letter is in effect,
amounts demanded by the Fund if the demand meets the terms of the letter. The
Fund's right to make this demand secures the borrower's obligations to it. The
terms of any such letters and the creditworthiness of the banks providing them
(which might include the Fund's custodian bank) must be satisfactory to the
Fund. Under the Fund's current lending procedures, the Fund may lend securities
only to broker-dealers and financial institutions deemed creditworthy by WRIMCO.
The Fund will make loans only under rules of the NYSE, which presently require
the borrower to give the securities back to the Fund within five business days
after the Fund gives notice to do so. If the Fund loses its voting rights on
securities loaned, it will have the securities returned to it in time to vote
them if a material event affecting the investment is to be voted on. The Fund
may pay reasonable finder's, administrative and custodian fees in connection
with loans of securities.

There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned goes up, risks of delay in
recovering the securities loaned or even loss of rights in the collateral should
the borrower of the securities fail financially.

Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules, which may be changed without shareholder vote, as
to: (i) whom securities may be loaned; (ii) the investment of cash collateral;
or (iii) voting rights.

Repurchase Agreements

The Fund may purchase securities subject to repurchase agreements. The
Fund will not enter into a repurchase transaction that will cause more than 10%
of its net assets to be invested in illiquid investments, which include
repurchase agreements not terminable within seven days. See "Illiquid
Investments." A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a

16
<PAGE>

commercial bank or broker-dealer) agrees, at the time of purchase, that it will
repurchase the security at a specified time and price. The amount by which the
resale price is greater than the purchase price reflects an agreed-upon market
interest rate effective for the period of the agreement. The return on the
securities subject to the repurchase agreement may be more or less than the
return on the repurchase agreement.

The majority of the repurchase agreements in which the Fund would engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that the
Fund may suffer a loss if the seller fails to pay the agreed-upon amount on the
delivery date and that amount is greater than the resale price of the underlying
securities and other collateral held by the Fund. In the event of bankruptcy or
other default by the seller, there may be possible delays or expenses in
liquidating the underlying securities or other collateral, decline in their
value and loss of interest. The return on such collateral may be more or less
than that from the repurchase agreement. The Fund's repurchase agreements will
be structured so as to fully collateralize the loans. In other words, the value
of the underlying securities, which will be held by the Fund's custodian bank or
by a third-party that qualifies as a custodian under Section 17(f) of the
Investment Company Act of 1940, as amended (the "1940 Act"), is and, during the
entire term of the agreement, will remain at least equal to the value of the
loan, including the accrued interest earned thereon. Repurchase agreements are
entered into only with those entities approved by WRIMCO on the basis of
criteria established by the Board of Directors.

Restricted Securities

Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, or in a registered
public offering. Where registration is required, the Fund may be obligated to
pay all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.

There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale might be desirable. Restricted securities in
which the Fund seeks to invest need not be listed or admitted to trading on a
foreign or domestic exchange and may be less liquid

17
<PAGE>

than listed securities. Certain restricted securities, e.g., 144A securities,
may be determined to be liquid in accordance with guidelines adopted by the
Board of Directors. See "Illiquid Investments" below.

Illiquid Investments

Illiquid investments are investments that cannot be sold or disposed of
in the ordinary course of business within seven days at approximately the price
at which they are valued. Investments currently considered to be illiquid
include:

(i) repurchase agreements not terminable within seven days;

(ii) securities for which market quotations are not readily available;

(iii) restricted securities not determined to be liquid pursuant to
guidelines established by the Board of Directors;

(iv) bank deposits, unless they are payable at principal plus accrued
interest on demand or within seven days after demand;

(v) securities involved in swap, cap, collar and floor transactions;

(vi) non-government stripped fixed-rate mortgage-backed securities;
and

(vii) over-the-counter ("OTC") options and their underlying collateral.

The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.

If through a change in values, net assets, or other circumstances, the
Fund were in a position where more than 10% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.

Options and Futures

General. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, forward currency
contracts, swaps, caps, collars, floors, indexed securities and other derivative
instruments

18
<PAGE>

(collectively, "Financial Instruments") to attempt to enhance income or yield or
to attempt to hedge the Fund's investments. The strategies described below may
be used in an attempt to manage the Fund's foreign currency exposure as well as
other risks of the Fund's investments that can affect fluctuation in its net
asset value.

Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only purchase or sell
a particular Financial Instrument if the Fund is authorized to invest in the
type of asset by which the return on, or value of, the Financial Instrument is
primarily measured. Since the Fund is authorized to invest in foreign
securities, it may purchase and sell foreign currency derivatives.

Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in the Fund's portfolio. Thus, in a short hedge, the Fund
takes a position in a Financial Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged.

Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.

Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Financial Instruments on indices, in
contrast, generally are used to attempt to hedge against price movements in
market sectors in which the Fund has invested or expects to invest. Financial
Instruments on debt securities may be used to hedge either individual securities
or broad debt market sectors.

The use of Financial Instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several exchanges upon
which they are traded and the Commodity Futures Trading Commission (the "CFTC").
In addition,

19
<PAGE>

the Fund's ability to use Financial Instruments will be limited by tax
considerations. See "Taxes."

In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Fund's goal and permitted by the Fund's
investment limitations and applicable regulatory authorities. The Fund might not
use any of these strategies, and there can be no assurance that any strategy
used will succeed. The Fund's Prospectus or SAI will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.

Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.

(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities, currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.

(2) There might be imperfect correlation, or even no correlation,
between price movements of a Financial Instrument and price movements of the
investments being hedged. For example, if the value of a Financial Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.

Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match the Fund's current or anticipated investments exactly. The Fund
may invest in options and futures contracts based on securities with

20
<PAGE>

different issuers, maturities, or other characteristics from the securities in
which it typically invests, which involves a risk that the options or futures
position will not track the performance of the Fund's other investments.

Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.

(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the price of the
Financial Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not attempted to hedge at all.

(4) As described below, the Fund might be required to maintain assets as
"cover," maintain accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If the Fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time.

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<PAGE>

(5) The Fund's ability to close out a position in a Financial Instrument
prior to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of the
other party to the transaction (the "counterparty") to enter into a transaction
closing out the position. Therefore, there is no assurance that any position can
be closed out at a time and price that is favorable to the Fund.

Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options, futures
contracts or forward contracts, or (2) cash and liquid assets with a value,
marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for these instruments and will, if the guidelines so
require, set aside cash or liquid assets in an account with its custodian in the
prescribed amount as determined daily.

Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.

Options. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying investment at the agreed-upon
price during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.

The purchase of call options can serve as a long hedge, and the purchase
of put options can serve as a short hedge. Writing put or call options can
enable the Fund to enhance income or yield by reason of the premiums paid by the
purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.

Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security or
currency appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security or currency at less than its

22
<PAGE>

market value. If the call option is an OTC option, the securities or other
assets used as cover would be considered illiquid to the extent described under
"Illiquid Investments."

Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid Investments."

The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.

The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.

A type of put that the Fund may purchase is an "optional delivery
standby commitment," which is entered into by parties selling debt securities to
the Fund. An optional delivery standby commitment gives the Fund the right to
sell the security back to the seller on specified terms. This right is provided
as an inducement to purchase the security.

Risks of Options on Securities. Options offer large amounts of leverage,
which will result in the Fund's net asset value being more sensitive to changes
in the value of the related instrument. The Fund may purchase or write both
exchange-traded and OTC options. Exchange-traded options in the United States
are issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the counterparty from whom it purchased the option to make or take delivery
of the underlying investment upon exercise of the option. Failure by

23
<PAGE>

the counterparty to do so would result in the loss of any premium paid by the
Fund as well as the loss of any expected benefit of the transaction.

The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by a transaction in the secondary market if any such
market exists. There can be no assurance that the Fund will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, the Fund might be unable to close
out an OTC option position at any time prior to its expiration.

If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.

Options on Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple (the
"multiplier"), which determines the total dollar value for each point of such
difference. When the Fund buys a call on an index, it pays a premium and has the
same rights as to such call as are indicated above. When the Fund buys a put on
an index, it pays a premium and has the right, prior to the expiration date, to
require the seller of the put, upon the Fund's exercise of the put, to deliver
to the Fund an amount of cash if the closing level of the index upon which the
put is based is less than the exercise price of the put, which amount of cash is
determined by the multiplier, as described above for calls. When the Fund writes
a put on an index, it receives a premium and the purchaser of the put has the
right, prior to the expiration date, to require the Fund to deliver to it an
amount of cash equal to the difference between the closing level of the index
and the exercise price times the multiplier if the closing level is less than
the exercise price.

Risks of Options on Indices. The risks of investment in options on
indices may be greater than options on securities.

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<PAGE>

Because index options are settled in cash, when the Fund writes a call on an
index it cannot provide in advance for its potential settlement obligations by
acquiring and holding the underlying securities. The Fund can offset some of the
risk of writing a call index option by holding a diversified portfolio of
securities similar to those on which the underlying index is based. However, the
Fund cannot, as a practical matter, acquire and hold a portfolio containing
exactly the same securities as underlie the index and, as a result, bears a risk
that the value of the securities held will vary from the value of the index.

Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as a common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.

If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.

OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund

25
<PAGE>

great flexibility to tailor the option to its needs, OTC options generally
involve greater risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.

Generally, OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.

Futures Contracts and Options on Futures Contracts. The purchase of
futures or call options on futures can serve as a long hedge, and the sale of
futures or the purchase of put options on futures can serve as a short hedge.
Writing call options on futures contracts can serve as a limited short hedge,
using a strategy similar to that used for writing call options on securities or
indices. Similarly, writing put options on futures contracts can serve as a
limited long hedge. Futures contracts and options on futures contracts can also
be purchased and sold to attempt to enhance income or yield.

In addition, futures strategies can be used to manage the average
duration of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the
average duration of the Fund's fixed-income portfolio, the Fund may sell a debt
futures contract or a call option thereon, or purchase a put option on that
futures contract. If WRIMCO wishes to lengthen the average duration of the
Fund's fixed-income portfolio, the Fund may buy a debt futures contract or a
call option thereon, or sell a put option thereon.

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.

Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when

26
<PAGE>

the Fund purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be substantial
in the event of adverse price movements. If the Fund has insufficient cash to
meet daily variation margin requirements, it might need to sell securities at a
time when such sales are disadvantageous.

Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.

Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.

If the Fund were unable to liquidate a futures contract or an option on
a futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain cash or
liquid assets in an account.

Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures market (including the options on futures
market), due to the differences in the natures of those markets, are subject to
the following factors, which may create distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions, rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market.

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<PAGE>

Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate, currency rate or stock market trends
by WRIMCO may still not result in a successful transaction. WRIMCO may be
incorrect in its expectations as to the extent of various interest rate,
currency exchange rate or stock market movements or the time span within which
the movements take place.

Index Futures. The risk of imperfect correlation between movements in
the price of an index future and movements in the price of the securities that
are the subject of the hedge increases as the composition of the Fund's
portfolio diverges from the securities included in the applicable index. The
price of the index future may move more than or less than the price of the
securities being hedged. If the price of the index future moves less than the
price of the securities that are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.

Where index futures are purchased to hedge against a possible increase
in the price of securities before the Fund is able to invest in them in an
orderly fashion, it is possible that the market may decline instead. If the Fund
then concludes not to invest in them at that time because of concern as to
possible further market decline or for other reasons, it will realize a loss on
the futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.

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<PAGE>

To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case other than for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish those
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) will not exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and unrealized losses on
any contracts the Fund has entered into. (In general, a call option on a futures
contract is "in-the-money" if the value of the underlying futures contract
exceeds the strike, i.e., exercise, price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying futures contract is
exceeded by the strike price of the put.) This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.

Foreign Currency Hedging Strategies--Special Considerations. The Fund
may use options and futures contracts on foreign currencies, as described above,
and foreign currency forward contracts, as described below, to attempt to hedge
against movements in the values of the foreign currencies in which the Fund's
securities are denominated or to attempt to enhance income or yield. Currency
hedges can protect against price movements in a security that the Fund owns or
intends to acquire that are attributable to changes in the value of the currency
in which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.

The Fund might seek to hedge against changes in the value of a
particular currency when no Financial Instruments on that currency are available
or such Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, the Fund may seek to hedge against price movements
in that currency by entering into transactions using Financial Instruments on
another currency or a basket of currencies, the values of which WRIMCO believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Financial Instrument
will not correlate perfectly with movements in the price of the currency subject
to the hedging transaction is magnified when this strategy is used.

The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.

29
<PAGE>

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.

Settlement of transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.

Forward Currency Contracts. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the forward
currency contract. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.

Such transactions may serve as long hedges; for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.

The Fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if the Fund owned securities denominated in pounds sterling, it could enter into
a forward currency contract to sell pounds sterling in return for U.S. dollars
to hedge against possible declines in the pound's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the pound

30
<PAGE>

sterling, for example, by entering into a forward contract to sell Deutsche
Marks or European Currency Units in return for U.S. dollars. This type of hedge,
sometimes referred to as a "proxy hedge," could offer advantages in terms of
cost, yield or efficiency, but generally would not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.

The Fund also may use forward currency contracts to attempt to enhance
income or yield. The Fund could use forward currency contracts to increase its
exposure to foreign currencies that WRIMCO believes might rise in value relative
to the U.S. dollar, or shift its exposure to foreign currency fluctuations from
one country to another. For example, if the Fund owned securities denominated in
a foreign currency and WRIMCO believed that currency would decline relative to
another currency, it might enter into a forward currency contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second foreign currency.

The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When the Fund enters into a forward currency contract, it relies on
the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.

As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in a segregated account.

The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the

31
<PAGE>

foreign currency, will change after the forward currency contract has been
established. Thus, the Fund might need to purchase or sell foreign currencies in
the spot (cash) market to the extent such foreign currencies are not covered by
forward currency contracts. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.

Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency contracts
when it determines that the best interests of the Fund will be served.

Successful use of forward currency contracts depends on WRIMCO's skill
in analyzing and predicting currency values. Forward currency contracts may
substantially change the Fund's exposure to changes in currency exchange rates
and could result in losses to the Fund if currencies do not perform as WRIMCO
anticipates. There is no assurance that WRIMCO's use of forward currency
contracts will be advantageous to the Fund or that WRIMCO will hedge at an
appropriate time.

Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.

Turnover. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
the Fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases

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<PAGE>

or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.

Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed-rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to receive payments on a notional principal amount from the party selling
the cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling the floor. A collar combines
elements of buying a cap and selling a floor.

Swap agreements, including caps, collars and floors, can be individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap agreements may
increase or decrease the overall volatility of the Fund's investments and its
share price and yield because, and to the extent, these agreements affect the
Fund's exposure to long-or short-term interest rates (in the United States or
abroad), foreign currency values, mortgage-backed security values, corporate
borrowing rates or other factors such as security prices or inflation rates.

Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.

The creditworthiness of firms with which the Fund enters into swaps,
caps or floors will be monitored by WRIMCO in accordance with procedures adopted
by the Fund's Board of Directors. If a firm's creditworthiness declines, the
value of the agreement would be likely to decline, potentially resulting in
losses. If a default occurs by the other party to such transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction.

The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The

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<PAGE>

Fund will also establish and maintain such account with respect to its total
obligations under any swaps that are not entered into on a net basis and with
respect to any caps or floors that are written by the Fund. WRIMCO and the Fund
believes that such obligations do not constitute senior securities under the
1940 Act and, accordingly, will not treat them as being subject to the Fund's
borrowing restrictions. The position of the SEC is that assets involved in swap
transactions are illiquid and are, therefore, subject to the limitations on
investing in illiquid securities.

Investment Restrictions and Limitations

Certain of the Fund's investment restrictions and other limitations are
described in this SAI. The following are the Fund's fundamental investment
limitations set forth in their entirety, which, like the Fund's goal, cannot be
changed without shareholder approval. For this purpose, shareholder approval
means the approval, at a meeting of Fund shareholders, by the lesser of (1) the
holders of 67% or more of the Fund's shares represented at the meeting, if more
than 50% of the Fund's outstanding shares are present in person or by proxy or
(2) more than 50% of the Fund's outstanding shares. The Fund may not:

(i) Purchase or sell physical commodities; however, this policy
shall not prevent the Fund from purchasing and selling foreign
currency, futures contracts, options, forward contracts, swaps,
caps, collars, floors and other financial instruments;

(ii) Buy real estate nor any nonliquid interests in real estate
investment trusts;

(iii) Buy shares of other investment companies that redeem their
shares. The Fund can buy shares of investment companies that do
not redeem their shares if it does it in a regular transaction
in the open market and then does not have more than one tenth
(i.e., 10%) of its total assets in these shares;

(iv) Lend money or other assets, other than through certain limited
types of loans; the Fund can buy debt securities and other
obligations consistent with its goal and its other investment
policies and restrictions; it can also lend its portfolio
securities (see "Lending Securities" above) and enter into
repurchase agreements (see "Repurchase Agreements" above);

(v) Invest for the purpose of exercising control or management of
other companies;

(vi) Participate on a joint, or a joint and several, basis in any
trading account in any securities;

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<PAGE>

(vii) Sell securities short (unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short) or purchase securities on margin, except that (1) this
policy does not prevent the Fund from entering into short
positions in foreign currency, futures contracts, options,
forward contracts, swaps, caps, collars, floors and other
financial instruments, (2) the Fund may obtain such short-term
credits as are necessary for the clearance of transactions, and
(3) the Fund may make margin payments in connection with futures
contracts, options, forward contracts, swaps, caps, collars,
floors and other financial instruments;

(viii) Engage in the underwriting of securities, that is, the selling
of securities for others;

(ix) Borrow money; or

(x) With respect to 75% of its total assets, purchase securities of
any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act), if immediately after
and as a result of such purchase, (a) the value of the holdings
of the Fund in the securities of such issuer exceeds 5% of the
value of the Fund's total assets, or (b) the Fund owns more than
10% of the outstanding voting securities of such issuer; or buy
a security if, as a result, more than 25% of its assets would
then be in securities of companies in any one industry.

The following investment restrictions are not fundamental and may be changed by
the Board of Directors without shareholder approval:

(i) The Fund does not intend to invest in non-investment grade debt
securities if, as a result of such investment, more than 5% of
its assets would consist of such investments.

(ii) The Fund does not intend to invest more than 20% of its total
assets in foreign securities.

(iii) The Fund may not purchase a security if, as a result, more than
10% of its net assets would consist of illiquid investments.

(iv) The Fund does not currently intend to invest more than 5% of its
assets in the securities of investment companies that do not
redeem their shares.

(v) The Fund does not currently intend to purchase the securities of
any issuer (other than securities issued or guaranteed by
domestic governments or political

35
<PAGE>

subdivisions thereof) if, as a result, more than 5% of its total
assets would be invested the securities of business enterprises
that, including predecessors, have a record of less than three
years of continuous operation. This restriction does not apply
to any obligations issued or guaranteed by the U.S. government
or a state or local government authority, or their respective
instrumentalities, or to collateralized mortgage obligations,
other mortgage-related securities, asset-backed securities,
indexed securities or over-the-counter derivative instruments.

(vi) The Fund does not intend to purchase any interests in oil and
gas or other mineral exploration or development programs if, as
a result, more than 10% of its total assets would be invested in
such interests.

An investment policy or limitation that states a maximum percentage of
the Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.

Portfolio Turnover

A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year and
dividing it by the monthly average of the market value of such securities during
the year, excluding U.S. Government securities with maturities of less than 12
months and certain short-term securities. The Fund's turnover rate may vary
greatly from year to year as well as within a particular year and may be
affected by cash requirements for the redemption of its shares. The Fund's
turnover rate for the fiscal years ended September 30, 1998 and 1997 was 90.51%
and 139.14%, respectively.

INVESTMENT MANAGEMENT AND OTHER SERVICES

The Management Agreement

The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO and
Waddell & Reed,

36
<PAGE>

Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.

The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Board of Directors prior to approving any Shareholder
Servicing Agreement or Accounting Services Agreement.

Waddell & Reed Financial, Inc.

WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly
owned subsidiary of Waddell & Reed Financial, Inc., a publicly held company. The
address of these companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.

Waddell & Reed, Inc. and its predecessors served as investment manager
to each of the registered investment companies in the United Group of Mutual
Funds, except United Asset Strategy Fund, Inc., since 1940 or the company's
inception date, whichever was later, and to Target/United Funds, Inc. since that
fund's inception, until January 8, 1992 when it assigned its duties as
investment manager for these funds (and the related professional staff) to
WRIMCO. WRIMCO has also served as investment manager for Waddell & Reed Funds,
Inc. since its inception in September 1992 and United Asset Strategy Fund, Inc.
since it commenced operations in March 1995. Waddell & Reed, Inc. serves as
principal underwriter for the investment companies in the United Group of Mutual
Funds and Waddell & Reed Funds, Inc. and serves as distributor for Target/United
Funds, Inc.

Shareholder Services

Under the Shareholder Servicing Agreement entered into between the Fund
and Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell &
Reed, Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.

37
<PAGE>

Accounting Services

Under the Accounting Services Agreement entered into between the Fund
and the Agent, the Agent provides the Fund with bookkeeping and accounting
services and assistance, including maintenance of the Fund's records, pricing of
the Fund's shares, and preparation of prospectuses for existing shareholders,
proxy statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Board of Directors
without shareholder approval.

Payments by the Fund for Management, Accounting and Shareholder Services

Under the Management Agreement, for WRIMCO's management services, the
Fund pays WRIMCO a fee as described in the Prospectus. The management fees paid
to WRIMCO during the Fund's fiscal years ended September 30, 1998, 1997 and 1996
were $10,495,461, $9,591,674 and $9,020,391, respectively.

For purposes of calculating the daily fee, the Fund does not include
money owed to it by Waddell & Reed, Inc. for shares which it has sold but not
yet paid the Fund. The Fund accrues and pays this fee daily.

Under the Shareholder Servicing Agreement, with respect to Class A
shares the Fund pays the Agent a monthly fee of $1.3125 for each shareholder
account that was in existence at any time during the prior month, plus $0.30 for
each account on which a dividend or distribution, of cash or shares, had a
record date in that month. For Class Y shares, the Fund pays the Agent a monthly
fee equal to one-twelfth of .15 of 1% of the average daily net assets of that
class for the preceding month. The Fund also pays certain out-of-pocket expenses
of the Agent, including long distance telephone communications costs; microfilm
and storage costs for certain documents; forms, printing and mailing costs; and
costs of legal and special services not provided by Waddell & Reed, Inc., WRIMCO
or the Agent.

Under the Accounting Services Agreement, the Fund pays the Agent a
monthly fee of one-twelfth of the annual fee shown in the following table.

38
<PAGE>

Accounting Services Fee
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>

Fees paid to the Agent for accounting services for the fiscal years
ended September 30, 1998, 1997 and 1996 were $100,000 for each of the three
years.

Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement are
described above. Waddell & Reed, Inc. and affiliates pay the Fund's Directors
and officers who are affiliated with WRIMCO and its affiliates. The Fund pays
the fees and expenses of the Fund's other Directors.

Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amounts of
underwriting commissions for Class A shares for the fiscal years ended September
30, 1998, 1997 and 1996 were $2,616,408, $2,397,522 and $3,514,918,
respectively, and the amounts retained by Waddell & Reed, Inc. for each fiscal
year were $1,122,228, $1,047,001 and $1,591,350, respectively.

A major portion of the sales charge for Class A shares is paid to
financial advisors and managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may
compensate its financial advisors as to purchases for which there is no sales
charge.

The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal

39
<PAGE>

fees, taxes, brokerage commissions, interest, insurance premiums, custodian
fees, fees payable by the Fund under Federal or other securities laws and to the
Investment Company Institute and nonrecurring and extraordinary expenses,
including litigation and indemnification relating to litigation.

Under a Distribution and Service Plan for Class A shares (the "Plan")
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed .25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with the distribution of the Class A shares and the
service and/or maintenance of Class A shareholder accounts.

Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force) unless it elects, which is not
currently contemplated for Class A shares, to make distribution of shares also
through other broker-dealers. In distributing shares through its sales force,
Waddell & Reed, Inc. will pay commissions and incentives to the sales force at
or about the time of sale and will incur other expenses including costs for
prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. The Plan permits Waddell & Reed, Inc. to receive
reimbursement for these Class A-related distribution activities through the
distribution fee, subject to the limit contained in the Plan. The Plan also
permits Waddell & Reed, Inc. to be reimbursed for amounts it expends in
compensating, training and supporting registered financial advisors, sales
managers and/or other appropriate personnel in providing personal services to
Class A shareholders of the Fund and/or maintaining Class A shareholder
accounts; increasing services provided to Class A shareholders of the Fund by
office personnel located at field sales offices; engaging in other activities
useful in providing personal service to Class A shareholders of the Fund and/or
maintenance of Class A shareholder accounts; and in compensating broker-dealers
who may regularly sell Class A shares of the Fund, and other third parties, for
providing shareholder services and/or maintaining shareholder accounts with
respect to Class A shares.

Fees paid (or accrued) as service and distribution fees by the Fund with
respect to Class A shares for the fiscal year ended September 30, 1998 were
$3,320,066 and $26,939, respectively. To the extent that Waddell & Reed, Inc.
incurs expenses for which reimbursement may be made under the Plan that relate
to distribution activities also involving another fund in the United Group of
Funds or Waddell & Reed Funds, Inc., Waddell & Reed, Inc. typically determines
the amount attributable to the Fund's expenses under the Plan on the basis of a
combination of the respective classes' relative net assets and number of
shareholder accounts.

40
<PAGE>

The only Directors or interested persons, as defined in the 1940 Act, of
the Fund who have a direct or indirect financial interest in the operation of
the Plan are the officers and Directors who are also officers of either Waddell
& Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. The Plan is
anticipated to benefit the Fund and its Class A shareholders through Waddell &
Reed, Inc.'s activities not only to distribute the Class A shares of the Fund
but also to provide personal services to Class A shareholders and thereby
promote the maintenance of their accounts with the Fund. The Fund anticipates
that Class A shareholders may benefit to the extent that Waddell & Reed's
activities are successful in increasing the assets of the Fund, through
increased sales or reduced redemptions, or a combination of these, and reducing
a Class A shareholder's share of Fund and Class A expenses. Increased Fund
assets may also provide greater resources with which to pursue the goal of the
Fund. Further, continuing sales of Class A shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts or at
times that may be disadvantageous to the Fund, to meet redemption demands. In
addition, the Fund anticipates that the revenues from the Plan will provide
Waddell & Reed, Inc. with greater resources to make the financial commitments
necessary to continue to improve the quality and level of services to the Fund
and Class A shareholders. The Plan was approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter, the "Plan Directors").
The Plan was also approved by the affected shareholders of the Fund.

Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding Class A shares of the Fund, and (iv)
while the Plan remains in effect, the selection and nomination of the Directors
who are Plan Directors will be committed to the discretion of the Plan
Directors.

Custodial and Auditing Services

The Fund's Custodian is UMB Bank, n.a., Kansas City, Missouri. In
general, the Custodian is responsible for holding the Fund's cash and
securities. Deloitte & Touche LLP, Kansas

41
<PAGE>

City, Missouri, the Fund's independent auditors, audits the Fund's financial
statements.

PURCHASE, REDEMPTION AND PRICING OF SHARES

Determination of Offering Price

The net asset value of each class of the shares of the Fund is the value
of the assets of that class, less the class's liabilities, divided by the total
number of outstanding shares of that class.

Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The sales charge is
paid to Waddell & Reed, Inc., the Fund's underwriter.
The price makeup as of September 30, 1998 was as follows:

Netasset value per Class A share (Class A net assets divided by Class A
shares outstanding) ......................................... $7.50
Add: selling commission (5.75% of offering
price) ...................................................... .46
-----
Maximum offering price per Class A share
(Class A net asset value divided by 94.25%) ................. $7.96
=====

The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge. The
offering price of a Class Y share is its net asset value next determined
following acceptance of a purchase order. The number of shares you receive for
your purchase depends on the next offering price after Waddell & Reed, Inc.
receives and accepts your order at its principal business office at the address
shown on the cover of this SAI. You will be sent a confirmation after your
purchase which will indicate how many shares you have purchased. Shares are
normally issued for cash only.

Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.

The net asset value and offering price per share are ordinarily computed
once on each day that the NYSE is open for trading as of the later of the close
of the regular session of the NYSE or the close of the regular session of any
securities or commodities exchange on which an option or future held by the Fund
is traded. The NYSE annually announces the days on which it will not be open for
trading. The most recent announcement indicates that the NYSE will not be open
on the following days:

42
<PAGE>
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, it is possible that the NYSE may close on other days. The net asset
value will change every business day, since the value of the assets and the
number of shares outstanding change every business day.

The securities in the portfolio of the Fund, except as otherwise noted,
that are listed or traded on a stock exchange, are valued on the basis of the
last sale on that day or, lacking any sales, at a price that is the mean between
the closing bid and asked prices. Other securities that are traded
over-the-counter are priced using the Nasdaq stock market, which provides
information on bid and asked prices quoted by major dealers in such stocks.
Bonds, other than convertible bonds, are valued using a third-party pricing
system. Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Short-term debt securities are valued at amortized
cost, which approximates market. When market quotations are not readily
available, securities and other assets are valued at fair value as determined in
good faith under procedures established by and under the general supervision and
responsibility of the Fund's Board of Directors.

Options and futures contracts purchased and held by the Fund are valued
at the last sales price thereof on the securities or commodities exchanges on
which they are traded, or, if there are no transactions, at the mean between the
bid and asked prices. Ordinarily, the close of the regular session for options
trading on national securities exchanges is 4:10 p.m. Eastern time and the close
of the regular session for commodities exchanges is 4:15 p.m. Eastern time.
Futures contracts will be valued by reference to established futures exchanges.
The value of a futures contract purchased by the Fund will be either the closing
purchase price of the contract or the bid price. Conversely, the value of a
futures contract sold by the Fund will be either the closing price or the asked
price.

When the Fund writes a put or call, an amount equal to the premium
received is included in the Fund's Statement of Assets and Liabilities as an
asset, and an equivalent deferred credit is included in the liability section.
The deferred credit is "marked-to-market" to reflect the current market value of
the put or call. If a call the Fund wrote is exercised, the proceeds received on
the sale of the related investment are increased by the amount of the premium
the Fund received. If the Fund exercised a call it purchased, the amount paid to
purchase the related investment is increased by the amount of the premium paid.
If a put written by the Fund is exercised, the amount that the Fund pays to
purchase the related investment is decreased by the amount of the premium it
received. If the Fund exercises a put it purchased, the amount received from the
sale of the related investment is reduced by the amount of the premium it paid.
If a put or call written by the Fund expires, it has a gain in the amount of the
premium; if it enters into a closing

43
<PAGE>

purchase transaction, it will have a gain or loss depending on whether the
premium was more or less than the cost of the closing transaction.

Foreign currency exchange rates are generally determined prior to the
close of trading of the regular session of the NYSE. Occasionally events
affecting the value of foreign investments and such exchange rates occur between
the time at which they are determined and the close of the regular session of
trading on the NYSE, which events will not be reflected in a computation of the
Fund's net asset value on that day. If events materially affecting the value of
such investments or currency exchange rates occur during such time period,
investments will be valued at their fair value as determined in good faith by or
under the direction of the Board of Directors. The foreign currency exchange
transactions of the Fund conducted on a spot (that is, cash) basis are valued at
the spot rate for purchasing or selling currency prevailing on the foreign
exchange market. This rate under normal market conditions differs from the
prevailing exchange rate in an amount generally less than one-tenth of one
percent due to the costs of converting from one currency to another.

Optional delivery standby commitments are valued at fair value under the
general supervision and responsibility of the Fund's Board of Directors. They
are accounted for in the same manner as exchange-listed puts.

Minimum Initial and Subsequent Investments

For Class A shares, initial investments must be at least $500 with the
exceptions described in this paragraph. A $100 minimum initial investment
pertains to certain exchanges of shares from another fund in the United Group. A
$50 minimum initial investment pertains to purchases for certain retirement plan
accounts and to accounts for which an investor has arranged, at the time of
initial investment, to make subsequent purchases for the account by having
regular monthly withdrawals of $25 or more made from a bank account. A minimum
initial investment of $25 is applicable to purchases made through payroll
deduction for or by employees of WRIMCO, Waddell & Reed, Inc., their affiliates,
or certain retirement plan accounts. Except with respect to certain exchanges
and automatic withdrawals from a bank account, a shareholder may make subsequent
investments of any amount. See "Exchanges for Shares of Other Funds in the
United Group."

For Class Y shares, investments by government entities or authorities or
by corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other Class
Y investors.

44
<PAGE>

Reduced Sales Charges (Applicable to Class A Shares Only)

Account Grouping

Large purchases of Class A shares are subject to lower sales charges.
The schedule of sales charges appears in the Prospectus for Class A shares. For
the purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by an
individual or deemed to be made by an individual may be grouped with purchases
in any other of these categories:

1. Purchases by an individual for his or her own account (includes
purchases under the United Funds Revocable Trust Form);

2. Purchases by that individual's spouse purchasing for his or her own
account (includes United Funds Revocable Trust Form of spouse);

3. Purchases by that individual or his or her spouse in their joint
account;

4. Purchases by that individual or his or her spouse for the account of
their child under age 21;

5. Purchase by any custodian for the child of that individual or spouse in
a Uniform Gifts to Minors Act ("UGMA") or Uniform Transfers to Minors
Act ("UTMA") account;

6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), or salary reduction plan account
under Section 457 of the Internal Revenue Code of 1986, as amended (the
"Code"), provided that such purchases are subject to a sales charge
(see "Net Asset Value Purchases"), tax sheltered annuity account
("TSA"), or Keogh plan account provided that the individual and spouse
are the only participants in the Keogh plan; and

7. Purchases by a trustee under a trust where that individual or his or
her spouse is the settlor (the person who establishes the trust).

Examples:

A. Grandmother opens an UGMA account for grandson A; Grandmother has
an account in her own name; A's father has an account in his own
name; the UGMA account may be grouped with A's father's account
but may not be grouped with Grandmother's account;

B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made
in the trust account is

45
<PAGE>

eligible for grouping with an IRA account of W, H's wife;

C. H's will provides for the establishment of a trust for the
benefit of his minor children upon H's death; his bank is named
as trustee; upon H's death, an account is established in the name
of the bank, as trustee; a purchase in the account may be grouped
with an account held by H's wife in her own name.

D. X establishes a trust naming herself as trustee and R, her son,
as successor trustee and R and S as beneficiaries; upon X's
death, the account is transferred to R as trustee; a purchase in
the account may not be grouped with R's individual account. If
X's spouse, Y, was successor trustee, this purchase could be
grouped with Y's individual account.

All purchases of Class A shares made under a "qualified" plan -- either
an employee benefit plan of an incorporated business or, for an unincorporated
business, a Keogh plan in which there is more than one participant where one or
more of the participants is other than the spouse of the owner/employer will be
grouped. A "qualified" plan is established pursuant to Section 401 of the Code.
All qualified plans of any one employer or affiliated employers will also be
grouped. An affiliate is defined as an employer that directly, or indirectly,
controls or is controlled by or is under control with another employer. All
qualified employee benefit plans of an employer who is a franchisor and those of
its franchisee(s) may also be grouped.

Example A: Corporation X sets up a defined benefit plan; its
subsidiary, Corporation Y, sets up a 401(k) plan; all
contributions made under both plans will be grouped.

Example B: H has established a Keogh plan; he and his wife W are the
only participants in the plan; they may group their purchases
made under the plan with any purchases in categories 1 through
7 above.

Example C: H has established a Keogh plan; his wife, W, is a
participant and they have hired one or more employees who also
become participants in the plan; H and W may not combine any
purchases made under the plan with any purchases in categories
1 through 7 above; however, all purchases made under the plan
for H, W or any other employee will be combined.

All purchases of Class A shares made under a simplified employee pension
plan ("SEP"), payroll deduction plan or similar arrangement adopted by an
employer or affiliated employers (as defined above) may be grouped provided that
the employer elects to have all such purchases grouped at the time the plan is
set up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be

46
<PAGE>

grouped with the other accounts of the individual employees described above in
"Account Grouping."

Account grouping as described above is available under the following
circumstances.

One-time Purchases

A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.

Example: H and W open an account in the Fund and invest $75,000; at the
same time, H's parents open up three UGMA accounts for H and
W's three minor children and invest $10,000 in each child's
name; the combined purchase of $105,000 of Class A shares is
subject to a reduced sales load of 4.75% provided that Waddell
& Reed, Inc. is advised that the purchases are entitled to
grouping.

Rights of Accumulation

If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.

Example: H is a current Class A shareholder who invested in the Fund
three years ago. His account has a net asset value of $80,000.
His wife, W, now wishes to invest $20,000 in Class A shares of
the Fund. W's purchase will be combined with H's existing
account and will be entitled to a reduced sales charge of
4.75%. H's original purchase was subject to a full sales
charge and the reduced charge does not apply retroactively to
that purchase.

In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.

If a purchaser holds shares which have been purchased under a
contractual plan, the shares held under such plan may be combined with the
additional purchase only if the contractual plan has been completed.

47
<PAGE>

Statement of Intention

The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Statement of Intention. By signing a Statement
of Intention form, which is available from Waddell & Reed, Inc., the purchaser
indicates an intention to invest, over a 13-month period, a dollar amount which
is sufficient to qualify for a reduced sales charge. The 13-month period begins
on the date the first purchase made under the Statement of Intention is accepted
by Waddell & Reed, Inc. Each purchase made from time to time under the Statement
of Intention is treated as if the purchaser were buying at one time the total
amount which he or she intends to invest. The sales charge applicable to all
purchases of Class A shares made under the terms of the Statement of Intention
will be the sales charge in effect on the beginning date of the 13-month period.

In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, Class A shares already held in the same account in which the purchase is
being made or in any account eligible for grouping with that account, as
described above, will be included.

Example: H signs a Statement of Intention indicating his intent to
invest in his own name a dollar amount sufficient to entitle
him to purchase Class A shares at the sales charge applicable
to a purchase of $100,000. H has an IRA account and the Class
A shares held under the IRA in the Fund have a net asset value
as of the date the Statement of Intention is accepted by
Waddell & Reed, Inc. of $15,000; H's wife, W, has an account
in her own name invested in another fund in the United Group
which charges the same sales load as the Fund, with a net
asset value as of the date of acceptance of the Statement of
Intention of $10,000; H needs to invest $75,000 in Class A
shares over the 13-month period in order to qualify for the
reduced sales load applicable to a purchase of $100,000.

A copy of the Statement of Intention signed by a purchaser will be
returned to the purchaser after it is accepted by Waddell & Reed, Inc. and will
set forth the dollar amount of Class A shares which must be purchased within the
13-month period in order to qualify for the reduced sales charge.

If a purchaser holds shares which have been purchased under a
contractual plan, the shares held under the plan will be taken into account in
determining the amount which must be invested under the Statement of Intention
only if the contractual plan has been completed.

The minimum initial investment under a Statement of Intention is 5% of
the dollar amount which must be invested under

48
<PAGE>

the Statement of Intention. An amount equal to 5% of the purchase required under
the Statement of Intention will be held "in escrow." If a purchaser does not,
during the period covered by the Statement of Intention, invest the amount
required to qualify for the reduced sales charge under the terms of the
Statement of Intention, he or she will be responsible for payment of the sales
charge applicable to the amount actually invested. The additional sales charge
owed on purchases of Class A shares made under a Statement of Intention which is
not completed will be collected by redeeming part of the shares purchased under
the Statement of Intention and held "in escrow" unless the purchaser makes
payment of this amount to Waddell & Reed, Inc. within 20 days of Waddell & Reed,
Inc.'s request for payment.

If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower than
that available under the Statement of Intention, the lower sales charge will
apply.

A Statement of Intention does not bind the purchaser to buy, or Waddell
& Reed, Inc. to sell, the shares covered by the Statement of Intention.

With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement of Intention will be deducted in computing the aggregate purchases
under the Statement of Intention.

Statements of Intention are not available for purchases made under an
SEP where the employer has elected to have all purchases under the SEP grouped.

Other Funds in the United Group

Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the United Group
subject to a sales charge. A purchase of Class A shares, or Class A shares held,
in any of the funds in the United Group subject to a sales charge will be
treated as an investment in the Fund for the purposes of determining the
applicable sales charge. For these purposes, Class A shares of United Cash
Management, Inc. that were acquired by exchange of another United Group fund's
Class A shares on which a sales charge was paid, plus the shares paid as
dividends on those acquired shares, are also taken into account.

Holders of an uncompleted United Vanguard Investment Program ("Program")
on May 30, 1996, with a face amount of less than $12,000, may purchase Class A
shares of the Fund at net asset value, up to the amount representing the unpaid
balance of the Program, if the purchase order is so designated.

49
<PAGE>

Net Asset Value Purchases of Class A Shares

Class A shares of the Fund may be purchased at net asset value by the
Directors and officers of the Fund, employees of Waddell & Reed, Inc., employees
of their affiliates, financial advisors of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and financial advisor. "Child" includes stepchild;
"parent" includes stepparent Purchases of Class A shares in an IRA sponsored by
Waddell & Reed, Inc. established for any of these eligible purchasers may also
be at net asset value. Purchases in any tax qualified retirement plan under
which the eligible purchaser is the sole participant may also be made at net
asset value. Trusts under which the grantor and the trustee or a co-trustee are
each an eligible purchaser are also eligible for net asset value purchases of
Class A shares. "Employees" includes retired employees. A "retired employee" is
an individual separated from service from Waddell & Reed, Inc. or affiliated
companies with a vested interest in any Employee Benefit Plan sponsored by
Waddell & Reed, Inc. or its affiliated companies. "Employees" also includes
individuals who, on November 6, 1998, were employees (including retired
employees) of a company that on that date was an affiliate of Waddell & Reed,
Inc. "Financial advisors" includes retired financial advisors. A "retired
financial advisor" is any financial advisor who was, at the time of separation
from service from Waddell & Reed, Inc., a Senior Financial Advisor. A custodian
under UGMA or UTMA purchasing for the child or grandchild of any employee or
financial advisor may purchase Class A shares at net asset value whether or not
the custodian himself is an eligible purchaser.

Purchases of Class A shares in a 401(k) plan having 100 or more eligible
employees and purchases of Class A shares in a 457 plan having 100 or more
eligible employees may be made at net asset value.

Holders of an uncompleted United Vanguard Investment Program ("Program")
on May 30, 1996 may purchase Class A shares of the Fund at net asset value, up
to the amount representing the unpaid balance of the Program, if the purchase
order is so designated. In addition, any person who was a Program holder on May
30, 1996 may purchase Class A shares of the Fund at net asset value up to the
amount representing partial Program withdrawals outstanding on May 30, 1996,
provided the purchase is so designated.

Shares may also be issued at NAV in a merger, acquisition or exchange
offer made pursuant to a plan of reorganization to which the Fund is a party.

Reasons for Differences in Public Offering Price of Class A Shares

As described herein and in the Prospectus for Class A shares, there are
a number of instances in which the Fund's Class A shares are sold or issued on a
basis other than the maximum

50
<PAGE>

public offering price, that is, the net asset value plus the highest sales
charge. Some of these relate to lower or eliminated sales charges for larger
purchases of Class A shares, whether made at one time or over a period of time
as under a Statement of Intention or right of accumulation. See the table of
sales charges in the Prospectus. The reasons for these quantity discounts are,
in general, that (i) they are traditional and have long been permitted in the
industry and are therefore necessary to meet competition as to sales of shares
of other funds having such discounts, (ii) certain quantity discounts are
required by rules of the National Association of Securities Dealers, Inc. (as
are elimination of sales charges on the reinvestment of dividends and
distribution), and (iii) they are designed to avoid an unduly large dollar
amount of sales charge on substantial purchases in view of reduced selling
expenses. Quantity discounts are made available to certain related persons for
reasons of family unity and to provide a benefit to tax-exempt plans and
organizations.

The reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at net
asset value are permitted because a sales charge has already been paid on the
shares exchanged. Sales of Class A shares without sales charge are permitted to
Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage incentive, responsibility and interest in the United
Group and an identification with its aims and policies. Limited reinvestments of
redemptions of Class A shares at no sales charge are permitted to attempt to
protect against mistaken or not fully informed redemption decisions. Class A
shares may be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such issuance is
exempted by the 1940 Act from the otherwise applicable restrictions as to what
sales charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interest of existing Class A shareholders
adversely affected since, in each case, the Fund receives the net asset value
per share of all shares sold or issued.

Flexible Withdrawal Service For Class A Shareholders

If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly, semiannual or
annual payments by redeeming on an ongoing basis Class A shares that you own of
the Fund or of any of the funds in the United Group. It would be a disadvantage
to an investor to make additional purchases of shares while a withdrawal program
is in effect because it would result in duplication of sales charges. Applicable
forms to start the Service are available through Waddell & Reed, Inc.

51
<PAGE>

To qualify for the Service, you must have invested at least $10,000 in
Class A shares which you still own of any of the funds in the United Group; or,
you must own Class A shares having a value of at least $10,000. The value for
this purpose is the value at the offering price.

You can choose to have your shares redeemed to receive:

1. a monthly, quarterly, semiannual or annual payment of $50 or more;

2. a monthly payment, which will change each month, equal to one-twelfth
of a percentage of the value of the shares in the Account (you select the
percentage); or

3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five shares).

Shares are redeemed on the 20th day of the month in which the payment is
to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.

Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of their service.

If you have a share certificate for the shares you want to make
available for this Service, you must enclose the certificate with the form
initiating the Service.

The dividends and distributions on shares you have made available for
the Service are paid in additional Class A shares. All payments under the
Service are made by redeeming Class A shares, which may involve a gain or loss
for tax purposes. To the extent that payments exceed dividends and
distributions, the number of Class A shares you own will decrease. When all of
the shares in your account are redeemed, you will not receive any further
payments. Thus, the payments are not an annuity or an income or return on your
investment.

You may, at any time, change the manner in which you have chosen to have
shares redeemed to any of the other choices originally available to you. You
may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also terminate
the Service by notifying you in writing.

After the end of each calendar year, information on shares redeemed will
be sent to you to assist you in completing your Federal income tax return.

52
<PAGE>

Exchanges for Shares of Other Funds in the United Group

Class A Share Exchanges

Once a sales charge has been paid on shares of a fund in the United
Group, these shares and any shares added to them from dividends or distributions
paid in shares may be freely exchanged for Class A shares of another fund in the
United Group. The shares you exchange must be worth at least $100 or you must
already own shares of the fund in the United Group into which you want to
exchange.

You may exchange Class A shares you own in another fund in the United
Group for Class A shares of the Fund without charge if (i) a sales charge was
paid on these shares, or (ii) the shares were received in exchange for shares
for which a sales charge was paid, or (iii) the shares were acquired from
reinvestment of dividends and distributions paid on such shares. There may have
been one or more such exchanges so long as a sales charge was paid on the shares
originally purchased. Also, shares acquired without a sales charge because the
purchase was $2 million or more will be treated the same as shares on which a
sales charge was paid.

United Municipal Bond Fund, Inc., United Government Securities Fund,
Inc. and United Municipal High Income Fund, Inc. shares are the exception and
special rules apply. Class A shares of these funds may be exchanged for Class A
shares of the Fund only if (i) you received those shares as a result of one or
more exchanges of shares on which a sales charge was originally paid, or (ii)
the shares have been held from the date of original purchase for at least 6
months.

Subject to the above rules regarding sales charges, you may have a
specific dollar amount of Class A shares of United Cash Management, Inc.
automatically exchanged each month into Class A shares of the Fund or any other
fund in the United Group. The shares of United Cash Management, Inc. which you
designate for automatic exchange must be worth at least $100 or you must own
Class A shares of the fund in the United Group into which you want to exchange.
The minimum value of shares which you may designate for automatic exchange
monthly is $100, which may be allocated among the Class A shares of different
funds in the United Group so long as each fund receives a value of at least $25.
Minimum initial investment and minimum balance requirements apply to such
automatic exchange service.

You may redeem your Class A shares of the Fund and use the proceeds to
purchase Class Y shares of that Fund if you meet the criteria for purchasing
Class Y shares.

53
<PAGE>

Class Y Share Exchanges

Class Y shares of the Fund may be exchanged for Class Y shares of any
other fund in the United Group or for Class A shares of United Cash Management,
Inc.

General Exchange Information

When you exchange shares, the total shares you receive will have the
same aggregate net asset value as the total shares you exchange. The relative
values are those next figured after your exchange request is received in good
order.

These exchange rights and other exchange rights concerning the other
funds in the United Group can in most instances be eliminated or modified at any
time and any such exchange may not be accepted.

Retirement Plans

As described in the Prospectus for Class A shares, your account may be
set up as a funding vehicle for a retirement plan. For individual taxpayers
meeting certain requirements, Waddell & Reed, Inc. offers model or prototype
documents for the following retirement plans. All of these plans involve
investment in shares of the Fund (or shares of certain other funds in the United
Group).

Individual Retirement Accounts (IRAs). Investors having earned income
may set up a plan that is commonly called an IRA. Under a traditional IRA, an
investor can contribute each year up to 100% of his or her earned income, up to
an annual maximum of $2,000. For a married couple, the annual maximum is $4,000
($2,000 for each spouse) or, if less, the couple's combined earned income for
the taxable year, even if one spouse has no earned income. Generally, the
contributions are deductible unless the investor (or, if married, either spouse)
is an active participant in a qualified retirement plan or if, notwithstanding
that the investor or one or both spouses so participate, their adjusted gross
income does not exceed certain levels. However, a married investor who is not an
active participant, files jointly with his or her spouse and whose combined
adjusted gross income does not exceed $150,000, is not affected by the spouse's
active participant status.

An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be subject
to Federal income tax until distributed from the IRA. A direct rollover
generally applies to any distribution from an employer's plan (including a
custodial account under Section 403(b)(7) of

54
<PAGE>

the Code, but not an IRA) other than certain periodic payments, required minimum
distributions and other specified distributions. In a direct rollover, the
eligible rollover distribution is paid directly to the IRA, not to the investor.
If, instead, an investor receives payment of an eligible rollover distribution,
all or a portion of that distribution generally may be rolled over to an IRA
within 60 days after receipt of the distribution. Because mandatory Federal
income tax withholding applies to any eligible rollover distribution which is
not paid in a direct rollover, investors should consult their tax advisers or
pension consultants as to the applicable tax rules. If you already have an IRA,
you may have the assets in that IRA transferred directly to an IRA offered by
Waddell & Reed, Inc.

Roth IRAs. Investors whose adjusted gross income (or combined adjusted
gross income, if married) does not exceed certain levels may establish and
contribute up to $2,000 per tax year to a Roth IRA. In addition, for an investor
whose adjusted gross income does not exceed $100,000 (and who is not a married
person filing a separate return), certain distributions from traditional IRAs
may be rolled over to a Roth IRA and any of the investor's traditional IRAs may
be converted into a Roth IRA; these rollover distributions and conversions are,
however, subject to Federal income tax.

Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in the Roth IRA, and withdrawals of earnings are not subject
to Federal income tax if the account has been held for at least five years and
the account holder has reached age 59 1/2 (or certain other conditions apply).

Education IRAs. Although not technically for retirement savings,
Education IRAs provide a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than $500 may be contributed for any year
to Education IRAs for the same beneficiary. Contributions are not deductible and
may not be made after the beneficiary reaches age 18; however, earnings
accumulate tax-free, and withdrawals are not subject to tax if used to pay the
qualified higher education expenses of the beneficiary (or a member of his or
her family).

Simplified Employee Pension (SEP) plans. Employers can make
contributions to SEP-IRAs established for employees. An employer may contribute
up to 15% of compensation or $24,000, whichever is less, per year for each
employee.

Savings Incentive Match Plans for Employees (SIMPLE Plans). An employer
with 100 or fewer employees who does not sponsor another active retirement plan
may sponsor a SIMPLE to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an

55
<PAGE>

employer can choose to match employee contributions dollar-for-dollar
(generally, up to 3% of the employee's compensation) or may contribute to all
eligible employees 2% of their compensation, whether or not they defer salary to
their SIMPLE plans. SIMPLE plans involve fewer administrative requirements than
401(k) or other qualified plans generally.

Keogh Plans. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money purchase
plan or a profit-sharing plan. As a general rule, an investor under a defined
contribution Keogh plan can contribute each year up to 25% of his or her annual
earned income, with an annual maximum of $30,000.

457 Plans. If an investor is an employee of a state or local government
or of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.

TSAs - Custodial Accounts and Title I Plans. If an investor is an
employee of a public school system or of certain types of charitable
organizations, he or she may be able to enter into a deferred compensation
arrangement through a custodian account under Section 403(b) of the Code. Some
organizations have adopted Title I plans, which are funded by employer
contributions in addition to employee deferrals.

401(k) Plans. With a 401(k) plan, employees can make tax-deferred
contributions into a plan to which the employer may also contribute, usually on
a matching basis. An employee may defer each year up to 25% of compensation,
subject to certain annual maximums, which may be increased each year based on
cost-of-living adjustments.

More detailed information about these arrangements and applicable forms
are available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax adviser or pension consultant.

Redemptions

The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days unless delayed because of emergency
conditions determined by the SEC, when the NYSE is closed other than for
weekends or holidays, or when trading on the NYSE is restricted. Payment is made
in cash, although under extraordinary conditions redemptions may be made in
portfolio securities. Payment for redemption of shares of the Fund may be made
in portfolio securities when the Fund's Board of Directors determines that
conditions exist making cash payments undesirable. Securities used for payment
of redemptions are valued at the value used in figuring net asset value. There
would be brokerage costs to the redeeming shareholder in selling

56
<PAGE>

such securities. The Fund, however, has elected to be governed by Rule 18f-1
under the 1940 Act, pursuant to which it is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder.

Reinvestment Privilege

The Prospectus for Class A shares discusses the reinvestment privilege
for Class A shares under which, if you redeem your Class A shares and then
decide it was not a good idea, you may reinvest. If Class A shares of the Fund
are then being offered, you can put all or part of your redemption payment back
into Class A shares of the Fund without any sales charge at the net asset value
next determined after you have returned the amount. Your written request to do
this must be received within 30 days after your redemption request was received.
You can do this only once as to Class A shares of the Fund. You do not use up
this privilege by redeeming Class A shares to invest the proceeds at net asset
value in a Keogh plan or an IRA.

Mandatory Redemption of Certain Small Accounts

The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate net asset value of such shares (taken at
cost or value as the Board of Directors may determine) is less than $500. The
Board has no intent to compel redemptions in the foreseeable future. If it
should elect to compel redemptions, shareholders who are affected will receive
prior written notice and will be permitted 60 days to bring their accounts up to
the minimum before this redemption is processed.

DIRECTORS AND OFFICERS

The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors. The majority of the
Directors is not affiliated with Waddell & Reed, Inc.

The principal occupation during at least the past five years of each
Director and officer is given below. Each of the persons listed through and
including Mr. Vogel is a member of the Fund's Board of Directors. The other
persons are officers but not Board members. For purposes of this section, the
term "Fund Complex" includes each of the registered investment companies in the
United Group of Mutual Funds, Waddell & Reed Funds, Inc. and Target/United
Funds, Inc. Each of the Fund's Directors is also a Director of each of the other
funds in the Fund Complex and each

57
<PAGE>

of its officers is also an officer of one or more of the funds in the Fund
Complex.

KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors and Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
of WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of the Fund and each of the other funds in the Fund Complex; formerly,
Chairman of the Board of Directors of Waddell & Reed Asset Management Company, a
former affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11,
1945.

JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.

JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President, JoDill Corp., an agricultural company; President and Director
of Dillingham Enterprises Inc.; formerly, Director and consultant, McDougal
Construction Company; formerly, Instructor at Central Missouri State University;
formerly, Member of the Board of Police Commissioners, Kansas City, Missouri;
formerly, Senior Vice President-Sales and Marketing, Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.

DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores
Dori Eccles Foundation. Director of First Security Corp., a bank holding
company, and Director of Fluor Corp., a company with interests in coal. Date of
birth: March 24, 1933.

LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Partner, Levy and Craig, P.C., a law firm.
Date of birth: July 29, 1953.

58
<PAGE>

JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at
the University of Oklahoma College of Law; formerly, Vice President for
Executive Affairs of the University of Oklahoma; formerly, an Attorney with
Crowe & Dunlevy, a law firm. Date of birth: January 17, 1967.

JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.

ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Vice President, Chief
Operating Officer, Director and Treasurer of Waddell & Reed Financial Services,
Inc.; Executive Vice President, Principal Financial Officer, Director and
Treasurer of WRIMCO; President, Chief Executive Officer, Principal Financial
Officer, Director and Treasurer of Waddell & Reed, Inc.; President, Director and
Treasurer of Waddell & Reed Services Company; formerly, Vice President of the
Fund and each of the other funds in the Fund Complex; formerly, Director and
Treasurer of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: November 12, 1936.

HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, Treasurer and Director of Waddell
& Reed Financial, Inc.; Vice President, Chief Investment Officer and Director of
Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: December 8, 1942.

GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and subsidiaries. Date of birth: February 19, 1924.

59
<PAGE>

WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
the Fund and each fund in the Fund Complex then in existence. (Mr. Morgan
retired as Chairman of the Board of Directors and President of the funds in the
Fund Complex then in existence on April 30, 1993); formerly, President, Director
and Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company and United Investors Life
Insurance Company, affiliates of Waddell & Reed, Inc. Date of birth: April 27,
1928.

RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director of Network Rehabilitation Services; formerly, Employment
Counselor and Director of McCue-Parker Center. Date of birth: August 3, 1934.

FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm. Date of
birth: April 9, 1953.

ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Professor of Business Administration, University of Missouri-Kansas
City; formerly, Chancellor, University of Missouri-Kansas City. Date of birth:
January 1, 1937.

FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.

60
<PAGE>

Helge K. Lee
Vice President, Secretary and General Counsel of the Fund and each of
the other funds in the Fund Complex; Secretary and General Counsel of Waddell &
Reed Financial, Inc.; Vice President, Secretary, General Counsel and Director of
Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary and
General Counsel of WRIMCO and Waddell & Reed, Inc.; Senior Vice President,
Secretary, General Counsel and Director of Waddell & Reed Services Company;
formerly, Executive Vice President, Secretary and Chief Compliance Officer of
LGT Asset Management, Inc. and affiliates; formerly, Senior Vice President,
General Counsel and Secretary of Strong Capital Management, Inc. and affiliates.
Date of birth: March 30, 1946.

Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund
and each of the other funds in the Fund Complex; Vice President of Waddell &
Reed Services Company. Date of birth: July 18, 1942.

Daniel P. Becker
Vice President of the Fund; Vice President of WRIMCO. Date of birth:
November 27, 1964.

The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.

The Directors who may be deemed to be "interested persons" as defined in
the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or of WRIMCO are
indicated as such by an asterisk.

The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the Board
provided the director has attained the age of 70 and has served as a director of
the funds in the United Group for a total of at least five years. A Director
Emeritus receives fees in recognition of his or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Messrs.
Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey and Paul
S. Wise retired as Directors of the Fund and of each of the funds in the Fund
Complex and elected a position as Director Emeritus.

The funds in the United Group, Target/United Funds, Inc. and Waddell &
Reed Funds, Inc. pay to each Director a total of $48,000 per year, plus $2,500
for each meeting of the Board of Directors attended plus reimbursement of
expenses of attending such meeting (prior to January 1, 1998, the funds in the
United Group, Target/United Funds, Inc. and Waddell & Reed Funds, Inc. paid to
each Director a fee of $44,000 per year, plus $1,000 for each meeting of the
Board of Directors attended) and $500 for each committee meeting attended which
is not held in conjunction with a Board of Directors' meeting other than
Directors who are

61
<PAGE>

affiliates of Waddell & Reed, Inc. The fees to the Directors
who receive them are divided among the funds in the United Group, Target/United
Funds, Inc. and Waddell & Reed Funds, Inc. based on their relative size.

During the Fund's fiscal year ended September 30, 1998, the Fund's
Directors received the following fees for service as a director:

<TABLE>
<CAPTION>
Compensation Table
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 3,871 56,000
John A. Dillingham 3,871 56,000
David P. Gardner 0 0
Linda K. Graves 3,871 56,000
Joseph Harroz, Jr. 0 0
John F. Hayes 3,871 56,000
Glendon E. Johnson 3,802 55,000
William T. Morgan 3,871 56,000
Ronald C. Reimer 0 0
Frank J. Ross, Jr. 3,871 56,000
Eleanor B. Schwartz 3,871 56,000
Frederick Vogel III 3,871 56,000
</TABLE>

*No pension or retirement benefits have been accrued as a part of Fund expenses.

Mr. Gardner was elected as a Director on August 19, 1998. Messrs.
Harroz, Hechler, Herrmann and Reimer were elected as Directors on November 18,
1998. The officers are paid by WRIMCO or its affiliates.

Shareholdings

As of December 31, 1998, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. The following
table sets forth information with respect to the Fund, as of December 31, 1998,
regarding the beneficial ownership of the classes of the Fund's shares.

<PAGE>

<TABLE>
<CAPTION>
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ----- ------------ -------
<S> <C> <C> <C>

Morrissey Inc Class Y 72,810 11.16%
401(k) Retirement Plan
9304 Bryand Ave S
Bloomington MN 55420-3474

Fiduciary Trust Co NH Tr Class Y 41,119 6.30
CMPP Okanogan Cnty Hosp Dist 3
FBO Unallocated Assets
Qualified Plan
P O Box 793
Omak WA 98841

Waddell & Reed
Financial, Inc. Class Y 223,983 34.32
Savings & Investment Plan
6300 Lamar Avenue
Overland Park KS 66201

Torchmark Corporation Class Y 305,973 46.88
Savings & Investment Plan
2001 Third Avenue South
Birmingham AL 35202
</TABLE>

PAYMENTS TO SHAREHOLDERS

General

There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is derived
from the dividends, interest and earned discount on the securities the Fund
holds less expenses (which will vary by class). The second source is net
realized capital gains, which are derived from the proceeds received from the
Fund's sale of securities at a price higher than the Fund's tax basis (usually
cost) in such securities, less losses from sales of securities at a price lower
than the Fund's basis therein; these gains can be either long-term or
short-term, depending on how long the Fund has owned the securities before it
sells them. The third source is net realized gains from foreign currency
transactions. The payments made to shareholders from net investment income, net
short-term capital gains and net realized gains from certain foreign currency
transactions are called dividends.

The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gains, depending on whether

63
<PAGE>

securities are sold and at what price. If the Fund has net capital gains, it
will pay distributions once each year, in the latter part of the fourth calendar
quarter, except to the extent it has net capital losses carried over from a
prior year or years to offset the gains.

Choices You Have on Your Dividends and Distributions

On your application form, you can give instructions that (i) you want
cash for your dividends and distributions, (ii) you want your dividends and
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid, or (iii) you want cash for your dividends and want your
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid. You can change your instructions at any time. If you
give no instructions, your dividends and distributions will be paid in shares of
the Fund of the same class as that with respect to which they were paid. All
payments in shares are at net asset value without any sales charge. The net
asset value used for this purpose is that computed as of the record date for the
dividend or distribution, although this could be changed by the Board of
Directors.

Even if you get dividends and distributions on Class A shares in cash,
you can thereafter reinvest them (or distributions only) in Class A shares of
the Fund at net asset value (i.e., with no sales charge) next determined after
receipt by Waddell & Reed, Inc. of the amount clearly identified as a
reinvestment. The reinvestment must be within 45 days after the payment.

TAXES

General

The Fund has qualified for treatment as a regulated investment company
("RIC") under the Code, so that it is relieved of Federal income tax on that
part of its investment company taxable income (consisting generally of net
investment income, net short-term capital gains and net gains from certain
foreign currency transactions) that is distributed to its shareholders. To
continue to qualify as a RIC, the Fund must distribute to its shareholders for
each taxable year at least 90% of the sum of its investment company taxable
income ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the Fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures contracts or forward contracts) derived with respect
to its business of investing in securities or those currencies ("Income
Requirement"); (2) at the close of each quarter of the

64
<PAGE>

Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities, securities of
other RICs and other securities that are limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities ("50% Diversification Requirement"); and (3) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. Government securities or
the securities of other RICs) of any one issuer.

Dividends and distributions declared by the Fund in October, November or
December of any year and payable to its shareholders of record on a date in any
of those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if they are paid by the Fund during the
following January. Accordingly, those dividends and distributions will be taxed
to the shareholders for the year in which that December 31 falls.

If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any distributions received on those shares. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or distribution, the investor will receive some portion of the
purchase price back as a taxable dividend or distribution.

The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. It is the Fund's policy to pay sufficient dividends and
distributions each year to avoid imposition of the Excise Tax. The Code permits
the Fund to defer into the next calendar year net capital losses incurred
between November 1 and the end of the current calendar year.

Income from Foreign Securities

Dividends and interest received, and gains realized, by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.

The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation -- other than a
"controlled foreign corporation" (i.e., a foreign

65
<PAGE>

corporation in which, on any day during its taxable year, more than 50% of the
total voting power of all voting stock therein or the total value of all stock
therein is owned, directly, indirectly, or constructively, by "U.S.
shareholders," defined as U.S. persons that individually own, directly,
indirectly, or constructively, at least 10% of that voting power) as to which
the Fund is a U.S. shareholder -- that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, the Fund will be subject to
Federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain on disposition of the stock (collectively "PFIC
income"), plus interest thereon, even if the Fund distributes the PFIC income as
a taxable dividend to its shareholders. The balance of the PFIC income will be
included in the Fund's investment company taxable income and, accordingly, will
not be taxable to it to the extent that income is distributed to its
shareholders.

If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gains
- -- which probably would have to be distributed by the Fund to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax -- even if those
earnings and gains were not distributed to the Fund by the QEF. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.

The Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. The Fund's adjusted basis in each PFIC's stock with respect
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken under the election. Regulations proposed in
1992 provided a similar election with respect to the stock of certain PFICs.

Foreign Currency Gains and Losses

Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of a debt security denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the

66
<PAGE>

date of acquisition of the security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally are treated
as ordinary income or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders.

Income from Options, Futures and Forward Currency Contracts and Foreign
Currencies

The use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
the Fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures contracts and forward currency contracts derived
by the Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.

Any income the Fund earns from writing options is treated as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it received for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being exercised,
the premium it received also will be a short-term capital gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund received will be added to the exercise price to
determine the gain or loss on the sale.

Certain options, futures contracts and forward currency contracts in
which the Fund may invest may be "section 1256 contracts." Section 1256
contracts held by the Fund at the end of its taxable year, other than contracts
subject to a "mixed straddle" election made by the Fund are "marked-to-market"
(that is, treated as sold at that time for their fair market value) for Federal
income tax purposes, with the result that unrealized gains or losses are treated
as though they were realized. Sixty percent of any net gains or losses
recognized on these deemed sales, and 60% of any net realized gains or losses
from any actual sales of section 1256 contracts, are treated as long-term
capital gains or losses, and the balance is treated as short-term capital gains
or losses. That 60% portion will qualify for the 20% (10% for taxpayers in the
15% marginal tax bracket) maximum tax rate on net capital gains enacted by the
Taxpayer Relief Act of 1997. Section 1256 contracts also may be marked-to-market

67
<PAGE>

for purposes of the Excise Tax and other purposes. The Fund may need to
distribute any mark-to-market gains to its shareholders to satisfy the
Distribution Requirement and/or avoid imposition of the Excise Tax, even though
it may not have closed the transactions and received cash to pay the
distributions.

Code section 1092 (dealing with straddles) may also affect the taxation
of options and futures contracts in which the Fund may invest. That section
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. The regulations under section
1092 also provide certain "wash sale" rules, that apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.

If the Fund has an appreciated financial position -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward currency contract entered into by the
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.

Zero Coupon and Payment-in-Kind Securities

The Fund may acquire zero coupon or other securities issued with
original issue discount. As the holder of those securities, the Fund must
include in its income the original issue discount that accrues on the securities
during the taxable year, even if the Fund receives no corresponding payment on
the securities during the year. Similarly, the Fund must include in its gross
income securities it receives as "interest" on payment-in-kind securities.
Because the Fund annually must distribute substantially all of its investment
company taxable income,

68
<PAGE>

including any accrued original issue discount and other non-cash income, in
order to satisfy the Distribution Requirement and to avoid imposition of the
Excise Tax, it may be required in a particular year to distribute as a dividend
an amount that is greater than the total amount of cash it actually receives.
Those distributions will be made from the Fund's cash assets or from the
proceeds of sales of portfolio securities, if necessary. The Fund may realize
capital gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gains.

PORTFOLIO TRANSACTIONS AND BROKERAGE

One of the duties undertaken by WRIMCO pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio of
the Fund. Transactions in securities other than those for which an exchange is
the primary market are generally done with dealers acting as principals or
market makers. Brokerage commissions are paid primarily for effecting
transactions in securities traded on an exchange and otherwise only if it
appears likely that a better price or execution can be obtained. The individual
who manages the Fund may manage other advisory accounts with similar investment
objectives. It can be anticipated that the manager will frequently place
concurrent orders for all or most accounts for which the manager has
responsibility or WRIMCO may otherwise combine orders for the Fund with those of
other funds in the United Group, Target/United Funds, Inc. and Waddell & Reed
Funds, Inc. or other accounts for which it has investment discretion.
Transactions effected pursuant to such combined orders are averaged as to price
and allocated in accordance with the purchase or sale orders actually placed for
each fund or advisory account, except where the combined order is not filled
completely. In this case, WRIMCO will ordinarily allocate the transaction pro
rata based on the orders placed. Sharing in large transactions could affect the
price the Fund pays or receives or the amount it buys or sells. However,
sometimes a better negotiated commission is available through combined orders.

To effect the portfolio transactions of the Fund, WRIMCO is authorized
to engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and/or
research services and other services, including pricing or quotation services
directly or through others ("research and brokerage services") considered by
WRIMCO to be useful or desirable for its investment management of the Fund
and/or

69
<PAGE>

the other funds and accounts over which WRIMCO has investment discretion.

Research and brokerage services are, in general, defined by reference to
Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers; (ii) furnishing
analyses and reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.

The commissions paid to brokers that provide such research and/or
brokerage services may be higher than another qualified broker would charge for
effecting comparable transactions if a good faith determination is made by
WRIMCO that the commission is reasonable in relation to the research or
brokerage services provided. Subject to the foregoing considerations, WRIMCO may
also consider sale of Fund shares as a factor in the selection of broker-dealers
to execute portfolio transactions. No allocation of brokerage or principal
business is made to provide any other benefits to WRIMCO.

The investment research provided by a particular broker may be useful
only to one or more of the other advisory accounts of WRIMCO and investment
research received for the commissions of those other accounts may be useful both
to the Fund and one or more of such other accounts. To the extent that
electronic or other products provided by such brokers to assist WRIMCO in making
investment management decisions are used for administration or other
non-research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by WRIMCO.

Such investment research (which may be supplied by a third party at the
request of a broker) includes information on particular companies and industries
as well as market, economic or institutional activity areas. It serves to
broaden the scope and supplement the research activities of WRIMCO; serves to
make available additional views for consideration and comparisons; and enables
WRIMCO to obtain market information on the price of securities held in the
Fund's portfolio or being considered for purchase.

The Fund may also use its brokerage to pay for pricing or quotation
services to value securities. During the Fund's fiscal years ended September 30,
1998, 1997 and 1996, it paid brokerage commissions of $2,644,391, $3,597,326 and
$1,698,766, respectively. These figures do not include principal transactions or
spreads or concessions on principal transactions,

70
<PAGE>

i.e., those in which the Fund sells securities to a broker-dealer firm or buys
from a broker-dealer firm securities owned by it.

During the Fund's fiscal year ended September 30, 1998, the
transactions, other than principal transactions, which were directed to
broker-dealers who provided research as well as execution totaled $1,779,407,785
on which $1,923,667 in brokerage commissions were paid. These transactions were
allocated to these broker-dealers by the internal allocation procedures
described above.

The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.

OTHER INFORMATION

The Shares of the Fund

The Fund offers two classes of shares: Class A and Class Y. Each class
represents an interest in the same assets of the Fund and differ as follows:
each class of shares has exclusive voting rights on matters pertaining to
matters appropriately limited to that class; Class A shares are subject to an
initial sales charge and to an ongoing distribution and/or service fee and Class
Y shares, which are designated for institutional investors, have no sales charge
nor ongoing distribution and/or service fee; each class may bear differing
amounts of certain class-specific expenses; and each class has a separate
exchange privilege. The Fund does not anticipate that there will be any
conflicts between the interests of holders of the different classes of shares of
the Fund by virtue of those classes. On an ongoing basis, the Board of Directors
will consider whether any such conflict exists and, if so, take appropriate
action. Each share of the Fund is entitled to equal voting, dividend,
liquidation and redemption rights, except that due to the differing expenses
borne by the two classes, dividends and liquidation proceeds of Class A shares
are expected to be lower than for Class Y shares of the Fund. Each fractional
share of a class has the same rights, in proportion, as a full share of that
class. Shares are fully paid and nonassessable when purchased.

The Fund does not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment advisory
agreement or a change in fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.

Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled

71
<PAGE>

to vote at such meeting, provided certain conditions stated in the bylaws are
met. There will normally be no meeting of the shareholders for the purpose of
electing directors until such time as less than a majority of directors holding
office have been elected by shareholders, at which time the directors then in
office will call a shareholders' meeting for the election of directors. To the
extent that Section 16(c) of the 1940 Act applies to the Fund, the directors are
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any director when requested in writing to do so by the
shareholders of record of not less than 10% of the Fund's outstanding shares.

Each share (regardless of class) has one vote. All shares of the Fund
vote together as a single class, except as to any matter for which a separate
vote of any class is required by the 1940 Act, and except as to any matter which
affects the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class.

72
<PAGE>

THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>

Shares Value
<S> <C> <C>
COMMON STOCKS
Apparel and Accessory Stores - 4.62%
Abercrombie & Fitch Co., Class A* ......................... 828,700 $ 36,462,800
Kohl's Corporation* ....................................... 760,000 29,640,000
Total ................................................... 66,102,800

Building Materials and Garden Supplies - 3.31%
Home Depot, Inc. (The) .................................... 1,200,000 47,400,000

Business Services - 6.67%
BMC Software, Inc.* ....................................... 617,200 37,051,287
Microsoft Corporation* .................................... 530,000 58,349,687
Total ................................................... 95,400,974

Chemicals and Allied Products - 17.01%
Bristol-Myers Squibb Company .............................. 395,700 41,103,338
Colgate-Palmolive Company ................................. 440,000 30,140,000
Lilly (Eli) and Company ................................... 277,700 21,747,381
Monsanto Company .......................................... 400,000 22,550,000
Pfizer Inc. ............................................... 316,600 33,539,812
Schering-Plough Corporation ............................... 482,800 49,999,975
Warner-Lambert Company .................................... 588,300 44,416,650
Total ................................................... 243,497,156

Communication - 0.83%
Clear Channel Communications, Inc.* ....................... 250,500 11,898,750

Depository Institutions - 3.09%
Comerica Incorporated ..................................... 460,000 25,213,750
MBNA Corp. ................................................ 662,700 18,969,788
Total ................................................... 44,183,538

Electronic and Other Electric Equipment - 3.73%
Intel Corporation ......................................... 445,100 38,181,234
Texas Instruments Incorporated ............................ 287,200 15,149,800
Total ................................................... 53,331,034

Furniture and Home Furnishings Stores - 0.42%
Williams-Sonoma, Inc.* .................................... 284,900 6,071,931

General Merchandise Stores - 2.95%
Dollar General Corporation ................................ 693,906 18,475,247
Wal-Mart Stores, Inc. ..................................... 434,700 23,745,488
Total ................................................... 42,220,735
</TABLE>

See Notes to Schedule of Investments on page 77.

73
<PAGE>

THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Health Services - 2.89%
Health Management Associates, Inc.,
Class A* ................................................ 1,476,050 $ 26,937,913
Tenet Healthcare Corporation* ............................. 500,000 14,375,000
Total ................................................... 41,312,913

Hotels and Other Lodging Places - 0.03%
Sun International Hotels, Ltd.* ........................... 10,000 379,375

Industrial Machinery and Equipment - 9.93%
Applied Materials, Inc.* .................................. 390,100 9,862,216
Cisco Systems, Inc.* ...................................... 643,200 39,777,900
EMC Corporation* .......................................... 1,615,900 92,409,281
Total ................................................... 142,049,397

Instruments and Related Products - 2.89%
Guidant Corporation ....................................... 307,500 22,831,875
Medtronic, Inc. ........................................... 318,500 18,433,187
United States Surgical Corporation ........................ 634 26,430
Total ................................................... 41,291,492

Insurance Carriers - 2.53%
American International Group, Inc. ........................ 287,250 22,118,250
MGIC Investment Corporation ............................... 382,400 14,101,000
Total ................................................... 36,219,250

Miscellaneous Retail - 1.91%
Costco Companies, Inc.* ................................... 70,000 3,316,250
Walgreen Co. .............................................. 545,300 24,027,281
Total ................................................... 27,343,531

Motion Pictures - 0.81%
Time Warner Incorporated .................................. 133,200 11,663,325

Nondepository Institutions - 10.21%
Capital One Financial Corp. ............................... 281,900 29,176,650
Fannie Mae ................................................ 1,132,700 72,775,975
Freddie Mac ............................................... 893,800 44,187,238
Total ................................................... 146,139,863

Printing and Publishing - 0.93%
Tribune Company ........................................... 263,200 13,242,250

Tobacco Products - 5.05%
Philip Morris Companies Inc. .............................. 1,570,000 72,318,125

Transportation Equipment - 2.69%
Harley-Davidson, Inc. ..................................... 1,310,000 38,481,250
</TABLE>

See Notes to Schedule of Investments on page 77.

74
<PAGE>

THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>

Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Transportation Services - 0.54%
Dial Corporation (The) .................................... 378,000 $ 7,796,250

Water Transportation - 2.87%
Carnival Corporation, Class A ............................. 1,293,400 41,146,288

Wholesale Trade - Durable Goods - 1.37%
Johnson & Johnson ......................................... 250,000 19,562,500

TOTAL COMMON STOCKS - 87.28% $1,249,052,727
(Cost: $967,857,672)
</TABLE>

Principal
Amount in
Thousands
<TABLE>
<S> <C> <C>
CORPORATE DEBT SECURITY - 0.15%
Health Services
Assisted Living Concepts, Convertible,
6.0%, 11-1-2002 ......................................... $2,500 $ 2,225,000
(Cost: $2,500,000)

SHORT-TERM SECURITIES
Commercial Paper
Communication - 1.74%
Bell Atlantic Financial Services, Inc.,
5.3%, 10-14-98 .......................................... 25,000 24,952,153

Electric, Gas and Sanitary Services - 2.89%
Carolina Power & Light Co.,
5.46%, 11-9-98 .......................................... 21,500 21,372,828
Houston Industries FinanceCo L.P. (Houston
Industries Incorporated, guarantor),
5.67%, 10-30-98 ......................................... 20,000 19,908,650
Total ................................................... 41,281,478

Fabricated Metal Products - 0.83%
Danaher Corporation,
5.3438%, Master Note .................................... 356 356,000
Snap-On Inc.,
5.51%, 10-15-98 ......................................... 11,500 11,475,358
Total ................................................... 11,831,358

Food and Kindred Products - 1.47%
ConAgra, Inc.,
5.7%, 10-9-98 ........................................... 7,000 6,991,133
General Mills, Inc.,
5.1988%, Master Note .................................... 77 77,000
Seagram (Joseph E.) & Sons Inc.,
5.4%, 10-15-98 .......................................... 14,000 13,970,600
Total ................................................... 21,038,733
</TABLE>

See Notes to Schedule of Investments on page 77.

75
<PAGE>

THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Instruments and Related Products - 1.65%
General Signal Corp.,
5.7%, 10-6-98 ........................................... $23,660 $ 23,641,269

Insurance Agents, Brokers and Service - 0.93%
Aon Corp.,
5.53%, 10-7-98 .......................................... 13,300 13,287,742

Nondepository Institutions - 1.88%
Penney (J.C.) Funding Corp.,
5.5%, 10-23-98 .......................................... 23,000 22,922,694
Whirlpool Corp.,
6.0%, 10-1-98 ........................................... 3,975 3,975,000
Total ................................................... 26,897,694

Textile Mill Products - 0.09%
Sara Lee Corporation,
5.1938%, Master Note .................................... 1,302 1,302,000

Tobacco Products - 0.18%
B.A.T. Capital Corp.,
5.6%, 11-5-98 ........................................... 2,600 2,585,845

Transportation Equipment - 0.52%
Dana Credit Corp.,
5.68%, 10-14-98 ......................................... 7,500 7,484,617

Total Commercial Paper - 12.18% 174,302,889

Commercial Paper (backed by irrevocable bank letter of credit)
- 0.56% Nondepository Institutions Hyundai Motor Finance Co.
(Bank of America NT & SA), 5.52%, 10-5-98 .... ........... 8,000 7,995,093

TOTAL SHORT-TERM SECURITIES - 12.74% $ 182,297,982
(Cost: $182,297,982)

TOTAL INVESTMENT SECURITIES - 100.17% $1,433,575,709
(Cost: $1,152,655,654)

LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.17%) (2,477,595)

NET ASSETS - 100.00% $1,431,098,114
</TABLE>

See Notes to Schedule of Investments on page 77.

76
<PAGE>

THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1998

Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.

See Note 1 to financial statements for security valuation and other
significant accounting policies concerning investments.

See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.

77
<PAGE>

UNITED VANGUARD FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
(In Thousands, Except for Per Share Amounts)
<TABLE>
<S> <C>
Assets
Investment securities -- at value
(Notes 1 and 3) ....................................................... $1,433,576
Cash ................................................................ 6
Receivables:
Investment securities sold ............................................ 12,619
Dividends and interest ................................................ 1,381
Fund shares sold ...................................................... 428
Prepaid insurance premium ............................................... 39
----------
Total assets ........................................................ 1,448,049
----------
Liabilities
Payable for investment securities purchased ............................. 13,608
Payable to Fund shareholders ............................................ 2,786
Accrued service fee (Note 2) ............................................ 313
Accrued transfer agency and dividend
disbursing (Note 2) ................................................... 202
Accrued management fee (Note 2) ......................................... 27
Accrued accounting services fee (Note 2) ................................ 8
Accrued distribution fee (Note 2) ....................................... 3
Other 4
----------
Total liabilities ................................................... 16,951
----------
Total net assets .................................................. $1,431,098
==========

Net Assets
$1.00 par value capital stock
Capital stock ......................................................... $ 190,735
Additional paid-in capital ............................................ 937,306
Accumulated undistributed income:
Accumulated undistributed net investment
income .............................................................. 1,776
Accumulated undistributed net realized gain on
investment transactions ............................................. 20,351
Net unrealized appreciation in value of
investments ......................................................... 280,930
----------
Net assets applicable to outstanding
units of capital .................................................. $1,431,098
==========
Net asset value per share (net assets divided
by shares outstanding)
Class A ................................................................. $7.50
Class Y ................................................................. $7.52
Capital shares outstanding
Class A ................................................................. 190,108
Class Y ................................................................. 627
Capital shares authorized .................................................. 600,000
</TABLE>

See notes to financial statements.

78
<PAGE>

UNITED VANGUARD FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1998
(In Thousands)

<TABLE>
<S> <C>
Investment Income
Income (Note 1B):
Dividends ............................................................. $13,366
Interest and amortization ............................................. 5,153
-------
Total income ........................................................ 18,519
-------
Expenses (Note 2):
Investment management fee ............................................. 10,495
Service fee - Class A ................................................. 3,320
Transfer agency and dividend disbursing - Class A...................... 2,395
Accounting services fee ............................................... 100
Distribution fee - Class A ............................................ 27
Custodian fees ........................................................ 23
Audit fees ............................................................ 19
Legal fees ............................................................ 10
Shareholder servicing - Class Y ....................................... 8
Other ................................................................. 202
-------
Total expenses ...................................................... 16,599
-------
Net investment income ............................................. 1,920
-------
Realized and Unrealized Gain on
Investments (Notes 1 and 3)
Realized net gain on securities ......................................... 24,654
Realized net gain on foreign currency
transactions .......................................................... 26
-------
Realized net gain on investments ...................................... 24,680
Unrealized appreciation in value of investments
during the period ..................................................... 32,486
-------
Net gain on investments ............................................. 57,166
-------
Net increase in net assets resulting
from operations ................................................. $59,086
=======
</TABLE>

See notes to financial statements.
79
<PAGE>

UNITED VANGUARD FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the fiscal year
ended September 30,
---------------------------------
1998 1997
Increase (Decrease)in Net Assets -------------- ------------
<S> <C> <C>
Operations:
Net investment income ........................... $ 1,920 $ 11,726
Realized net gain on investments ................ 24,680 332,325
Unrealized appreciation (depreciation)........... 32,486 (52,010)
---------- ----------
Net increase in net assets
resulting from operations ................... 59,086 292,041
---------- ----------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A ....................................... (6,595) (9,105)
Class Y ....................................... (29) (42)
Realized gains on securities transactions:
Class A ....................................... (284,084) (197,515)
Class Y ....................................... (1,024) (690)
---------- ----------
(291,732) (207,352)
Capital share transactions: ---------- ----------
Proceeds from sale of shares:
Class A (40,123,616 and 8,448,618
shares, respectively) ....................... 321,631 71,292
Class Y (122,262 and 152,715
shares, respectively) ....................... 996 1,278
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (41,192,909 and
27,174,275 shares, respectively)............. 285,879 203,701
Class Y (151,657 and 97,643
shares, respectively) ....................... 1,052 733
Payments for shares redeemed:
Class A (53,303,525 and 20,669,570
shares, respectively) ....................... (426,626) (173,060)
Class Y (224,280 and 146,263
shares, respectively) ....................... (1,798) (1,192)
---------- ----------
Net increase in net assets
resulting from capital
share transactions ........................ 181,134 102,752
---------- ----------
Total increase (decrease) ................... (51,512) 187,441
Net Assets
Beginning of period ............................... 1,482,610 1,295,169
---------- ----------
End of period, including undistributed
net investment income of $1,776
and $6,454, respectively ........................ $1,431,098 $1,482,610
========== ==========
</TABLE>

*See "Financial Highlights" on pages 81 - 82.
See notes to financial statements.

80
<PAGE>

UNITED VANGUARD FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:

<TABLE>
<CAPTION>
For the fiscal year ended
September 30,
-------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period....... $9.11 $8.77 $8.97 $7.73 $7.10
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ................. 0.01 0.07 0.03 0.07 0.00
Net realized and
unrealized gain
on investments ......... 0.19 1.69 0.26 1.82 0.83
----- ----- ----- ----- -----
Total from investment
operations ............... 0.20 1.76 0.29 1.89 0.83
----- ----- ----- ----- -----
Less distributions:
From net investment
income ................. (0.04) (0.06) (0.04) (0.03) (0.02)
From capital gains ....... (1.77) (1.36) (0.45) (0.62) (0.18)
----- ----- ----- ----- -----
Total distributions ......... (1.81) (1.42) (0.49) (0.65) (0.20)
----- ----- ----- ----- -----
Net asset value,
end of period ............ $7.50 $9.11 $8.77 $8.97 $7.73
===== ===== ===== ===== =====
Total return* ............... 3.76% 23.60% 3.59% 26.82% 11.86%
Net assets, end of
period (in millions) ..... $1,426 $1,478 $1,291 $1,285 $1,014
Ratio of expenses
to average net assets .... 1.10% 1.09% 1.09% 1.05% 1.05%
Ratio of net
investment income
to average net assets .... 0.13% 0.86% 0.36% 0.87% 0.04%
Portfolio
turnover rate ............ 90.51% 139.14% 57.10% 30.01% 36.70%
</TABLE>

*Total return calculated without taking into account the sales load deducted on
an initial purchase.

See notes to financial statements.

81
<PAGE>

UNITED VANGUARD FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the
For the fiscal year period
ended September 30, from 9/8/95*
--------------------------- through
1998 1997 1996 9/30/95
----- ----- ------ --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period....... $9.12 $8.78 $8.97 $9.05
----- ----- ----- -----
Income from investment
operations:
Net investment
income ................. 0.03 0.09 0.07 0.00
Net realized and
unrealized gain
(loss) on
investments............. 0.19 1.69 0.24 (0.08)
----- ----- ----- -----
Total from investment
operations................ 0.22 1.78 0.31 (0.08)
----- ----- ----- -----
Less distributions:
From net investment
income.................. (0.05) (0.08) (0.05) (0.00)
From capital gains........ (1.77) (1.36) (0.45) (0.00)
----- ----- ----- -----
Total distributions.......... (1.82) (1.44) (0.50) (0.00)
----- ----- ----- -----
Net asset value,
end of period............. $7.52 $9.12 $8.78 $8.97
===== ===== ===== =====
Total return ................ 4.02% 23.87% 3.80% -0.88%
Net assets, end of
period (in
millions) ................ $ 5 $ 5 $ 4 $ 2
Ratio of expenses
to average
net assets ............... 0.91% 0.90% 0.91% 0.00%
Ratio of net investment
income to average
net assets................ 0.33% 1.05% 0.69% 0.00%
Portfolio
turnover rate............. 90.51% 139.14% 57.10% 30.01%**

*Commencement of operations.
**Annualized.
</TABLE>

See notes to financial statements.

82
<PAGE>

UNITED VANGUARD FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998

NOTE 1 -- Significant Accounting Policies

United Vanguard Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Its investment objective is appreciation through a diversified holding
of securities issued primarily by companies that the Fund's investment manager
believes have appreciation possibilities and through proper timing of purchases
and sales of securities. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.

A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period
as reported by the principal securities exchange on which the issue is
traded or, if no sale is reported for a stock, the average of the
latest bid and asked prices. Bonds, other than convertible bonds, are
valued using a pricing system provided by a pricing service or dealer
in bonds. Convertible bonds are valued using this pricing system only
on days when there is no sale reported. Stocks which are traded
over-the-counter are priced using the Nasdaq Stock Market, which
provides information on bid and asked prices quoted by major dealers in
such stocks. Short-term debt securities are valued at amortized cost,
which approximates market.

B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Securities gains and losses are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. See Note 3
--Investment Security Transactions.

C. Foreign currency translations -- All assets and liabilities denominated
in foreign currencies are translated into U.S. dollars daily. Purchases
and sales of investment securities and accruals of income and expenses
are translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates.
The Fund combines fluctuations from currency exchange rates and
fluctuations in market value when computing net realized and unrealized
gain or loss from investments.

D. Federal income taxes -- It is the Fund's policy to distribute all of
its taxable income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code. In addition, the Fund intends to pay
distributions as required to avoid imposition of excise tax.
Accordingly, provision has not been made for Federal income taxes. See
Note 4 -- Federal Income Tax Matters.

83
<PAGE>

E. Dividends and distributions -- Dividends and distributions to
shareholders are recorded by the Fund on the record date. Net
investment income dividends and capital gains distributions are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
due to differing treatments for items such as deferral of wash sales
and post-October losses, foreign currency transactions, net operating
losses and expiring capital loss carryovers. At September 30, 1998,
$26,325 was reclassified between accumulated undistributed net
investment income and accumulated undistributed net realized gain on
investment transactions.

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.

NOTE 2 -- Investment Management and Payments to Affiliated Persons

The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .30% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $18.9 billion of
combined net assets at September 30, 1998) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.

Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.

The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of the Fund. For
these services, the Fund pays WARSCO a monthly fee of one-twelfth of the annual
fee shown in the following table.

84
<PAGE>

<TABLE>
<CAPTION>
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>

For Class A shares, the Fund also pays WARSCO a monthly per account
charge for transfer agency and dividend disbursement services of $1.3125 for
each shareholder account which was in existence at any time during the prior
month, plus $0.30 for each account on which a dividend or distribution of cash
or shares had a record date in that month. With respect to Class Y shares, the
Fund pays WARSCO a monthly fee at an annual rate of .15% of the average daily
net assets of the class for the preceding month. The Fund also reimburses W&R
and WARSCO for certain out-of-pocket costs.

As principal underwriter for the Fund's shares, W&R received gross sales
commissions for Class A shares (which are not an expense of the Fund) of
$2,616,408, out of which W&R paid sales commissions of $1,494,180 and all
expenses in connection with the sale of Fund shares, except for registration
fees and related expenses.

Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.

The Fund paid Directors' fees of $52,898, which are included in other
expenses.

W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding
company, and a direct subsidiary of Waddell & Reed Financial Services, Inc., a
holding company.

NOTE 3 -- Investment Security Transactions

Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $1,272,581,034 while proceeds from maturities
and sales aggregated $1,533,587,281. Purchases of short-term securities
aggregated $1,711,846,241 while proceeds from maturities and sales aggregated
$1,551,788,315.

For Federal income tax purposes, cost of investments owned at September
30, 1998 was $1,154,245,771, resulting in net unrealized appreciation of
$279,329,938, of which $293,147,061 related to

85
<PAGE>

appreciated securities and $13,817,123 related to depreciated securities.

NOTE 4 -- Federal Income Tax Matters

For Federal income tax purposes, the Fund realized capital gain net
income of $26,175,538 during its fiscal year ended September 30, 1998, of which
a portion was paid to shareholders during the period ended September 30, 1998.
Remaining net capital gains will be distributed to the Fund's shareholders in
fiscal 1999.

NOTE 5 -- Multiclass Operations

On August 15, 1995, the Fund was authorized to offer two classes of
shares, Class A and Class Y, each of which has equal rights as to assets and
voting privileges. Class Y shares are not subject to a sales charge on
purchases; they are not subject to a Rule 12b-1 Distribution and Service Plan
and have a separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the Prospectus and Statement of Additional
Information for the Fund.

Income, non-class specific expenses and realized and unrealized gains
and losses are allocated daily to each Class of shares based on the value of
relative net assets as of the beginning of the day adjusted for the prior day's
capital share activity.

86
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders,
United Vanguard Fund, Inc.:

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Vanguard Fund, Inc. (the "Fund") as of
September 30, 1998, and the related statements of operations for the fiscal year
then ended and changes in net assets for each of the fiscal years in the
two-year period then ended, and the financial highlights for each of the fiscal
periods in the five-year period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1998 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of United Vanguard
Fund, Inc. as of September 30, 1998, the results of its operations, the changes
in its net assets and the financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.

Deloitte & Touche LLP
Kansas City, Missouri
November 6, 1998
87