UNITED GOLD & GOVERNMENT FUND INC, 497, 1994-04-05

UNITED GOLD & GOVERNMENT FUND INC
497, 1994-04-05

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<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.

6300 Lamar Avenue

P. O. Box 29217

Shawnee Mission, Kansas 66201-9217

(913) 236-2000

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

March 31, 1994

PROSPECTUS

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

United Gold & Government Fund, Inc. (the "Fund") is a management investment
company which seeks a high total return to investors by investing in (i)
minerals-related securities and gold, silver and platinum during periods of
actual or expected inflation; (ii) U.S. Government Securities during periods of
actual or expected disinflation or low inflation; and (iii) gold, silver and
platinum during periods when the environment for investment in precious metals
appears to be favorable. See "Goal and Investment Policies of the Fund" for the
definitions of each of these types of investments. There is no assurance that
the Fund will achieve its goal. The Fund is subject to significant risks
associated with investments in gold and other minerals-related securities,
foreign securities and precious metals. See "Risk Factors" for a discussion of
these risks.

This Prospectus contains concise information about the Fund of which you
should be aware before investing. Additional information has been filed with
the Securities and Exchange Commission and is contained in a Statement of
Additional Information (the "SAI"), dated March 31, 1994. You may obtain a copy
of the SAI free of charge by request to the Fund or its Underwriter, Waddell &
Reed, Inc., at the address or telephone number shown below. The SAI is
incorporated by reference into this Prospectus and you will not be aware of all
facts unless you read both this Prospectus and the SAI.

Retain This Prospectus For Future Reference

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

This Supplement is required by The Office of The Commissioner of Securities of
the State of Wisconsin

Section SEC 3.09(1)(c), Wis. Adm. Code permits an open-end investment company to
invest up to 10% of its assets in precious metals. This Fund may invest up to
25% of its assets in a combination of gold, silver and platinum bullion and
coins. Thus, the Fund does not comply with the fairness standards set by the
Office of the Wisconsin Commissioner of Securities. See page 5. This Fund has
been registered for sale in the State of Wisconsin.

To be attached to the front cover page of the United Gold & Government Fund,
Inc. Prospectus

NUS2013WI

<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
Summary of Expenses

Shareholder Transaction Expenses
- --------------------------------

Maximum Sales Load Imposed on Purchases 5.75%
(as a percentage of offering price)

Maximum Sales Load Imposed on Reinvested None
Dividends (as a percentage of offering price)

Deferred Sales Load (as a percentage
of original purchase price or redemption
proceeds, as applicable) None

Redemption Fees (as a percentage
of amount redeemed, if applicable) None

Exchange Fee None

Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)

Management Fees 0.72%

12b-1 Service Fees* 0.25%

Other Expenses 0.94%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)

Total Fund Operating Expenses** 1.91%

Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of each
time period: $76 $114 $155 $268

The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown.

*Expense information reflects the 12b-1 service fee which became effective
October 1, 1993, which fee will not exceed .25% of the Fund's average annual
net assets. It is possible that long-term shareholders of the Fund may bear
12b-1 fees which are more than the economic equivalent of the maximum front-
end sales charge permitted under the rules of the National Association of
Securities Dealers, Inc.

**Expense information has been restated to reflect the current maximum 12b-1
service fee which became effective October 1, 1993.

<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
FINANCIAL HIGHLIGHTS
(Audited)

The following information has been audited by Price Waterhouse, independent
accountants, and should be read in conjunction with the financial statements and
notes thereto, together with the report of Price Waterhouse.
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
For the
period
from
September
4, 1985
For the fiscal year ended December 31, through
--------------------------------------------------------------------------- December 31,
1993 1992 1991 1990 1989 1988 1987 1986 1985*
---- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ....... $5.70 $6.63 $6.68 $8.66 $7.47 $7.95 $6.83 $5.07 $5.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment income ..... .04 .06 .15 .11 .16 .17 .14 .17 .06
Net realized and
unrealized gain (loss)
on investments .......... 4.27 (0.93) (0.05) (1.97) 1.20 (0.48) 1.93 1.89 .01
----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations ................ 4.31 (0.87) .10 (1.86) 1.36 (0.31) 2.07 2.06 .07
----- ----- ----- ----- ----- ----- ----- ----- -----
Less distributions:
Dividends from net
investment income ....... (0.04) (0.06) (0.15) (0.12) (0.17) (0.17) (0.13) (0.22) 0.00
Distributions from
capital gains ........... 0.00 0.00 0.00 0.00 0.00 0.00 (0.82) (0.08) 0.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ......... (0.04) (0.06) (0.15) (0.12) (0.17) (0.17) (0.95) (0.30) 0.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period ............ $9.97 $5.70 $6.63 $6.68 $8.66 $7.47 $7.95 $6.83 $5.07
===== ===== ===== ===== ===== ===== ===== ===== =====
Total return** ............. 75.82% -13.18% 1.47% -21.59% 18.42% -3.92% 30.36% 41.48% 4.39%
Net assets, end of period
(000 omitted) ............ $46,908 $27,136 $40,587 $54,371 $83,154 $99,460 $119,894 $17,695 $1,769
Ratio of expenses to average
net assets ............... 1.69% 1.88% 1.57% 1.56% 1.42% 1.42% 1.20% 1.48% 0.48%
Ratio of net investment income
to average net assets .... 0.48% 0.90% 2.11% 1.43% 1.91% 2.14% 1.81% 3.46% 2.17%
Portfolio turnover rate*** . 84.00% 61.50% 112.80% 82.42% 89.92% 100.19% 107.00% 159.66% 21.73%

*The Fund's inception date is February 28, 1985; however, since the Fund did not have investment activity or incur
expenses prior to the date of public offering, the per-share data and ratios are for a capital share outstanding for
the period from September 4, 1985 (initial public offering) through December 31, 1985. On an annual basis, the ratios
of expenses and net investment income to average net assets would have been approximately 1.50% and 6.77%, respectively.
**Total return calculated without taking into account the sales load deducted on an initial purchase.
***This rate is, in general, calculated by dividing the average value of the Fund's portfolio securities during the period
into the lesser of its purchases or sales of securities in the period, excluding short-term securities and bullion.
</TABLE>
<PAGE>
What is the Fund?

United Gold & Government Fund, Inc. is a corporation organized under
Maryland law on February 28, 1985. It is an open-end diversified management
investment company commonly called a "mutual fund." The Fund has a Board of
Directors which has overall responsibility for the management of its affairs.
For the names of the Directors and other information about them, see the SAI.
The Fund has only one class of shares. Each share has the same rights to
dividends and to vote. Shares are fully paid and nonassessable when bought.
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 a fundamental investment policy, which require
shareholder approval, will be presented to shareholders at an annual or special
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 to vote at such meeting, provided certain conditions
stated in the Bylaws of the Fund are met. There will normally be no meeting of
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 Investment
Company Act of 1940, as amended, 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.

Performance Information

From time to time Waddell & Reed, Inc. or the Fund may include performance
data in advertisements or in information furnished to present or prospective
shareholders. Fund performance may be shown by presenting one or more
performance measurements, including total return and performance rankings.

The Fund's total return is its overall change in value for the period shown
including the effect of reinvesting dividends and capital gains distributions
and any change in the net asset value per share. A cumulative total return
reflects the Fund's change in value over a stated period of time. An average
annual total return reflects the hypothetical annually compounded return that
would have produced the cumulative total return for a stated period if the
Fund's performance had been constant during each year of that period. Average
annual total returns are not actual year-by-year results and investors should
realize that total returns will fluctuate.

Standardized total return figures reflect payment of the maximum sales
charge. The Fund may also provide non-standardized performance information
which does not reflect deduction of such sales charge or which is for periods
other than those required to be presented or which differs otherwise from
standardized performance information. See the SAI for total return and method
of computation.

From time to time in advertisements and information furnished to present or
prospective shareholders the Fund may discuss its 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. The Fund may also compare its performance to
that of other selected mutual funds or selected recognized market indicators.
Performance information may be quoted numerically or presented in a table, graph
or other illustration.

All performance information which the Fund advertises or includes in
information provided to present or prospective shareholders is historical in
nature and is not intended to represent or guarantee future results. The value
of the Fund's shares when redeemed may be more or less than their original cost.

Information regarding the performance of the Fund is contained in the
Fund's annual report to shareholders which may be obtained without charge by
request to the Fund at the address or phone number shown on the cover of this
Prospectus.

Goal and Investment Policies of the Fund

During past inflationary periods minerals-related securities and precious
metals such as gold, silver and platinum generally have increased in value while
the value of debt securities has tended to decrease due to rising interest
rates. Conversely, during periods of disinflation or low inflation, the value
of debt securities has generally increased while the value of minerals-related
securities and precious metals has decreased. Low inflation is considered to be
generally in the 3% to 6% range, as measured by the Consumer Price Index. Also,
during periods of declining stock prices, the prices of gold, silver and
platinum may increase or remain stable while the value of minerals-related
securities may be subject to a general decline experienced by the stock market
as a whole. Based on these historical trends, the Fund's manager, Waddell &
Reed Investment Management Company (the "Manager"), will attempt to anticipate
inflationary and disinflationary periods and manage the Fund's investments in a
manner designed to achieve the Fund's goal.

The goal of the Fund is to seek a high total return to investors. Total
return is the aggregate of income and appreciation of share value. See above
for how total return is calculated. This goal is a fundamental policy which can
only be changed by shareholder vote. The Fund will attempt to achieve this goal
by investing (i) in minerals-related securities and gold, silver and platinum
during periods of actual or expected inflation; (ii) in U.S. Government
Securities during periods of actual or expected disinflation or low inflation;
and (iii) in gold, silver and platinum during periods when the environment for
investment in precious metals appears to be favorable. Minerals-related
securities are securities that offer an investment participation in the mining,
processing, production, exploration, refining or sales of gold, platinum, silver
or hydrocarbons. U.S. Government Securities are securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities.

As a matter of fundamental policy the Fund will not invest in other than
(i) those minerals-related securities which are related to the mining,
processing, production, exploration, refining or sales of gold; and/or (ii) U.S.
Government Securities; and/or (iii) gold, silver and platinum if thereafter less
than 65% of its total assets would be invested in these investments. It may
invest in securities other than minerals-related securities, U.S. Government
Securities and gold, silver or platinum, subject to this 65% test and to the
other restrictions set forth in this Prospectus and the SAI. As a fundamental
policy, the Fund may not invest more than 25% of its total assets in gold,
silver and platinum.

It is a fundamental policy of the Fund to concentrate (i.e., invest more
than 25% of its assets) its investments in an industry related to gold and other
minerals during periods of actual or anticipated inflation and up to 100% of its
assets may be so invested. During periods of actual or expected disinflation or
low inflation, up to 100% of the Fund's assets may be invested in U.S.
Government Securities of varying maturities and not more than 25% will be
invested in gold and other minerals-related securities. When the Fund is
invested in minerals-related securities it is anticipated that a substantial
portion, and up to 100%, of its assets will be invested in foreign securities.
See "Risk Factors."

The Manager believes that this strategy will allow the Fund to achieve a
higher total return than could be achieved if it remained invested in minerals-
related securities and precious metals during periods of low inflation or
disinflation because the income and value of minerals-related securities and
precious metals might decline during periods of disinflation or low inflation.
During such periods the Manager expects that higher income can be achieved and
that capital will be better preserved by investing in U.S. Government
Securities. It is expected that during periods of disinflation and low
inflation a greater portion of the total return of the Fund will be attributable
to income achieved through investment in U.S. Government Securities. It is
expected that during inflationary periods a greater portion of the total return
of the Fund will be attributable to appreciation from investment in minerals-
related securities and precious metals.

The Manager will evaluate numerous economic and monetary factors in making
a determination as to whether the economy is in or is likely to enter into an
inflationary or disinflationary period. Among the factors the Manager will
evaluate are changes in governmental fiscal and monetary policy, rates of
changes in the Consumer Price Index and actual and anticipated changes and rate
of change in the value of the U.S. dollar in relation to other key foreign
currencies, short- and long-term interest rates and the money supply. For
example, when the Manager believes that the economy is in an inflationary cycle
or an inflationary cycle is expected because of rising interest rates, a decline
in the value of the U.S. dollar and a higher rate of change in the Consumer
Price Index, the Fund generally will concentrate in minerals-related securities.
On the other hand, when interest rates are declining, the value of the U.S.
dollar is increasing, and the rate of change in the Consumer Price Index is
declining, the Fund generally will invest in U.S. Government Securities.
However, the Manager will take into account factors other than those given in
these examples and the Manager's subjective judgment of all factors it deems
relevant precludes the application of any formulas or mechanical determinations
in assessing the state of the economy. As of the date of this Prospectus, the
Manager anticipates that inflationary rates may not decline to such a degree
that higher income can be achieved and capital preserved by investing primarily
in U.S. Government Securities rather than by a weighting of the Fund's portfolio
toward minerals-related assets. The Manager's evaluation takes into
consideration political instability in certain parts of the world as well as
domestic and international economic factors.

The Fund anticipates that gold, silver and platinum will be purchased in
the form of bullion or coins or in the form of vault or other negotiable
receipts representing ownership of these metals. The Fund may incur expenses
for the shipping, storage and insurance of precious metals it purchases.

Precious metals prices are affected by various factors such as economic
conditions, political events and monetary policies. As a result, the price of
gold, silver or platinum may fluctuate widely. The sole source of return to the
Fund from such investments will be gains realized on sales; a negative return
will be realized if the metal is sold at a loss. Investments in precious metals
do not provide a yield.

Ownership of gold, silver and platinum may be prohibited by any one or more
of the states in which shares of the Fund are sold. In the event that any state
prohibits such investment, the Fund may elect not to make such investments. In
addition, the Fund's direct investment in these precious metals may be limited
by tax considerations. See "Taxes" in the SAI.

The securities the Fund will invest in include common stock, preferred
stock, debt securities and convertible securities. Common stock is an ownership
interest in a company. Preferred stock is also an ownership interest, but
usually is entitled to a stated amount of dividends. Debt securities are an
obligation to pay a specified sum on a specified date and to pay interest in the
meantime. Convertible securities may be exchanged for another type of
securities; for example, certain debt securities are convertible into common
stock. Common stocks generally offer the greatest possibilities for growth, but
may not offer as much safety of capital as preferred stocks or debt securities.
These securities in which the Fund may invest include preferred stock that
converts to common stock either automatically or after a specified period of
time or at the option of the issuer, and debt securities whose performance is
linked to a specified equity security or securities index. U.S. Government and
other debt securities increase and decrease in value, depending in large part on
changes in prevailing interest rates. An increase in interest rates may cause
the value of a debt security to go down; a decrease in interest rates may cause
the value of a debt security to go up. Preferred stocks may increase and
decrease in value for similar reasons. Changes in interest rates may cause
long-term obligations to fluctuate more in value than short-term obligations.
The Fund has no policy limiting the maturity of the debt instruments in which it
invests. As an operating (i.e., nonfundamental) policy, the Fund does not
intend to invest more than 5% of its assets in non-investment grade debt
securities. See the SAI for a discussion of the risks associated with non-
investment grade debt securities.

Securities issued or guaranteed by the U.S. Government include a variety of
Treasury securities that differ only in their interest rates, maturities and
dates of issuance. Except for U.S. Treasury securities, obligations of U.S.
Government agencies and instrumentalities may or may not be supported by the
full faith and credit of the United States. Many are backed by the right of the
issuer to borrow from the Treasury; others such as the Student Loan Marketing
Association are supported by discretionary authority of the U.S. Government to
purchase the agencies' obligations. In the case of securities not backed by the
full faith and credit of the United States, the Fund must look principally to
the agency issuing or guaranteeing the obligation for ultimate repayment, and
may not be able to assert or claim against the United States itself in the event
the agency or instrumentality does not meet its commitment. The Fund will
invest in securities of such instrumentality only when the Manager is satisfied
that the credit risk with respect to any such instrumentality is acceptable.

Among the U.S. Government Securities that the Fund may purchase are
"mortgage-backed securities" of the Government National Mortgage Association
("Ginnie Mae"), the Federal Home Loan Mortgage Association ("Freddie Mac") and
the Federal National Mortgage Association ("Fannie Mae"). There is no
percentage limitation on its purchase of these securities. These mortgage-
backed securities include "pass-through" securities, participation certificates
and collateralized mortgage obligations ("CMOs"). The yield characteristics of
mortgage-backed securities, including CMOs, in which the Fund may invest differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently on mortgage-backed and
asset-backed securities and that principal may be prepaid at any time because
the underlying mortgage loans or other assets generally may be prepaid at any
time. As a result, if the Fund purchases these securities at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity while
a prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if the Fund purchases these
securities at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will reduce, yield to maturity. Accelerated
prepayments on securities purchased by the Fund at a premium also impose a risk
of loss of principal because the premium may not have been fully amortized at
the time the principal is repaid in full. Timely payment of principal and
interest is guaranteed by the full faith and credit of the United States as to
Ginnie Mae pass-through securities but not as to obligations of Freddie Mac and
Fannie Mae which are backed by the right of the issuer to borrow from the
Treasury. There is no guarantee against market decline of the value of these
securities or shares of the Fund. It is possible that the availability and the
marketability (i.e., liquidity) of the securities discussed in this paragraph
could be adversely affected by actions of the U.S. Government to tighten the
availability of its credit. More information about the characteristics of
Treasury securities and the U.S. Government agencies which issue or guarantee
such securities is contained in the SAI.

The Fund may purchase U.S. Government Securities on a when-issued or
delayed delivery basis or sell them on a delayed delivery basis in order to
secure what is considered to be an advantageous price and yield at the time of
entering into the transaction. From the time of entering into the transaction
until the transaction is completed, the U.S. Government Securities so purchased
or sold are subject to market fluctuation. See the SAI for further information
about these transactions.

The Fund may buy and write (sell) put and call options on U.S. Government
Securities or write calls on securities whether or not they are U.S. Government
Securities subject to certain limitations which are set forth in the SAI. Calls
written by the Fund must be covered (i.e., the Fund must own the securities
which are subject to the call or have the right to acquire them without
additional payment). It may write options on securities for the purpose of
increasing its income by receiving premiums paid by the purchaser of the
options. It may purchase calls to take advantage of an expected rise in the
market value of securities which the Fund does not hold in its portfolio.

It may purchase puts on related investments it owns ("protective puts") or
on related investments it does not own ("nonprotective puts"). Buying a
protective put permits the Fund to protect itself during the put period against
a decline in the value of the related investments below the exercise price by
selling them through the exercise of the put. Buying a nonprotective put
permits the Fund, if the market price of the related investments is below the
put price during the put period, either to resell the put or to buy the related
investments and sell them at the exercise price. 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 investment.

The Fund may also buy and sell interest rate futures contracts relating to
U.S. Government Securities ("Government Securities Futures") and options on such
interest rate futures contracts for the purpose of hedging the value of its
securities portfolio against future changes in interest rates. At the present
time, the U.S. Government Securities to which Government Securities Futures
relate are long-term U.S. Treasury Bonds, Treasury Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities and three-
month U.S. Treasury Bills. It is a fundamental policy that the Fund's use of
options and futures contracts is limited to those relating to U.S. Government
Securities except for the writing of covered call options as stated above. When
the Fund is invested in U.S. Government Securities it may employ a hedging
strategy as a temporary measure in lieu of immediately restructuring the Fund's
portfolio in response to changes in interest rates or other economic indicators.
This will allow the portfolio to be restructured by lengthening or shortening
maturities or changing the quality of the Fund's portfolio securities in a more
orderly fashion should the economic indicators continue to support a
restructuring. See "Risk Factors" and "Options and Futures" for information
concerning the risks of investments in options and futures.

The Fund may enter into forward foreign currency exchange contracts
("Forward Contracts") provided that it does not thereafter have more than 15% of
its assets committed to the consummation of such contracts. A Forward Contract
is an obligation to purchase or sell specific currency at a future date at a
fixed price. The Fund enters into Forward Contracts to attempt to protect
against losses which may result from an adverse change in the relationship
between the U.S. dollar and a foreign currency but at the same time Forward
Contracts tend to limit any potential gain which might result from currency
changes. There are risks associated with the use of such contracts due to the
difficulty of accurately predicting short-term currency market movements. See
the SAI for further discussion.

The Fund may invest up to 2% of its assets in warrants which are rights to
purchase securities.

For the purpose of increasing income, the Fund may purchase securities
subject to repurchase agreements (which can be considered as collateralized
loans by the Fund) but may not cause more than ten percent of its net assets to
be subject to repurchase agreements not terminable within seven days. The
majority of the repurchase transactions in which the Fund would engage run from
day to day, and the delivery pursuant to the resale typically will occur within
one to five days of the purchase. The Fund's risk is limited to the ability of
the vendor to pay the agreed-upon sum upon the delivery date. The Fund may also
lend its securities for the purpose of realizing income. The Fund will not loan
more than 30% of its assets at any one time. The percentage limit and the
requirement that such loans be on a collateralized basis in accordance with
certain regulatory requirements are fundamental policies. There are certain
risks associated with lending securities in that the Fund may experience delays
in recovering the collateral or even loss of the collateral. See the SAI for
more information about these risks. The Fund may purchase restricted foreign
securities provided that after such purchase not more than 5% of its total
assets consist of such securities.

Due to their possible limited liquidity, the Fund may not make certain
investments if thereafter more than 10% of its net assets would consist of such
investments. The investments included in this 10% limit are: (i) repurchase
agreements not terminable within seven days; (ii) fixed time deposits (including
insured deposits) subject to withdrawal penalties other than overnight deposits;
(iii) restricted securities, i.e., securities which cannot freely be sold for
legal reasons; (iv) securities for which market quotations are not readily
available; and (v) unlisted options and their underlying collateral to the
extent such options are illiquid. However, this 10% limit does not include any
obligations payable at principal amount plus accrued interest on demand or
within seven days after demand, which, in the opinion of the Manager, have
minimal credit risk.

The Fund may purchase shares of investment companies which do not redeem
their shares provided that thereafter it does not have more than 10% of its
assets so invested, subject to the conditions stated in the SAI.

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 such securities during the year, excluding certain
short-term securities and bullion. Since the turnover rate of the Fund will be
affected by a number of factors, the Fund is unable to predict what rate the
Fund will have in any particular period or periods, although such rate is not
expected to exceed 100%. However, the rate could be substantially higher or
lower in any particular period. The factors which may affect the rate include
moving from a position emphasizing gold and other minerals-related securities to
a position emphasizing U.S. Government Securities or vice versa and the possible
necessary sales of securities to meet redemptions. The Fund may engage in
short-term trading and have a high portfolio turnover. Option transactions may
increase the turnover rate. This results in correspondingly greater commission
expenses and transaction costs and may result in tax consequences. See the SAI
for additional information.

There is no assurance that the Fund will achieve its goal and an investment
in the Fund should not be considered a complete investment program.

Risk Factors

Investments in minerals-related securities and precious metals are
considered speculative and involve substantial risks and special considerations,
including the following:

1. Risk of Price Fluctuations. Metals and minerals prices are affected by
various factors such as economic conditions, political events, monetary policies
and other factors. As a result, prices of minerals-related securities and of
gold, silver and platinum may fluctuate sharply.

2. Concentration of Source of Gold Supply and Control of Gold Sales. The
four largest producers of gold are the Republic of South Africa, the former
Union of Soviet Socialist Republics, Canada and the United States. Economic and
political conditions and objectives prevailing in these countries may have a
direct effect on the production and marketing of newly produced gold and sales
of central bank gold holdings. In South Africa, the activities of companies
engaged in gold mining are subject to the policies adopted by the Ministry of
Mines. The Reserve Bank of South Africa, as the sole authorized sales agent for
South African gold, has an influence on the price and timing of sales of South
African gold. Political and social conditions in South Africa and unsettled
political conditions prevailing in neighboring countries may pose risks to the
Fund, which may invest up to 100% of its assets in securities of South African
issuers.

3. Unpredictable International Monetary Policies, Economic and Political
Conditions. There is the possibility that under unusual international monetary
or political conditions, the Fund's assets might be less liquid or that the
change in value of its assets might be more volatile than would be the case with
other investments. In particular, the price of gold is affected by direct and
indirect use of it to settle net deficits and surpluses between nations.
Because the prices of metals and minerals may be affected by unpredictable
international monetary policies and economic conditions, there may be greater
likelihood of a more dramatic impact upon the market price of the Fund's
investments than of other investments.

4. Foreign Securities. A major portion of the Fund's assets will usually
be invested in foreign securities during periods of actual or anticipated
inflation. There are also certain risks associated with foreign securities not
usually associated with U.S. securities including absence of uniform accounting,
auditing and financial standards, less government regulation, changes in
currency rates and in exchange regulations, and political instability. See the
SAI for further discussions of these risks. When purchasing foreign securities,
the Fund may purchase American Depository Receipts ("ADR's"), which are
certificates issued by U.S. banks representing the right to receive securities
of a foreign issuer deposited with that or another bank, and may also purchase
securities of a foreign issuer directly in the foreign market. 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 would be desirable.

5. Failure to Anticipate Changes in Economic Cycles. In addition to the
risks discussed above, the Fund's investment success will be dependent to a high
degree on the Manager's ability to anticipate the onset and termination of
inflationary and disinflationary cycles. A failure to anticipate a
disinflationary cycle could result in the Fund's assets being disproportionately
invested in minerals-related securities. Conversely, a failure to predict an
inflationary cycle could result in the Fund's assets being disproportionately
invested in U.S. Government Securities. The Fund's investment success will be
dependent to a high degree on the validity of the premise that the values of
minerals-related securities will move in a different direction than the values
of U.S. Government Securities during periods of inflation or disinflation. If
the values of both types of securities move down during the same period of time
the value of the shareholder's investment will decline rather than stabilize or
increase, as anticipated, regardless of whether the Fund is invested in
minerals-related securities or U.S. Government Securities.

Options and Futures

The primary risks associated with the use of options and futures are: (i)
loss of the increase in the value of securities owned by the Fund if a call
option sold by the Fund is exercised thereby requiring the Fund to deliver the
securities at a price which is lower than the market value of the securities;
(ii) incurring higher costs to purchase securities which are subject to a put
option sold by the Fund if the put is exercised and the option price is higher
than the market value of the security; (iii) loss of premiums paid by the Fund
on options it purchases; (iv) imperfect correlation between the change in the
market value of the U.S. Government Securities held in the Fund's portfolio and
the prices of futures and options thereon relating to U.S. Government Securities
purchased or sold by the Fund; (v) incorrect forecasts by the Manager concerning
interest rates which may result in the hedge being ineffective; and (vi)
possible lack of a liquid secondary market for any option or futures contract;
the resulting inability to close an option or futures position could have an
adverse impact on the Fund's ability to hedge or increase income. For a hedge
to be completely effective, the price change of the hedging instrument should
equal the price change of the security being hedged. Such equal price changes
are not always possible because the investment underlying the hedging instrument
may not be the same investment that is being hedged. Because the Fund may write
certain uncovered calls on Debt Futures, there is the additional risk that if an
uncovered call the Fund wrote was exercised, to meet the exercise the Fund would
have to purchase the future at whatever the market price might be at the time of
the exercise. See the SAI for further information about these instruments and
their risks.

Management and Services

Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the inception of the investment company, whichever was later, and
to TMK/United Funds, Inc. since its inception. On January 8, 1992, subject to
the authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned
its investment management duties (and assigned its professional staff for
investment management services) to Waddell & Reed Investment Management Company,
a wholly-owned subsidiary of Waddell & Reed, Inc. The Manager has also served
as investment manager for Waddell & Reed Funds, Inc. since its inception in
September 1992 and Torchmark Government Securities Fund, Inc. and Torchmark
Insured Tax-Free Fund, Inc. since each commenced operations in February 1993.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter for
each of the investment companies in the United Group of Mutual Funds, TMK/United
Funds, Inc. and Waddell & Reed Funds, Inc. Waddell & Reed, Inc. is an indirect
subsidiary of Torchmark Corporation, a holding company, and United Investors
Management Company, a holding company, and a direct subsidiary of Waddell & Reed
Financial Services, Inc., a holding company.

Subject to authority of the Fund's Board of Directors, the Manager provides
investment advice and supervises investments for which it is paid a fee
consisting of two elements: (i) a "Specific" fee 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 net assets and (ii) a pro rata participation based on the relative net asset
size of the Fund in a "Group" fee computed each day on the combined net asset
value of all of the funds in the United Group at the annual rates shown in the
following table. The fee is accrued and paid daily. Prior to the above-
described assignment to the Manager on January 8, 1992, the fees were paid to
Waddell & Reed, Inc.

Group Fee Rate

Group Net Asset Level Annual Group
(all dollars in millions) Fee Rate for Each Level
- ------------------------- -----------------------

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%

Waddell & Reed Services Company, a subsidiary of Waddell & Reed, Inc., acts
as transfer agent ("Shareholder Servicing Agent") for the Fund and processes the
payments of dividends. See the SAI for the fees paid for these services.
Inquiries concerning shareholder accounts should be sent to that company at the
address shown on the inside back cover of this Prospectus or to the Fund at the
address shown on the front cover of this Prospectus.

Waddell & Reed Services Company also acts as agent ("Accounting Services
Agent") in providing bookkeeping and accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays the Accounting Services Agent a monthly fee of one-twelfth of the
annual fee shown in the following table.

Accounting Services Fee

Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
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

Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to Waddell &
Reed, Inc., the principal underwriter for the Fund, in an amount not to exceed
.25% of the Fund's average annual net assets. The fee is to be paid to
reimburse Waddell & Reed, Inc. for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts. In particular, the Service Plan and a related Service
Agreement between the Fund and Waddell & Reed, Inc. contemplate that these
expenditures may include costs and expenses incurred by Waddell & Reed, Inc. and
its affiliates in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located at
field sales offices; engaging in other activities useful in providing personal
services to Fund shareholders and/or maintenance of shareholder accounts; and in
compensating broker-dealers who may regularly sell Fund shares for providing
shareholder services and/or maintaining shareholder accounts. See the SAI for
additional information and terms of the Service Plan.

The combined net asset values of all of the funds in the United Group were
approximately $11.1 billion as of December 31, 1993. Management fees for the
fiscal year ended December 31, 1993 were 0.72% of the Fund's average net assets.
The Fund's total expenses for that year were 1.69% of its average net assets.

The Manager places transactions for the Fund's portfolio and in doing so
may consider sales of shares of the Fund and other funds it manages as a factor
in the selection of brokers to execute portfolio transactions. See the SAI for
further information.

Michael L. Avery is primarily responsible for the day-to-day management of
the portfolio of the Fund. Mr. Avery is Vice President of the Manager and Vice
President of the Fund. Mr. Avery has held his Fund responsibilities since
February 1, 1994. He has been an employee of the Manager since January 8, 1992.
Prior to that date, Mr. Avery was an employee of Waddell & Reed, Inc., the then
investment manager of the Fund, and served in various capacities. Other members
of the Manager's investment management department provide input on market
outlook, economic conditions, investment research and other considerations
relating to the Fund's investments.

Dividends, Distributions and Taxes

Ordinarily, dividends are paid quarterly from net investment income, which
includes dividends, accrued interest, earned discount, and other income earned
on portfolio securities less expenses. The Fund also distributes substantially
all of its net capital gains (the excess of net long-term capital gains over net
short-term capital losses) and net short-term capital gains, if any, after
deducting any available capital loss carryovers, and any net realized gains from
foreign currency transactions, with its regular dividend at the end of the
calendar year. The Fund may make additional distributions if necessary to avoid
Federal income or excise taxes on certain undistributed income and capital
gains. You have the option to receive dividends and distributions in cash, to
reinvest them without charge or to receive dividends in cash and reinvest
distributions, as you may instruct. In the absence of instructions, dividends
and distributions will be reinvested.

The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986 so that it will be
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) and net capital
gains that is distributed to its shareholders.

Dividends from the Fund's investment company taxable income are taxable to
you as ordinary income, to the extent of the Fund's earnings and profits,
whether received in cash or reinvested in additional Fund shares. Distributions
of the Fund's realized net capital gains, when designated as such, are taxable
to you as long-term capital gains, whether received in cash or reinvested in
additional Fund shares and regardless of the length of time you have owned your
shares. The Fund notifies you after each calendar year-end as to the amounts of
dividends and distributions paid (or deemed paid) to you for that year.

A portion of the dividends paid by the Fund, whether received in cash or
reinvested 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 alternative minimum
tax.

The Fund is required to withhold 31% of all dividends, distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not furnish the Fund with a correct tax identification
number. Withholding at that rate from dividends and distributions also is
required for such shareholders who otherwise are subject to backup withholding.

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 your adjusted
basis 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 shares through a redemption or exchange within 90 days after
your purchase thereof and subsequently 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. In these cases, any
gain on the disposition of the 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 after redeeming other Fund shares at a loss, all or part of that loss will
not be deductible and will increase the basis of the newly purchased shares.

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

Purchase of Shares

You may purchase shares through Waddell & Reed, Inc. and its sales
representatives. To open an account you must complete an application. Orders
are accepted only at the home office of Waddell & Reed, Inc. (see inside back
cover of this Prospectus for address) and it need not accept any orders. The
offering price of a share is its net asset value next determined following
acceptance plus the sales charge shown in the table below. This net asset value
per share is the value of the Fund's assets, less liabilities, divided by the
number of shares outstanding. Net asset value is determined once each day as of
the later of the close of the regular session of the New York Stock Exchange or
the close of the regular session of any domestic securities exchange or
commodities exchange on which an option or future held by the Fund is traded on
each day the New York Stock Exchange is open. The Fund may invest in securities
listed on foreign exchanges which may trade on Saturdays and on customary U.S.
national business holidays when the New York Stock Exchange is closed.
Consequently, the net asset value of Fund shares may be significantly affected
on days when the Fund does not price its shares and when the shareholder has no
access to the Fund. The Fund's portfolio securities listed or traded on an
exchange are valued using market quotations or, if not available, at their fair
value in a manner determined in good faith by the Board of Directors. U.S.
Government Securities are valued according to prices quoted by a dealer in U.S.
Government Securities which offers a pricing service. Gold and silver bullion
will be valued at the last spot settlement price for current delivery as
calculated by the Commodity Exchange, Inc. as of the close of the regular
session of the Exchange. Platinum bullion will be valued at the last spot
settlement price as calculated by the New York Mercantile Exchange as of the
close of the regular session of that Exchange. If either exchange is closed on
a day when the New York Stock Exchange is open, value will be determined by
averaging quotes from two major dealers in the particular precious metal.
Short-term debt securities are valued at amortized cost which approximates
market value. Other assets are valued at their fair value.

Sales Charge
Sales Charge as Approximate
as Percent of Percent of
Size of Purchase Offering Price Amount Invested

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

Ordinarily, the minimum initial investment is $500. A $50 minimum initial
investment pertains to certain retirement plan accounts. A $100 minimum initial
investment pertains to certain exchanges of shares from other funds in the
United Group.

A shareholder may arrange with Waddell & Reed, Inc. to purchase shares by
having regular monthly withdrawals of $25 or more made from a checking account
or by having regular monthly exchanges of shares with a value of $25 or more
made from United Cash Management, Inc., subject to certain conditions explained
in the SAI.

Lower sales charges are available by combining additional purchases of any
of the funds in the United Group except United Municipal Bond Fund, Inc., United
Cash Management, Inc., United Government Securities Fund, Inc. and United
Municipal High Income Fund, Inc. with net asset value of shares already held
("rights of accumulation") and by grouping all purchases made during a thirteen-
month period ("Statement of Intention"). Shares of another fund purchased
through a "contractual plan" may not be included unless the plan has been
completed. Purchases by certain related persons may be grouped. Shares of this
Fund may be exchanged for shares of another fund in the United Group without
payment of an additional sales charge. Subject to certain conditions, automatic
monthly exchanges of shares of United Cash Management, Inc. and exchanges of
shares of certain other funds in the United Group (listed on back cover of this
Prospectus) may be made into the Fund. These exchange privileges may be
eliminated or modified at any time, upon notice in certain instances.
Information as to rights of accumulation, Statements of Intention, grouping by
related persons, exchange privileges, Flexible Withdrawal Service, Individual
Retirement Accounts, Section 403(b) plans, Keogh, 401(k), 457 plans and other
qualified employee benefit plans is contained in the SAI. Applicable forms are
available from Waddell & Reed, Inc.'s representatives.

Fund shares may be purchased at net asset value by the Directors and
officers of the Fund, employees of Waddell & Reed, Inc., employees of their
affiliates, sales representatives of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and sales representative. Purchases in certain
retirement plans and certain trusts for these persons may also be made at net
asset value. Purchases in a 401(k) plan having 100 or more eligible employees
may be made at net asset value. Shares may also be issued at net asset value in
a merger, acquisition or exchange offer made pursuant to a plan of
reorganization to which the Fund is a party. See the SAI for additional
information.

Redemption

You have the right to sell your shares back to the Fund (redeem) at any
time by sending a written request to the address on the front cover of this
Prospectus, stating how many shares or the amount in dollars you wish to redeem.
The written request must be in good order which requires that if more than one
person owns the shares, each owner must sign the written request. If you hold a
certificate, it must be properly endorsed and sent to the Fund. The Fund
reserves the right to require a signature guarantee by a national bank, a
federally chartered savings and loan or a member firm of a national stock
exchange or other eligible guarantor in accordance with procedures of the Fund's
transfer agent if the request for redemption is made by a corporation,
partnership or fiduciary, or if the redemption request is made by, or if
redemption proceeds are payable to, someone other than the owner of record. If
you recently purchased the shares by check, the payment of redemption proceeds
on these shares may be delayed. You may arrange for the bank upon which the
purchase check was drawn to provide to the Fund telephone or written assurance,
satisfactory to the Fund, that the check has cleared and been honored. If no
such assurance is given, payment of the redemption proceeds on these shares will
be delayed until the earlier of 10 days or when the Fund has been able to verify
that your purchase check has cleared and been honored.

The Fund will redeem your shares at their net asset value (which may be
more or less than what you paid) next computed after receipt of your written
request for redemption in good order at the Fund's address shown on the front
cover of this Prospectus. Payment is made within seven days, unless delayed
because of emergency conditions determined by the Securities and Exchange
Commission, when the New York Stock Exchange is closed (other than on weekends
and holidays) or when trading on the Exchange is restricted. Payment is made in
cash, although under extraordinary conditions redemptions may be made in
portfolio securities.

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

Under the terms of the 401(k) plan which Waddell & Reed, Inc. has
available, the plan may have the right to make a loan to a plan participant by
redeeming Fund shares held by the plan. Principal and interest payments on the
loan made in accordance with the terms of the plan may be reinvested by the
plan, without payment of a sales charge, in shares of any of the funds in the
United Group in which the plan may invest.

The Fund reserves the right to redeem at net asset value all shares owned
by a particular shareholder in the Fund having an aggregate net asset value less
than $500. The Fund will give the shareholder notice of intention to redeem and
a 60-day opportunity to purchase a sufficient number of additional shares to
bring the net asset value of his or her shares in the Fund to $500. See the SAI
for further information.

Information concerning the establishment of automatic payments from an
account is available from representatives of Waddell & Reed, Inc.
<PAGE>
THE INVESTMENTS OF
UNITED GOLD & GOVERNMENT FUND, INC.
DECEMBER 31, 1993

Troy
Ounces Value

BULLION
Gold* .................................. 12,446 $ 4,863,897
Platinum* .............................. 2,500 987,250

TOTAL BULLION - 12.47% $ 5,851,147
(Cost: $5,687,434)

COMMON STOCKS AND WARRANTS
Gold
Australia - 10.83%
Gold Mines of Kalgoorlie Limited . ...... 531,660 480,089
Gold Mines of Kalgoorlie
Limited, Warrants* .................... 2,000,000 1,112,000
Mount Burgess Gold Mining Company NL* .. 250,000 202,000
Normandy Poseiden Limited .............. 902,100 1,622,878
Nuigini Mining Limited* ................ 309,900 1,157,477
Resolute Resources Limited* ............ 415,200 507,374
Total ................................. 5,081,818

Canada - 30.65%
Agnico-Eagle Mines, Ltd. ............... 100,000 1,305,000
Euro-Nevada Mining Corporation Limited . 110,400 3,935,981
Franco-Nevada Mining Corporation Limited 56,900 3,917,281
International Musto Explorations Ltd.* . 100,000 784,900
Platinova Resources Ltd.* .............. 400,000 938,000
Royal Oak Mines Inc.* .................. 100,000 472,800
TVX Gold Inc.* ......................... 300,000 1,985,700
Venezuelan Goldfields Ltd.* ............ 109,600 1,036,378
Total ................................. 14,376,040

South Africa - 18.40%
Beatrix Mines Limited, ADR ............. 69,000 487,347
Driefontein Consolidated Limited, ADR .. 25,000 321,875
Free State Consolidated Gold Mines, ADR 135,000 2,303,370
Hartebeestfontein Gold Mining Company
Limited, ADR .......................... 141,400 848,400
Vaal Reefs Exploration & Mining Company
Limited, New Shares, ADR .............. 225,000 2,256,975
Western Deep Levels, Ltd., ADR ......... 50,000 2,412,500
Total.................................. 8,630,467

See Notes to Schedule of Investments on page 18.
<PAGE>
THE INVESTMENTS OF
UNITED GOLD & GOVERNMENT FUND, INC.
DECEMBER 31, 1993

Shares Value

COMMON STOCKS AND WARRANTS (Continued)
Gold (Continued)
United States - 3.88%
Battle Mountain Gold Company ........... 100,000 $ 1,012,500
Canyon Resources Corporation* .......... 200,000 806,200
Total ................................. 1,818,700

Total Gold Securities - 63.76% 29,907,025

Other Metals
South Africa - 1.80%
De Beers Consolidated Mines Limited,
ADR ................................... 35,000 844,375

United Kingdom - 2.31%
RTZ Corporation PLC (The) .............. 90,344 1,083,676

United States - 4.25%
AMAX Inc. .............................. 106,137 729,692
Cyprus Minerals Company ................ 12,500 323,438
Newmont Mining Corporation ............. 20,000 942,500
Total ................................. 1,995,630

Total Other Metals Securities - 8.36% 3,923,681

Miscellaneous
Public Utilities - Gas - 1.71%
Louis Dreyfus Natural Gas Corp.* ....... 50,000 800,000

Steel - 1.79%
National Steel Corporation, Class B* ... 70,000 840,000

Total Miscellaneous - 3.50% 1,640,000

TOTAL COMMON STOCKS AND WARRANTS - 75.62% $35,470,706
(Cost: $20,963,982)

PREFERRED STOCKS - 5.10%
Gold
United States
Battle Mountain Gold Company,
Convertible ........................... 10,000 645,000
Echo Bay Finance Corp., Convertible .... 40,000 1,745,000
Total ................................. $ 2,390,000
(Cost: $1,498,700)

See Notes to Schedule of Investments on page 18.
<PAGE>
THE INVESTMENTS OF
UNITED GOLD & GOVERNMENT FUND, INC.
DECEMBER 31, 1993

Principal
Amount in
Thousands Value

TOTAL SHORT-TERM SECURITIES - 6.97%
J. P. Morgan Securities, 3.1%
Repurchase Agreement dated
12-31-93, to be repurchased
at $3,270,845 on 1-3-94** ............. $3,270 $ 3,270,000
(Cost: $3,270,000)

TOTAL INVESTMENTS - 100.16% $46,981,853
(Cost: $31,420,116)

LIABILITIES, NET OF CASH AND OTHER ASSETS- (0.16%) (73,940)

NET ASSETS - 100.00% $46,907,913

Notes To Schedule Of Investments

*Non-income producing.

**Collateralized by $2,780,000 U.S. Treasury Notes, 8.375% due 8-15-2008, market
value and accrued interest aggregate $3,336,840.

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.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1993

Assets
Investments -- at value (Notes 1 and 3):
Bullion (cost -- $5,687,434) .................... $ 5,851,147
Securities (cost -- $25,732,682) ................ 41,130,706
-----------
46,981,853
Cash ............................................. 8,013
Receivables:
Fund shares sold ................................ 60,174
Interest and dividends .......................... 53,939
Prepaid insurance premium ........................ 10,482
-----------
Total assets .................................. 47,114,461
-----------
Liabilities
Payable for Fund shares redeemed ................. 164,395
Accrued transfer agency and dividend disbursing .. 17,636
Accrued service fee ............................... 8,141
Accrued accounting services fee .................. 1,667
Other ............................................ 14,709
-----------
Total liabilities ............................. 206,548
-----------
Total net assets ............................. $46,907,913
===========
Net Assets
$1.00 par value capital stock, authorized --
100,000,000; shares outstanding -- 4,704,220
Capital stock ................................... $ 4,704,220
Additional paid-in capital ...................... 61,622,989
Accumulated undistributed income (loss):
Accumulated undistributed net investment income . 8,046
Accumulated net realized loss on investment
transactions .................................. (34,989,079)
Net unrealized appreciation in value of
investments at end of period .................. 15,561,737
-----------
Net assets applicable to outstanding units
of capital.................................... $46,907,913
===========
Net asset value per share (net assets divided by
shares outstanding) .............................. $ 9.97
Sales load (offering price x 5.75%) ................ .61
------
Offering price per share (net asset value
divided by 94.25%) ............................... $10.58
======

On sales of $100,000 or more the sales load
is reduced as set forth on page .

See notes to financial statements.

<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended December 31, 1993

Investment Income
Income:
Dividends (net of foreign withholding taxes
of $64,709) .................................... $ 579,864
Interest ........................................ 230,971
-----------
Total income .................................. 810,835
-----------
Expenses (Note 2):
Investment management fee ....................... 268,796
Transfer agency and dividend disbursing ......... 211,949
Custodian fees .................................. 34,928
Accounting services fee ......................... 20,000
Audit fees ...................................... 19,976
Service fee ..................................... 11,554
Legal fees ...................................... 1,798
Other ........................................... 63,249
-----------
Total expenses ................................ 632,250
-----------
Net investment income ........................ 178,585
-----------

Realized and Unrealized Gain on Investments
Realized net loss on bullion ...................... (5,405)
Realized net gain on securities .................. 2,100,574
-----------
Realized net gain on investments ................ 2,095,169
-----------
Unrealized appreciation in value of bullion
during the period ............................... 427,352
Unrealized appreciation in value of securities
during the period ............................... 17,417,369
-----------
Unrealized appreciation in value of investments
during the period ............................. 17,844,721
-----------
Net gain on investments ....................... 19,939,890
-----------
Net increase in net assets resulting from
operations ................................. $20,118,475
===========

See notes to financial statements.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS

For the fiscal year
ended December 31,
-----------------------
1993 1992
----------- -----------
Increase (Decrease) in Net Assets
Operations:
Net investment income ............... $ 178,585 $ 302,931
Realized net gain (loss) on
investments ....................... 2,095,169 (3,804,756)
Unrealized appreciation
(depreciation) .................... 17,844,721 (819,102)
----------- -----------
Net increase (decrease) in net
assets resulting from
operations ....................... 20,118,475 (4,320,927)
----------- -----------
Dividends to shareholders from
net investment income* .............. (188,719) (302,741)
----------- -----------
Capital share transactions:
Proceeds from sale of shares
(1,720,096 and 417,887 shares,
respectively) ...................... 13,848,251 2,625,548
Proceeds from reinvestment of
dividends (23,934 and 48,731
shares, respectively) ............. 185,584 297,163
Payments for shares redeemed
(1,796,401 and 1,834,816 shares,
respectively) ...................... (14,191,833) (11,749,689)
----------- -----------
Net decrease in net assets
resulting from capital
share transactions ............... (157,998) (8,826,978)
----------- -----------
Total increase (decrease) ........ 19,771,758 (13,450,646)
Net Assets
Beginning of period .................. 27,136,155 40,586,801
----------- -----------
End of period ........................ $46,907,913 $27,136,155
=========== ===========
Undistributed net investment
income ............................ $ 8,046 $ 2,506
=========== ===========

*See "Financial Highlights" on page 22.

See notes to financial statements.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:

<TABLE>
<CAPTION>
For the
period
from
September
4, 1985
For the fiscal year ended December 31, through
--------------------------------------------------------------------------- December 31,
1993 1992 1991 1990 1989 1988 1987 1986 1985*
---- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ....... $5.70 $6.63 $6.68 $8.66 $7.47 $7.95 $6.83 $5.07 $5.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment income ..... .04 .06 .15 .11 .16 .17 .14 .17 .06
Net realized and
unrealized gain (loss)
on investments .......... 4.27 (0.93) (0.05) (1.97) 1.20 (0.48) 1.93 1.89 .01
----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations ................ 4.31 (0.87) .10 (1.86) 1.36 (0.31) 2.07 2.06 .07
----- ----- ----- ----- ----- ----- ----- ----- -----
Less distributions:
Dividends from net
investment income ....... (0.04) (0.06) (0.15) (0.12) (0.17) (0.17) (0.13) (0.22) 0.00
Distributions from
capital gains ........... 0.00 0.00 0.00 0.00 0.00 0.00 (0.82) (0.08) 0.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ......... (0.04) (0.06) (0.15) (0.12) (0.17) (0.17) (0.95) (0.30) 0.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period ............ $9.97 $5.70 $6.63 $6.68 $8.66 $7.47 $7.95 $6.83 $5.07
===== ===== ===== ===== ===== ===== ===== ===== =====
Total return** ............. 75.82% -13.18% 1.47% -21.59% 18.42% -3.92% 30.36% 41.48% 4.39%
Net assets, end of period
(000 omitted) ............ $46,908 $27,136 $40,587 $54,371 $83,154 $99,460 $119,894 $17,695 $1,769
Ratio of expenses to average
net assets ............... 1.69% 1.88% 1.57% 1.56% 1.42% 1.42% 1.20% 1.48% 0.48%
Ratio of net investment income
to average net assets .... 0.48% 0.90% 2.11% 1.43% 1.91% 2.14% 1.81% 3.46% 2.17%
Portfolio turnover rate*** . 84.00% 61.50% 112.80% 82.42% 89.92% 100.19% 107.00% 159.66% 21.73%

<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1993

NOTE 1 -- Significant Accounting Policies

United Gold & Government Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. 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 major 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 NASDAQ
(National Association of Securities Dealers Automated Quotations) which
provides information on bid and asked or closing prices quoted by major
dealers in such stocks. Gold and silver bullion are valued at the last
spot settlement price for current delivery as calculated by the Commodity
Exchange, Inc. as of the close of that Exchange. Platinum bullion is
valued at the last spot settlement price as calculated by the New York
Mercantile Exchange as of the close of that Exchange. Securities for which
quotations are not readily available are valued as determined in good faith
in accordance with procedures established by and under the general
supervision of the Fund's Board of Directors. 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. Original issue discount (as defined in the Internal
Revenue Code), premiums on the purchase of bonds and post-1984 market
discount are amortized for both financial and tax reporting purposes over
the remaining lives of the bonds. Dividend income is recorded on the ex-
dividend date except that certain dividends from foreign securities are
recorded as soon as the Fund is informed of the ex-dividend date. Interest
income is recorded on the accrual basis. See Note 3 -- Investment
Securities Transactions.

C. Foreign currency translations -- All assets and liabilities expressed in
foreign currencies are converted into U.S. dollars at the mean of the bid
and asked prices of such currencies against U.S. dollars at the end of the
respective period. The cost of portfolio securities is translated at the
rates of exchange prevailing when acquired. Income is translated at rates
of exchange prevailing when accrued or received. The resulting transaction
exchange gains or losses have been included in the results of operations
with the type of transaction giving rise to the gain or loss.

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 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.

E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the record date. During the twelve months
ended December 31, 1993, the Fund adopted Statement of Position 93-2
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.
Accordingly, permanent book and tax basis differences relating to future
shareholder distributions have been reclassified to additional paid-in
capital. As of January 1, 1993, the cumulative effect of such differences
totaling $137 was reclassified from accumulated undistributed net realized
gain on investment transactions to additional paid-in capital. At the same
time, $15,674 was reclassified from undistributed net investment income to
accumulated undistributed net realized gain on investment transactions to
more appropriately conform book and tax treatment of dividend distributions
paid to shareholders. Net investment income, net realized gains and net
assets were not affected by this change.

F. Repurchase agreements -- Repurchase agreements are collateralized by the
value of the resold securities which, during the entire period of the
agreement, remains at least equal to the value of the loan, including
accrued interest thereon. The collateral for the repurchase agreement is
held by the Fund's custodian bank.

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 $11.1 billion of
combined net assets at December 31, 1993) 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.

Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
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

At present, the Fund operates under state expense requirements which limit
the amount of aggregate annual expenses, adjusted for certain excess expenses,
that the Fund may incur during its fiscal year. The Manager will reimburse the
Fund for any expenses in excess of the limitation. No such reimbursement is
required for the period ended December 31, 1993.

The Fund pays WARSCO a per account charge for transfer agency and dividend
disbursement services of $1.0208 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. 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 direct and
indirect gross sales commissions (which are not an expense of the Fund) of
$180,359, out of which W&R paid sales commissions of $100,480 and all expenses
in connection with the sale of Fund shares, except for registration fees and
related expenses.

On September 28, 1993, shareholders of the Fund approved the adoption of a
12b-1 Service Plan with a maximum fee of .25%. The Plan went into effect
October 1, 1993.

The Fund paid Directors' fees of $1,337.

W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.

NOTE 3 -- Investment Securities Transactions

Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $25,596,671 while proceeds from maturities and sales
aggregated $26,470,912. Purchases of bullion aggregated $3,883,964 with proceeds
from the sale of bullion aggregating $727,021. Purchases of short-term
securities aggregated $808,115,000 while proceeds from maturities and sales
aggregated $807,743,028. Proceeds from the sale of U.S. Government securities
aggregated $3,093,010, resulting in a gain of $630,383. There was no gain or
loss on the sale of short-term securities.

For Federal income tax purposes, cost of investments owned at December 31,
1993 was $31,420,116, resulting in net unrealized appreciation of $15,561,737,
of which $15,956,816 related to appreciated securities and $395,079 related to
depreciated securities.

NOTE 4 -- Federal Income Tax Matters

For Federal income tax purposes, the Fund realized capital gain net income
of $2,095,170 during the year ended December 31, 1993, which was fully offset by
utilization of capital loss carryforwards. Remaining prior year capital loss
carryforwards of the Fund aggregated $34,989,079 at December 31, 1993. This
amount is available to offset future realized capital gain net income for
Federal income tax purposes through December 31, 1996; $11,894,711 of this
amount is available through December 31, 1997; $11,331,322 is available through
December 31, 1998; $6,823,792 is available through December 31, 1999 and
$4,958,441 is available through December 31, 2000.

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
United Gold & Government Fund, Inc.

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of United Gold & Government Fund, Inc.
(the "Fund") at December 31, 1993, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of portfolio positions at December 31, 1993 by correspondence with
the custodian and brokers, provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE
Kansas City, Missouri
January 31, 1994

<PAGE>
United Gold & Government Fund, Inc.

Custodian Underwriter
United Missouri Bank, n. a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P.O. Box 29217
Legal Counsel Shawnee Mission, Kansas 66201-9217
Kirkpatrick & Lockhart (913) 236-2000
1800 M Street N. W.
Washington, D. C. Shareholder Servicing Agent
Waddell & Reed Services Company
Independent Accountants 6300 Lamar Avenue
Price Waterhouse P.O. Box 29217
Kansas City, Missouri Shawnee Mission, Kansas 66201-9217
(913) 236-2000
Investment Manager
Waddell & Reed Investment Accounting Services Agent
Management Company Waddell & Reed Services Company
6300 Lamar Avenue 6300 Lamar Avenue
P. O. Box 29217 P.O. Box 29217
Shawnee Mission, Kansas Shawnee Mission, Kansas 66201-9217
66201-9217 (913) 236-2000
(913) 236-2000

<PAGE>
United Gold & Government Fund, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217

PROSPECTUS
March 31, 1994

The United Group of Mutual Funds
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.

TABLE OF CONTENTS
Summary of Expenses ..... 2
Financial Highlights .... 3
What is the Fund? ....... 4
Performance Information . 4
Goal and Investment Policies
of the Fund .......... 5
Risk Factors ............ 9
Options and Futures .....10
Management and Services .10
Dividends, Distributions
and Taxes ............12
Purchase of Shares ......13
Redemption ..............14
Financial Statements.....16

NUP2013(3-94)
printed on recycled paper

<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.

6300 Lamar Avenue

P. O. Box 29217

Shawnee Mission, Kansas 66201-9217

(913) 236-2000

March 31, 1994

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus (the
"Prospectus") of United Gold & Government Fund, Inc. (the "Fund") dated March
31, 1994, which may be obtained from the Fund or its underwriter, Waddell &
Reed, Inc., at the address or telephone number shown above.

TABLE OF CONTENTS

Performance Information .......................... 2

Investment Objective and Policies ................ 3

Investment Management and Other Services ......... 24

Purchase, Redemption and Pricing of Shares ....... 29

Directors and Officers ........................... 43

Payments to Shareholders ......................... 47

Taxes ............................................ 48

Portfolio Transactions and Brokerage ............. 52

Other Information ................................ 54

<PAGE>
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 rankings in
advertisements and sales materials.

Total Return

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 from which the maximum sales load of 5.75% is deducted. All
dividends and distributions are assumed to be reinvested at net asset value as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions. The formula used to calculate the total
return 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 and it may
not reflect the sales charge. For example, the Fund may also compute total
return 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 were reflected, it would
reduce the performance quoted.

The average annual total return quotations as of December 31, 1993, which
is the most recent balance sheet included in the Prospectus, for the periods
shown were as follows:

With Without
Sales LoadSales Load
Deducted Deducted

One-year period from January 1, 1993 to
December 31, 1993: 65.71% 75.82%

Five-year period from January 1, 1988 to
December 31, 1993: 6.27% 7.54

Period from September 4, 1985* to
December 31, 1993: 11.28% 12.08

*initial public offering date

The Fund may also quote unaveraged or cumulative total return which
reflects the change in value of an investment over a stated period of time.
Cumulative total returns 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. 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 Stock Index and the Dow Jones Industrial Average. Performance
information may be quoted numerically or presented in a table, graph or other
illustration.

All performance information which 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 a Fund's shares when redeemed may be more or less
than their original cost.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective and policies of the Fund are described in the
Prospectus, which refers to the following investment methods and practices.

Securities - General

The Fund may invest in securities including common stock, preferred stock,
debt securities and convertible securities, as described in the Prospectus.
These securities may include the following described securities from time to
time.

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 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 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 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.

Foreign Securities

Waddell & Reed Investment Management Company (the "Manager"), the Fund's
investment manager, believes that while there are investment risks (see below)
in investing in foreign securities, there are also investment opportunities 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. The Manager 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.

Further, an investment in foreign securities is also subject to currency
fluctuation. For example, when the Funds' assets are invested in securities
denominated in foreign currency, an investor can expect that the Fund's net
asset value per share will tend to increase when the value of the U.S. dollar is
decreasing as against such currencies. Conversely, a tendency toward decline in
net asset value can be expected when the value of the U.S. dollar is increasing
as against such currencies. An investment may also be affected by changes in
exchange control regulations (i.e., currency blockage). The Fund may bear a
transaction charge in connection with the exchange of currency. There may be
less publicly available information about a foreign company than about a
domestic company. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Most foreign stock markets have substantially
less volume than the New York Stock Exchange and securities of some foreign
companies are less liquid and more volatile than securities of comparable
domestic companies. There is generally less government regulation of stock
exchanges, brokers and listed companies than in the United States. In addition,
with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments which could adversely affect investments in securities
of issuers located in those countries. If it should become necessary, the Fund
would normally encounter greater difficulties in commencing a lawsuit against
the issuer of a foreign security than it would against a United States' issuer.

When purchasing foreign securities, the Fund will ordinarily purchase
securities which are traded in the U.S. or purchase American Depository Receipts
("ADR's") which are certificates issued by U.S. banks representing the right to
receive securities of a foreign issuer deposited with that bank or a
correspondent bank. However, the Fund may purchase the securities of a foreign
issuer directly in foreign markets so long as in the Manager's judgment an
established public trading market exists. Such investments may increase the
risk with respect to the liquidity of the Fund's portfolio and the Fund's
ability to meet a large number of shareholder redemption requests should there
be economic, political or social turmoil in a country in which the Fund has a
substantial portion of its assets invested or should relations between the U.S.
and foreign countries deteriorate markedly.

Restricted Securities

The Fund may purchase foreign restricted securities. However, it will not
purchase restricted securities if as a result of such purchase more than 5% of
its total assets would consist of restricted securities. This is a fundamental
policy that may only be changed with shareholder approval. Restricted
securities are securities which are subject to legal or contractual restrictions
on resale.

Restricted securities which are traded in foreign markets are often subject
to restrictions which prohibit resale to United States persons or entities or
permit sales only to foreign broker-dealers who agree to limit their resale to
such persons or entities. The buyer of such securities must enter into an
agreement that, usually for a limited period of time, it will resell such
securities subject to such restrictions. 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 than listed securities.

Lending Securities

One of the ways in which the Fund may try to realize income is by lending
its securities. If the Fund does this, 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 loaned the securities. The Fund also receives additional
compensation as discussed below.

Any securities loans which 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 or U.S. Government Securities (as defined in
the Prospectus) or bank letters of credit at least equal in value to the market
value of the securities loaned on each day that the loan is outstanding. If the
market value of the loaned 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 loaned. If the market value of the securities decreases, the
borrower is entitled to return of the excess collateral.

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 such two cases may be shared with the borrower.

The letters of credit which 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.

The Manager, subject to the direction and control of the Board of
Directors, has adopted additional rules concerning lending of securities which
may be changed without shareholder vote. At present, under these rules, the
Fund will lend securities only to creditworthy broker-dealers and financial
institutions. The Fund will make loans only under rules of the New York Stock
Exchange, which presently require the borrower to return the securities 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.

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.

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.

Repurchase Agreements

The Fund may purchase securities subject to repurchase agreements. A
repurchase transaction occurs when, at the time the Fund purchases securities,
it also resells them to the vendor (normally a commercial bank or broker-
dealer), and must deliver those securities and/or securities substituted for
them under the repurchase agreement to the vendor on an agreed-upon date in the
future. In this section, such securities, including any securities so
substituted, are referred to as the "Resold Securities." The resale price is in
excess of the purchase price in that it reflects an agreed-upon market interest
rate effective for the period of time during which the Fund's money is invested
in the Resold Securities. The majority of the repurchase transactions in which
the Fund would engage run from day to day, and the delivery pursuant to the
resale typically will occur within one to five days of the purchase. The Fund's
risk is limited to the ability of the vendor to pay the agreed-upon sum upon the
delivery date. In the event of bankruptcy or other default by the vendor, there
may be possible delays or expenses in liquidating the Resold Securities, decline
in their value or loss of interest. Upon default, the Resold Securities
constitute collateral security for the repurchase obligation. 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, i.e., the value of the Resold Securities, which will be held by the
Fund's custodian bank or by a third party that qualifies as a custodian under
section 17f(5) of the Investment Company Act of 1940, is and, during the entire
term of the agreement, remains 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 on the basis of criteria
established by the Board of Directors.

Illiquid Investments

The Fund has an operating policy, which may be changed without shareholder
approval, which provides that due to their possible limited liquidity, the Fund
may not make certain illiquid investments if as a result more than 10% of its
net assets would consist of such investments. The investments which are
included in this 10% limit are: (i) repurchase agreements not terminable within
seven days; (ii) fixed time deposits (including insured deposits) subject to
withdrawal penalties other than overnight deposits; (iii) restricted securities;
(iv) securities for which market quotations are not readily available; and (v)
unlisted options and their underlying collateral.

Currency Exchange Contracts

The Fund may enter into forward foreign currency exchange contracts
("Forward Contracts"), provided that it does not thereafter have more than 15%
of the value of its assets committed to the consummation of all such Forward
Contracts; however, it will not enter into Forward Contracts or maintain a net
exposure to such Forward Contracts where the consummation of the Forward
Contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of its portfolio securities or other assets denominated in
that currency. The Fund may hold foreign currency only in connection with
Forward Contracts, only up to four business days, as well as in connection with
the purchase or sale of foreign securities, but not otherwise. All the policies
stated in this paragraph are fundamental policies.

A Forward 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 Contract agreed upon by the parties, at a price set at the
time of the Forward Contract. These Forward Contracts are traded directly
between currency traders (usually large commercial banks) and their customers.

The Fund expects to use Forward Contracts under two circumstances:

1. When the Manager wishes to "lock in" the U.S. dollar price of a security
when the Fund is purchasing or selling a security denominated in a foreign
currency;

2. When the Manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, the Fund
would be able to enter into a Forward Contract to sell foreign currency for
a fixed U.S. dollar amount approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency.

As to the first circumstance, when the Fund enters into a trade for the
purchase or sale of a security denominated in a foreign currency, it may be
desirable to establish (lock in) the U.S. dollar cost or proceeds. By entering
into Forward Contracts in U.S. dollars for the purchase or sale of a foreign
currency involved in an underlying security transaction, the Fund will be able
to protect itself against a possible loss between trade and settlement dates
resulting from the adverse change in the relationship between the U.S. dollar
and the subject foreign currency.

Under the second circumstance, when the Manager believes that the currency
of a particular country may suffer a substantial decline, the Fund could enter
into a Forward Contract to sell for a fixed dollar amount the amount in foreign
currencies approximating the value of some or all of its portfolio securities
denominated in such foreign currency. The Fund will place cash or liquid equity
or debt securities in a separate account with its Custodian in an amount equal
to the value of the Forward Contracts entered into under the second
circumstance. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account equals the amount of the Fund's
commitments with respect to such Forward Contracts.

The precise matching of Forward Contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the Forward Contract is entered into
and the date it matures. The projection of short-term currency market movements
is extremely difficult, and the successful execution of short-term hedging
strategy is highly uncertain. The Manager does not intend to enter into such
Forward Contracts on a regular basis. Normally, consideration of the prospect
for currency parities will be incorporated into the long-term investment
decisions made with respect to overall diversification strategies. However, the
Manager believes that it is important to have flexibility to enter into such
Forward Contracts when it determines that the Fund's best interests may be
served.

Generally, the Fund will not enter into a Forward Contract with a term of
greater than one year. At the maturity of the Forward Contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate the obligation to deliver the foreign
currency by purchasing an "offsetting" Forward Contract with the same currency
trader obligating the Fund to purchase, on the same maturity date, the same
amount of the foreign currency.

It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the Forward Contract. Accordingly, it
may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency the Fund is obligated to deliver.

If the Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or loss (as described below) to the extent
that there has been movement in Forward Contract prices. If it engages in an
offsetting transaction, it may subsequently enter into a new Forward Contract to
sell the foreign currency. Should forward prices decline during the period
between the Fund's entering into a Forward Contract for the sale of a foreign
currency and the date it enters into an offsetting Forward Contract for the
purchase of the foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency it
agreed to purchase. Should forward prices increase, it will suffer a loss to
the extent the price of the currency it has agreed to purchase exceeds the price
of the currency it has agreed to sell.

It should be realized that this method of attempting to protect the value
of the Fund's portfolio securities against a decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which one can achieve at some future point
in time. Additionally, although Forward Contracts tend to minimize the risk of
loss due to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gains which might result should the value of such
currency increase. The Fund will enter into foreign forward currency exchange
contracts only for hedging purposes and has made an undertaking to a State
Securities Commission to this effect.

Investment in Warrants

The Fund may not invest more than 2% of its net assets valued at the lower
of cost or market in warrants. Warrants acquired in units or attached to other
securities are not considered for purposes of computing the 2% limitation.
Warrants basically 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. Warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.

Investment in Unseasoned Issuers

In order to comply with the regulations of certain states, the Fund will
not purchase securities of unseasoned issuers, including their predecessors,
which have been in operation for less than three years, if the value of its
investment in such securities will exceed 5% of its total assets.

U.S. Government Securities

U.S. Government 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,
Federal National Mortgage Association, Farmers Home Administration, Export-
Import Bank of the United States, Small Business Administration, Government
National Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Farm Credit Banks, Maritime Administration, the Tennessee Valley Authority, the
Resolution Funding Corporation and the Student Loan Marketing Association.

Among the U.S. Government Securities that the Fund will purchase are
"mortgage-backed securities" of the Government National Mortgage Association
("Ginnie Mae"), the Federal Home Loan Mortgage Association ("Freddie Mac") and
the Federal National Mortgage Association ("Fannie Mae"). These mortgage-backed
securities include "pass-through" securities and "participation certificates";
both are similar, representing pools of mortgages that are assembled, with
interests sold in the pool; the assembly is made by an "issuer," such as a
mortgage banker, commercial bank or savings and loan association, which
assembles the mortgages in the pool and passes through payments of principal and
interest for a fee payable to it. Payments of principal and interest by
individual mortgagors are "passed through" to the holders of the interests in
the pool. Thus, the monthly or other regular payments on pass-through
securities and participation certificates include payments of principal
(including prepayments on mortgages in the pool) rather than only interest
payments. Another type of mortgage-backed security is the "collateralized
mortgage obligation," which is similar to a conventional bond (in that it has
more regular principal and interest payments than pass-through securities and
participation certificates) and is secured by groups of individual mortgages.
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 paragraph could be adversely affected by
actions of the U.S. Government to tighten the availability of its credit.

The value of the U.S. Government Securities and other debt securities in
which the Fund may invest will fluctuate depending in large part on changes in
prevailing interest rates. If these rates go up after the Fund buys a security,
its value may go down; if these rates go down, its value may go up. Changes in
value and yield based on changes in prevailing interest rates may have different
effects on short-term debt obligations than on long-term obligations. Long-term
obligations (which often have higher yields) may fluctuate in value more than
short-term ones. The Fund has no policy limiting the maturity of the U.S.
Government Securities or other debt securities in which it may invest.

Investments in Precious Metals

The ownership of precious metals will allow the Fund to take advantage of
those periods of time when the outlook for the price of gold, silver and
platinum is favorable while the outlook for the share prices of minerals-related
securities may be unfavorable. For example, during periods of declining stock
prices, the price of gold may increase or remain stable, while the value of
gold-related securities may be subject to the same general decline experienced
by the stock market as a whole. Under these or similar circumstances, the
ability of the Fund to purchase and hold gold, silver or platinum will allow it
to benefit from a potential increase in the price of precious metals or
stability in the price of such metals at a time when the value of minerals-
related securities may be declining.

The Fund's ability to purchase platinum will allow the Fund to invest in
platinum without the risks associated with owning shares of South African
companies engaged in the production of platinum. While the Fund is authorized
to invest in South African issuers, investments in South Africa are subject to
the risks associated with the unsettled political and social conditions
prevailing in that country and neighboring countries.

Ownership of gold, silver and platinum may be prohibited by any one or more
of the states in which the Fund is sold. In the event that any state prohibits
such investment, the Fund may elect not to make such investments.

Put and Call Options

The Fund may write (i.e., sell) call options ("calls") but only if (i) the
investments to which the call relates (the "related investments") are either
securities (whether or not they are U.S. Government Securities) or futures
contracts (see "Futures Contracts" below) relating to U.S. Government Securities
("Government Securities Futures"); (ii) the calls are listed on a domestic
securities or commodities exchange or quoted on the automatic quotation system
of the National Association of Securities Dealers, Inc. ("NASDAQ"); and (iii)
the calls are covered, i.e., the Fund owns the related investments (or other
investments acceptable for escrow arrangements) while the call is outstanding.

The Fund may purchase calls but only if (i) the related investments are
either U.S. Government Securities or Government Securities Futures; and (ii) the
calls are listed on a domestic securities or commodities exchange or quoted on
NASDAQ.

The Fund may purchase put options ("puts") but only if (i) the investments
to which the put relates (the "related investments") are U.S. Government
Securities or Government Securities Futures; and (ii) either (a) the puts are
listed on a domestic securities or commodities exchange or quoted on NASDAQ; or
(b) are "optional delivery standby commitments" (see below). The Fund may
purchase puts as to related investments it owns ("protective puts") or as to
related investments it does not own ("nonprotective puts"). Optional delivery
standby commitments are entered into by sellers (other than broker-dealers) of
U.S. Government Securities as an inducement to the Fund to purchase such
securities and give the Fund the right to sell them back to the seller on
specified terms. They are thus a form of "protective puts." However, unlike
exchange listed puts, the Fund must rely on the creditworthiness of the seller,
which is evaluated by the Manager should the Fund exercise its right to make the
delivery and sale. These investments and exchange listed puts are accounted for
in the same manner. These investments will be valued at fair value in good
faith as determined under procedures established by and under the general
supervision and responsibility of the Fund's Board of Directors.

The Fund may write (i.e., sell) puts but only if (i) the related
investments are U.S. Government Securities or Government Securities Futures; and
(ii) the puts are listed on a domestic securities or commodities exchange or
quoted on NASDAQ.

The above limitations on the puts and calls the Fund may write or purchase
are fundamental policies, i.e., rules which may not be changed unless
shareholders vote to change them. The Fund has no fundamental policy as to
percentage limitations on its use of options.

At the present time, no puts or calls of any kind are quoted on NASDAQ.
The Fund has undertaken to certain State Securities Commissions that it will not
engage in options trading on NASDAQ listed securities and that it will not
purchase put options or call options if after such purchase the aggregate
premium paid for all such options owned at that time would exceed 5% of the
Fund's total assets. The Fund has also undertaken to a State Securities
Commission that it will write puts only when it is willing to purchase the
underlying security at the exercise price.

The Fund may write options for the purpose of increasing its income by
receiving premiums from the purchases of the options. The Fund may purchase puts
to protect against major price declines in the value of its portfolio
securities. The Fund may purchase calls to take advantage of an expected rise
in the market value of securities it does not hold in its portfolio (or in a
"closing purchase transaction" as discussed below).

When the Fund writes a call, it receives a premium and agrees to sell the
related investments to a purchaser of a call during the call period (usually not
more than 9 months) at a fixed exercise price (which may differ from the market
price of the related investments) regardless of market price changes during the
call period. If a call is exercised, the Fund foregoes any gain from an
increase in the market price over the exercise price.

To terminate its obligation on a call which it has written, the Fund may
purchase a call in a "closing purchase transaction." A profit or loss will be
realized depending on the amount of option transaction costs and whether the
premium previously received is more or less than the price of the call
purchased. A profit may also be realized if the call lapses unexercised,
because the Fund retains the related investments and the premium received.

When the Fund buys a call, it pays a premium and has the right to buy the
related investments from a seller of a call during the call period at a fixed
exercise price. The Fund benefits only if the market price of the related
investments is above the call price during the call period and the call is
either exercised or sold at a profit. If the call is not exercised or sold
(whether or not at a profit), it will become worthless at its expiration date
and the Fund will lose its premium payment and the right to purchase the related
investments.

When the Fund buys a put, it pays a premium and has the right to sell the
related investments to a seller of a put during the put period at a fixed
exercise price. Buying a protective put (as defined above) permits the Fund to
protect itself during the put period against a decline in the value of the
related investments below the exercise price by selling them through the
exercise of the put. Buying a nonprotective put (as defined above) permits the
Fund, if the market price of the related investments is below the put price
during the put period, either to resell the put or to buy the related
investments and sell them at the exercise price. If the market price of the
related investments is above the exercise price and as a result, the put is not
exercised or resold (whether or not at a profit), the put will become worthless
at its expiration date.

When the Fund writes a put, it receives a premium and agrees to purchase
the related investments from a purchaser of a put during the put period at a
fixed exercise price (which may differ from the market price of the related
investments) regardless of market price changes during the put period. If the
put is exercised, the Fund must purchase the related investments at the exercise
price, regardless of how much the market price of the related investments has
declined below the exercise price. The Fund's cost of purchasing the
investments will be adjusted by the amount of the premium it has received.

To terminate its obligation on a put which it has written, the Fund may
purchase a put in a "closing purchase transaction." (As discussed above, the
Fund may also purchase puts other than as part of such closing transactions.) A
profit or loss will be realized depending on the amount of option transaction
costs and whether the premium previously received is more or less than the cost
of the put purchased. A profit will also be realized if the put lapses
unexercised because the Fund retains the premium received.

When the Fund writes a put it will, until it enters into a closing purchase
transaction as to that put, segregate and maintain designated cash or readily
marketable assets adequate to purchase the related investments should the put be
exercised.

An option position may be closed out only on an exchange which provides a
secondary market for options of the same series, and there is no assurance that
a liquid secondary market will exist for any particular option. The Fund's put
and call activities may affect its turnover rate and brokerage commission
payments. The exercise of calls or puts written by the Fund may cause it to
sell or purchase related investments, thus adversely increasing its turnover
rate in a manner beyond its control. The exercise of puts 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 the Fund to sell
the related investments for reasons which would not exist in the absence of the
put. Holding a nonprotective put might cause the purchase of the related
investments to permit the Fund to exercise the put. The Fund will pay a
brokerage commission each time it buys or sells a put or call or buys or sells
an underlying investment in connection with the exercise of a put or call. Such
commissions may be higher than those which would apply to direct purchases or
sales.

The Fund's custodian bank, or a securities depository acting for it, will
act as the Fund's escrow agent as to the related investments on which the Fund
has written calls, or as to other assets acceptable for such escrow, so that
pursuant to the rules of the Option Clearing Corporation and certain exchanges,
no margin deposit will be required of the Fund on such calls. Until the related
investments or other investments held in escrow are released from escrow, they
cannot be sold by the Fund; this release will take place on the expiration of
the call or the Fund's entering into a closing purchase transaction.

Option premiums paid to control an amount of related investments are small
in relation to the market value of related investments and consequently, put and
call options offer large amounts of leverage. The leverage offered by trading
in debt options will result in the Fund's net asset value being more sensitive
to changes in the value of the related investment. Markets for options on debt
instruments and options on futures contracts are in their initial stages so it
is not possible to predict the amount of trading interest which may exist in
debt options or whether viable exchange markets will develop or continue over
time.

As indicated under "Taxes," to continue to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), the Fund must derive less than 30% of its gross income from the
disposition of certain investments held for less than three months. Due to this
limitation, the Fund will limit the extent to which it engages in the following
activities, but will not be precluded from them: (i) selling investments held
for less than three months, whether or not they were purchased on the exercise
of a call held by the Fund or a put written by the Fund; (ii) the writing of
calls on investments held for less than three months; (iii) the writing or
purchasing of puts or calls which expire in less than three months; (iv)
effecting closing transactions with respect to puts or calls written or
purchased less than three months previously; and (v) exercising puts or calls
held by the Fund for less than three months.

Futures Contracts

The Fund may engage in buying and selling interest rate futures contracts,
but only those relating to U.S. Government Securities ("Government Securities
Futures" or "Futures"). This limitation of the Fund's engaging in interest rate
futures contracts to those relating to U.S. Government Securities is a
fundamental policy which may only be changed by shareholders. The Fund has no
other fundamental policies as to its use of futures contracts and thus no
fundamental policy as to a percentage limit thereon; however, see below for
limitations relating to the Commodity Futures Trading Commission ("CFTC").

At the present time, the U.S. Government Securities to which Government
Securities Futures relate are long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities and three-month U.S. Treasury Bills. See "Investment Objective and
Policies" for further information as to these securities.

The Fund will not use Government Securities Futures or puts and calls
related thereto for speculation but only to attempt to hedge (i.e., protect)
against future changes in interest rates which might otherwise adversely affect
the value of the U.S. Government Securities held in the Fund's portfolio. Such
adverse effects could occur because either (i) the value of the Fund's U.S.
Government Securities declines due to a rise in interest rates; or (ii) the
Fund's U.S. Government Securities or cash are not fully included in, i.e., do
not participate in, an increase in value in long-term U.S. Government Securities
due to a decline in interest rates at times when the Fund is not fully invested
in long-term U.S. Government Securities.

The "sale" of a Government Securities Future by the Fund means the
acquisition by the Fund of an obligation to deliver the related U.S. Government
Securities (i.e., those called for by the contract) at a specified price on a
specified date. The "purchase" of a Government Securities Future by the Fund
means the acquisition by the Fund of an obligation to acquire the related U.S.
Government Securities at a specified price on a specified date.

Unlike when the Fund purchases or sells a U.S. Government Security, no
price is paid or received by the Fund upon the purchase or sale of a Government
Securities Future. Initially, the Fund will be required to deposit with the
futures commission merchant (the "broker") an amount of cash or U.S. Treasury
Bills equal to a varying specified percentage of the contract amount. This
amount is known as initial margin. Cash held in the margin account is not
income producing. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying U.S.
Government Securities fluctuates making the Government Securities Future more or
less valuable, a process known as mark to the market. Margin deposits are also
required in connection with the sale by the Fund of puts or calls on Government
Securities Futures. Changes in variation margin are recorded by the Fund as
unrealized gains or losses. Initial margin payments will be deposited in the
Fund's custodian bank in an account registered in the broker's name; access to
the assets in that account may be made by the broker only under specified
conditions. At any time prior to expiration of the Government Securities
Future, the Fund may elect to close the position by taking an opposite position
which will operate to terminate the Fund's position in the Government Securities
Future. A final determination of variation margin is then made, additional cash
is required to be paid by or released to the Fund and the Fund realizes a loss
or gain. Although Government Securities Futures by their terms call for the
actual delivery or acquisition of the related U.S. Government Securities, in
most cases the contractual obligation is so fulfilled without having to make or
take delivery of the related U.S. Government Securities. The Fund does not
intend to make or take delivery of these securities. All transactions in the
futures markets, including transactions in Government Securities Futures, are
made, offset or fulfilled through a clearing house associated with the exchange
on which the contracts are traded. Although the Fund intends to buy and sell
Government Securities Futures only on exchanges where there appears to be an
active secondary market, there is no assurance that a liquid secondary market
will exist for any particular Government Securities Future at any particular
time. In such event, it may not be possible to close a futures position.

One risk in employing Government Securities Futures to attempt to protect
against the price volatility of the U.S. Government Securities held in the
Fund's portfolio is the prospect that the prices of Government Securities
Futures will correlate imperfectly with the behavior of the cash (i.e., market
value) prices of the Fund's U.S. Government Securities. For a hedge to be
completely effective, the price change of the hedging instrument should equal
the price change of the security being hedged. Such equal price changes are not
always possible because the investment underlying the hedging instrument may not
be the same investment that is being hedged. The Manager will attempt to create
a closely correlated hedge but hedging activity may not be completely successful
in eliminating market value fluctuation. The ordinary spreads between prices in
the cash and futures markets, due to differences in the natures of those
markets, are subject to distortions. A discussion of some factors which may
create such distortions follows. 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 future 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. 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 trends by the Manager may
still not result in a successful transaction.

Another risk is that the Manager would be incorrect in the expectations as
to the extent of various interest rate movements
or the time span within which the movements take place. For example, if the
Fund sold a Government Securities Future in anticipation of an increase in
interest rates, and then interest rates went down instead, the Fund would lose
money on the sale.

The Fund will deposit in a segregated account with its custodian bank high-
quality debt obligations maturing in one year or less, or cash, in an amount
equal to the fluctuating market value of long futures contracts it has purchased
less any margin deposited on its long position. It may hold cash or acquire
such debt obligations for the purpose of making these deposits.

The use of futures and options thereon to attempt to protect against the
market risk of a decline in the value of portfolio securities is referred to as
having a "short futures position." The use of Government Securities Futures and
options thereon to attempt to protect against the risk that the Fund might not
be fully invested to the extent permissible at a time when the value of these
securities is increasing due to declining interest rates is referred to as
having a "long futures position." The Fund must operate within certain
restrictions as to its long and short positions in Government Securities Futures
and options thereon under a rule (the "CFTC Rule") adopted by the Commodity
Futures Trading Commission (the "CFTC") under the Commodity Exchange Act (the
"CEA") to be eligible for the exclusion provided by the CFTC Rule from
registration by the Fund with the CFTC as a "commodity pool operator" (as
defined under the CEA), and must represent to the CFTC that it will operate
within such restrictions. Under these restrictions the Fund will not, as to any
positions, whether long, short or a combination thereof, enter into Government
Securities Futures and options thereon for which the aggregate initial margins
and premiums exceed 5% of the fair market value of the Fund's assets after
taking into account unrealized profits and losses on options it has entered
into; in the case of an option that is "in-the-money" (as defined under the CEA)
the "in-the-money" amount may be excluded in computing such 5%. (In general a
call option on a Future is "in-the-money" if the value of the future exceeds the
strike, i.e., exercise, price of the call; a put option on a future is "in-the-
money" if the value of the future which is the subject of the put is exceeded by
the strike price of the put.) Under the restrictions, the Fund also must, as to
its short positions, use Government Securities Futures and options thereon
solely for bona fide hedging purposes within the meaning and intent of the
applicable provisions under the CEA; see the third paragraph under "Futures
Contracts" as to the meaning of "hedging" in the case of the Fund. As to its
long positions which are used as part of the Fund's portfolio strategy and are
incidental to the Fund's activities in the underlying cash market, the
"underlying commodity value" (see below) of the Fund's Government Securities
Futures and options thereon must not exceed the sum of (i) cash set aside in an
identifiable manner, or short-term U.S. debt obligations or other U.S. dollar-
denominated high-quality short-term money market instruments so set aside, plus
any funds deposited as margin; (ii) cash proceeds from existing investments due
in 30 days, and (iii) accrued profits held at the futures commission merchant.
(There is described above the segregated accounts which the Fund must maintain
with its custodian bank as to its option and futures activities due to SEC
requirements; the Fund will, as to its long positions, be required to abide by
the more restrictive of these SEC and CFTC requirements.) The "underlying
commodity value" of a future is computed by multiplying the size (dollar amount)
of the future by the daily settlement price of the future. For an option on a
future that value is the underlying commodity value of the future underlying the
option.

The Fund has no fundamental policy setting a percentage limitation on the
purchase and sale of futures; see, however, the CFTC limitation discussed above.

When-Issued and Delayed Delivery Transactions

The Fund may also purchase U.S. Government Securities on a when-issued or
delayed delivery basis or sell them on a delayed delivery basis; their value may
be less when delivered than the purchase price paid. For example, delivery to
the Fund and payment by the Fund in the case of a purchase by it, or delivery by
the Fund and payment to it in the case of a sale by the Fund, may take place a
month or more after the date of the transaction. The purchase or sale price is
fixed on the transaction date. The Fund will enter into when-issued or delayed
delivery transactions in order to secure what is considered to be an
advantageous price and yield at the time of entering into the transaction. The
U.S. Government Securities so purchased by the Fund are subject to market
fluctuation; their value may be less when delivered than the purchase price
paid. No interest accrues to the Fund until delivery and payment is completed.
When the Fund makes a commitment to purchase securities on a when-issued or
delayed delivery basis the Fund will record the transaction and thereafter
reflect the value of the securities in determining its net asset value per
share. The U.S. Government Securities sold by the Fund on a delayed delivery
basis are also subject to market fluctuation; their value when the Fund delivers
them may be more than the purchase price the Fund receives. When the Fund makes
a commitment to sell securities on a delayed delivery basis, it will record the
transaction and thereafter value the securities at the sales price in
determining the Fund's net asset value per share.

Ordinarily, the Fund purchases U.S. Government Securities on a when-issued
or delayed delivery basis with the intention of actually taking delivery of the
securities. However, before the securities are delivered to the Fund and before
it has paid for them, (the "settlement date") the Fund could sell the securities
if the Manager decided it was advisable to do so for investment reasons. The
Fund will hold aside or segregate cash or other U.S. Government Securities at
least equal to the amount it will have to pay on the settlement date; these
other U.S. Government Securities will be sold at or before the settlement date.
There are no percentage limitations on the Fund's right to buy U.S. Government
Securities on a when-issued basis.

Risk Factors of High-Yield Investing

As an operating (i.e., nonfundamental) policy, the Fund does not intend to
invest more than 5% of its assets in non-investment grade debt securities. The
market for high-yield, high-risk debt securities is relatively new and much of
its growth paralleled a long economic expansion, during which this market
involved a significant increase in the use of high-yield debt securities to fund
highly leveraged corporate acquisitions and restructurings. Thereafter, this
market was affected by a relatively high percentage of defaults with respect to
high-yield securities as compared with higher rated securities. An economic
downturn or increase in interest rates is likely to have a greater negative
effect on this market and the value of high-yield debt securities, if any, in
the Fund's portfolio.

Prices of high-yield debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of high-yield debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash.
Where it deems it appropriate and in the best interests of Fund shareholders,
the Fund may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect the interests
of security holders of its portfolio companies.

Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price volatility
for these securities and limited liquidity in the resale market. If market
quotations are not readily available for the Fund's lower rated or unrated
securities, these securities will be valued by a method that the Fund's Board of
Directors believes accurately reflects fair value. Valuation becomes more
difficult and judgment plays a greater role in valuing high-yield debt
securities than with respect to securities for which more external sources of
quotations and last sale information are available.

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

Investment Restrictions

Certain of the Fund's investment restrictions are described in the
Prospectus. The following are fundamental policies and, together with certain
restrictions described in the Prospectus, cannot be changed without shareholder
approval. Under these additional restrictions the Fund may not:

(i) Buy real estate nor any nonliquid interest in real estate investment
trusts;

(ii) Buy the securities of any company if it would then own more than 10% of
its voting securities or any class of its securities; or buy the
securities of any company if more than 5% of the Fund's total assets
(valued at market value) would then be invested in that company; or buy
the securities of companies in any one industry if more than 25% of the
Fund's total assets would then be in companies in that industry,
except, as stated in the Prospectus, the Fund intends to concentrate in
gold and other minerals-related securities;

(iii) Buy shares of other investment companies which redeem their shares.
The Fund can buy shares of investment companies which do not redeem
their shares if it does so 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; however, the Fund does not have any current
intent to invest more than 5% of its assets in such securities. The
Fund may also buy these shares as part of a merger or consolidation;

(iv) Make loans other than certain limited types of loans; the Fund can also
buy debt securities which have been sold to the public; 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) Buy or continue to hold securities if the Fund's Directors or officers
or certain others own too much of the same securities; if any of these
people owns more than one two-hundredths (i.e., .5 of 1%) of the shares
of a company and if the people who own that much or more own one
twentieth (i.e., 5%) of that company's shares, the Fund cannot buy that
company's shares or continue to own them;

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

(viii) Sell securities short or buy securities on margin; however, the Fund
may make margin deposits in connection with Government Securities
Futures contracts and options thereon; also, the Fund may not engage in
arbitrage transactions;

(ix) Engage in the underwriting of securities or invest in restricted
securities, except up to 5% of total assets taken at the time of
purchase may be invested in restricted foreign securities. Restricted
securities are securities which are subject to legal or contractual
restrictions on resale;

(x) Buy commodities except that it may invest up to 25% of its total assets
in gold, silver and platinum and may buy put and call options and
Government Securities Futures. Put and call options and Government
Securities Futures may, for various purposes, be considered to be
"commodities" or "securities" but the Fund may buy them whether they
are "commodities" or "securities." The Fund may also not buy any
minerals-related programs or leases;

(xi) Borrow for investment purposes, that is, to purchase securities or
mortgage or pledge any of its assets; this does not prohibit the escrow
deposits required by put and call transactions. The Fund may borrow
money from banks as a temporary measure or for extraordinary or
emergency purposes but only up to 5% of its total assets.

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 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
portfolio turnover rate was 84.00% for the fiscal year ended December 31, 1993
and 61.50% for the fiscal year ended December 31, 1992. A high turnover rate
will increase transaction costs and commission costs that will be borne by the
Fund and could generate taxable income or loss.

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 Waddell & Reed Investment Management Company, a wholly-
owned subsidiary of Waddell & Reed, Inc. Under the Management Agreement, the
Manager is employed to supervise the investments of the Fund and provide
investment advice to the Fund. The address of Waddell & Reed, Inc. and the
Manager 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 Directors prior to approving any Shareholder Servicing
Agreement or Accounting Services Agreement.

Torchmark Corporation and United Investors Management Company

The Manager 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 United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company. The address of Torchmark
Corporation and United Investors Management Company is 2001 Third Avenue South,
Birmingham, Alabama 35233.

Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the company's inception date, whichever was later, and to
TMK/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 the Manager. The Manager has also served as investment
manager for Waddell & Reed Funds, Inc. since its inception in September 1992 and
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund,
Inc. since they each commenced operations in February 1993. Waddell & Reed,
Inc. serves as principal underwriter for the investment companies in the United
Group of Mutual Funds, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc.

Shareholder Services

Under the Shareholder Servicing Agreement entered into between Waddell &
Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed, Inc., and
the Fund, 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 Directors without shareholder approval.

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 Directors without
shareholder approval.

Payments by the Fund for Management, Accounting and Shareholder Services

Under the Management Agreement, for the Manager's management services, the Fund
pays the Manager a fee as described in the Prospectus. Prior to the above-
described assignment from Waddell & Reed, Inc. to Waddell & Reed Investment
Management Company, all fees were paid to Waddell & Reed, Inc.

The management fees accrued by the Fund for the fiscal years ended December
31, 1993, 1992 and 1991 were $268,796, $244,902 and $350,639, 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 to the
Fund. The Fund accrues and pays this fee daily.

Under the Shareholder Servicing Agreement, the Fund pays the Agent a
monthly fee of $1.0208 for each shareholder account which was in existence at
any time during the prior month, plus $0.30 for each account on which dividend
or distribution, of cash or shares, was paid in that month. It 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., the Manager or the Agent.

Under the Accounting Services Agreement, the Fund pays the Agent a fee for
accounting services as described in the Prospectus. Fees paid to the Agent for
the fiscal years ended December 31, 1993, 1992 and 1991 were $20,000, $20,000
and $24,167, respectively.

The State of California imposes limits on the amount of certain expenses
the Fund can pay. If these expense limitations are exceeded, the Manager is
required to reduce the amount by which these expenses exceed the expense
limitation.

In the past, and for future fiscal periods, the state of California has
granted the Fund a variance from the expense limitation to allow the Fund to
exclude from its aggregate annual expenses transfer agency fees, professional
fees, and report costs attributable to the Fund's average account size being
smaller than the average account size for investment companies with an objective
similar to the Fund's and the amount by which its custodian fee ratio exceeds
the average custodian fee ratio for the domestic portion of portfolio securities
of the equity funds in the United Group. Other expenses excluded from aggregate
annual expenses include interest, taxes, brokerage commissions and extraordinary
expenses, such as litigation.

The Fund will notify shareholders of any change in the variance. For the
fiscal years ended December 31, 1993, 1992 and 1991, no expense reimbursement by
Waddell & Reed, Inc., the then investment manager, was required.

Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, the Manager
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 the Manager 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 the fiscal years ended December 31, 1993, 1992 and
1991 were $180,359, $87,567 and $107,724, respectively. The amounts retained by
Waddell & Reed, Inc. for these same periods were $79,879, $39,053 and $48,927,
respectively.

A major portion of the sales charge is paid to sales representatives and
managers of Waddell & Reed, Inc. Waddell & Reed. Inc. may compensate its sales
representatives 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 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 Service Plan (the "Plan") adopted by the Fund pursuant to Rule 12b-
1 under the Investment Company Act of 1940, 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, paid monthly, to reimburse Waddell & Reed,
Inc. for its costs and expenses in connection with the provision of personal
services to Fund shareholders and/or maintenance of shareholder accounts.

The Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that Waddell & Reed, Inc. may be reimbursed for amounts
it expends in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located at
field sales offices; engaging in other activities useful in providing personal
service to Fund shareholders and/or maintenance of shareholder accounts; and in
compensating broker-dealers who may regularly sell Fund shares for providing
shareholder services and/or maintaining shareholder accounts. For its fiscal
year ended December 31, 1993, the Fund paid (or accrued) $11,554 to Waddell &
Reed, Inc. as service fees.

The Plan and the Service Agreement were 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 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 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 United Missouri Bank, n.a., Kansas City, Missouri.
In general, it is responsible for holding the Fund's cash and securities. If
Fund assets are held in foreign countries, the Fund will comply with Rule 17f-5
under the Investment Company Act of 1940. Price Waterhouse, Kansas City,
Missouri, the Fund's independent accountants, audits the Fund's financial
statements.

PURCHASE, REDEMPTION AND PRICING OF SHARES

Determination of Offering Price

The net asset value of one of the shares of the Fund is the value of its
assets, less what it owes, divided by the total number of shares. For example,
if on a particular day the Fund owned securities worth $100 and had cash of $15,
the total value of the assets would be $115. If it owed $5, the net asset value
would be $110 ($115 minus $5). If it had 11 shares outstanding, the net asset
value of one share would be $10 ($110 divided by 11).

Shares of the Fund are sold at their next determined net asset value plus
the sales charge described in the Prospectus. The price makeup as of December
31, 1993 was as follows:

Net asset value per share (net assets divided by
capital shares outstanding) ..................... $9.97
Add: selling commission (5.75% of offering price).. .61
-----
Maximum offering price per share (net asset value
per share divided by 94.25%) .................... $10.58
=====

The offering price of a share is its net asset value next determined
following acceptance of a purchase order plus the sales charge. 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 per share and offering price are ordinarily computed
once on each day that the New York Stock Exchange is open for trading. Net
asset value per share will be computed on each day on which it is computed as of
the later of the close of the regular session of the New York Stock Exchange or
the close of the regular session of any such domestic securities or commodities
exchange on which an option or future held by the Fund is traded. The New York
Stock Exchange annually announces the days on which it will not be open for
trading. The most recent announcement indicates that it will not be open on the
following days: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However, it is
possible that the Exchange may close on other days. The net asset value will
change every business day, since the value of the assets changes every day and
so does the number of shares.

The Fund's portfolio securities, except as otherwise noted, listed or
traded on a national securities exchange are valued on the basis of the last
sale price on that day or, lacking any sales at a price which is the mean
between the closing bid and asked prices. Securities which are traded over-the-
counter are valued at the mean between bid and asked prices provided by NASDAQ
(National Association of Securities Dealers Automated Quotations). Bonds, other
than U.S. Government Securities and convertible bonds, are valued using a
pricing system provided by a major dealer in bonds. 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.
Foreign securities which are listed or traded only on a foreign securities
exchange will be valued using the last sale price on that exchange prior to the
computation, or, if no sale is reported at that time, the mean between the bid
and asked prices. Foreign securities represented by American Depository
Receipts listed or admitted to trading on a domestic securities exchange or
traded in the United States over-the-counter market will be valued in the same
manner as domestic exchange listed or over-the-counter securities. Foreign
securities issued or guaranteed by any foreign government or any subdivision,
agency or instrumentality thereof are valued by the same methods indicated above
for the valuation of bonds. As to foreign securities which are quoted in foreign
currencies, such quotation will be converted to U.S. dollars using foreign
exchange rates. 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.

As to U.S. Government Securities, the Board of Directors has decided to use
the prices quoted by a dealer in bonds which offers a pricing service to value
U.S. Government Securities. The Board of Directors believes that such a service
does quote their fair value. The Board of Directors, however, may hereafter
determine to use another service or use the bid price quoted by dealers if it
should determine that such service or quotes more accurately reflect the fair
value of U.S. Government Securities held by the Fund.

Gold and silver bullion will be valued at the last spot settlement price on
the Commodity Exchange, Inc., and platinum bullion will be valued at the last
spot settlement price or, if not available, the settlement price of the nearest
contract month on the New York Mercantile Exchange. If prices are not available
on any of these exchanges, the relevant precious metal will be valued at prices
in the bullion market or markets approved by the Board of Directors for that
purpose; if there is no readily available market quotation, then bullion will be
valued at fair value as determined in good faith, by the Board of Directors.

Puts, calls and Government Securities Futures 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 bid and asked prices. (Ordinarily, the close of option trading on
national securities exchanges is 4:10 P.M. Eastern time and the close of
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 price of that 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 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 the Fund
receives 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 purchase transaction, the
Fund will have a gain or loss depending on whether the premium was more or less
than the cost of the closing transaction.

Minimum Initial and Subsequent Investments

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

Waddell & Reed, Inc., in addition to distributing shares of the funds in
the United Group, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. may
distribute certain limited partnership investment interests from time to time.
These investments may provide distributions at various intervals in amounts less
than $500. A Fund account may be set up by an investor in these limited
partnerships to receive partnership distributions of $25 or more. Accordingly,
the $500 minimum initial investment will not apply to such accounts.

Reduced Sales Charges

Account Grouping

Large purchases are subject to lower sales charges. The schedule of sales
charges appears in the Prospectus. 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 Gift to Minors Act ("UGMA")or Uniform Transfers to Minors Act
account;

6. Purchases by that individual or his or her spouse for his or her Individual
Retirement Account ("IRA"), Section 457 (of the Code) salary reduction plan
account, 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 a UGMA for grandson A; Grandmother has an account in
her own name; A's father has an account in his own name; the UGMA 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 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 made for a participant in a multi-participant Keogh plan may
be grouped only with other purchases made under the same plan; a multi-
participant Keogh plan is defined as a 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.

Example A: 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 B: 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 made under a "qualified" employee benefit plan of an
incorporated business will be grouped. A "qualified" employee benefit plan is
established pursuant to Section 401 of the Code. All qualified employee benefit
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.

Example: 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.

All purchases 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 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 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 Uniform Gift to Minors Act accounts for
H and W's three minor children and invest $10,000 in each child's name;
the combined purchase of $105,000 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 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 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 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 an investment
program ("contractual plan") the shares held under the plan may be combined with
the additional purchase only if the contractual plan has been completed.

Statement of Intention

The benefit of a reduced sales charge for larger purchases 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 is accepted by Waddell & Reed, Inc..
Each purchase made from time to time under the Statement 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 made under the terms of
the Statement 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, 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
shares at the sales charge applicable to a purchase of $100,000. H
has an IRA account and the shares held under the IRA in the Fund have
a net asset value as of the date the Statement 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 $10,000; H needs to invest $75,000 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 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 an investment
program ("contractual plan"), the shares held under the plan will be taken into
account in determining the amount which must be invested under the Statement
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 the Statement. An amount equal to 5%
of the purchase required under the Statement will be held "in escrow." If a
purchaser does not, during the period covered by the Statement, invest the
amount required to qualify for the reduced sales charge under the terms of the
Statement, 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 made under a Statement which is not completed will be collected by
redeeming part of the shares purchased under the Statement 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.

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 will be deducted in computing the aggregate purchases under the
Statement.

Statements of Intention are not available for purchases made under a
simplified employee pension plan ("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 apply to purchases of any of the
funds in the United Group which are subject to a sales charge. A purchase of,
or shares held, in any of the funds in the United Group which are subject to the
same sales charge as the Fund will be treated as an investment in the Fund for
the purpose of determining the applicable sales charge. The following funds in
the United Group are subject to a maximum 5.75% ("full") sales charge as
described in the prospectus of each Fund: United Funds, Inc., United
International Growth Fund, Inc., United Continental Income Fund, Inc., United
Vanguard Fund, Inc., United Retirement Shares, Inc., United High Income Fund,
Inc., United New Concepts Fund, Inc., United Gold & Government Fund, Inc. and
United High Income Fund II, Inc. The following funds in the United Group are
subject to a "reduced" sales charge as described in the prospectus of each fund:
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc. and
United Municipal High Income Fund, Inc. For the purposes of obtaining the lower
sales charge which applies to large purchases, purchases in a fund in the United
Group which is subject to a full sales charge may not be grouped with purchases
in a fund in the United Group which is subject to a reduced sales charge;
conversely, purchases made in a fund with a reduced sales charge may not be
grouped or combined with purchases of a fund which is subject to a full sales
charge.

United Cash Management, Inc. is not subject to a sales charge. Purchases
in that fund are not eligible for grouping with purchases in any other fund.

Net Asset Value Purchases

As stated in the Prospectus, Fund shares may be purchased at net asset
value by the Directors and officers of the Fund, employees of Waddell & Reed,
Inc., employees of their affiliates, sales representatives of Waddell & Reed,
Inc. and the spouse, children, parents, children's spouse's and parents of each
such Director, officer, employee and sales representative. "Child" includes
stepchild; "parent" includes stepparent. Purchases 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.
"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. "Sales representatives" includes retired sales
representatives. A "retired sales representative" is any sales representative
who was, at the time of separation from service from Waddell & Reed, Inc., a
Senior Account Representative. A custodian under the Uniform Gifts (or
Transfers) to Minors Act purchasing for the child or grandchild of any employee
or sales representative may purchase at net asset value whether or not the
custodian himself is an eligible purchaser.

Reasons for Differences in Public Offering Price

As described herein and in the Prospectus, there are a number of instances
in which the Fund's shares are sold or issued on a basis other than the maximum
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, 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 distributions); and (iii)
they are designed to avoid an unduly large dollar amount of sales charges 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 are as follows. Exchanges at net asset value are
permitted because a sales charge has already been paid on the shares exchanged.
Sales 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 at no sales charge are
permitted to attempt to protect against mistaken or not fully informed
redemption decisions. 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 in the Investment Company Act of 1940 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 interests
of existing 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

If you qualify, you may arrange to receive regular monthly, quarterly,
semi-annual or annual payments; this can be done by redeeming shares on a
regular basis. This service is called Flexible Withdrawal Service (the
"Service"). It is available not only for Fund shares but also for shares 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 as
this would result in duplication of sales charges.

To qualify for this Service, you must have invested at least $10,000 in
shares which you still own of any of the funds in the United Group; or, you must
own shares having a value of at least $10,000. The value for this purpose is
not the net asset value but the value at the offering price, i.e., the net asset
value plus the sales charge.

To start this Service, you must fill out a form (available from Waddell &
Reed, Inc.) advising Waddell & Reed, Inc. how you want your shares redeemed to
make the payments. You have three choices:

First. To get a monthly, quarterly, semi-annual or annual payment of $50
or more;

Second. To get 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 fix
the percentage; or

Third. To get 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.

The Fund, not Waddell & Reed, Inc., pays the costs of this Service. Having
the Service costs you nothing extra individually. There is a $2.00 fee for each
withdrawal from Retirement Plan Accounts.

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

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

You may, at any time, change the manner in which you have chosen to have
shares redeemed. You can change to any one of the other choices originally
available to you. For example, if you started out with a $50 monthly payment,
you could change to a $200 quarterly payment. You can 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.

Exchanges for Shares of Other Funds in the United Group

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 reinvestment of dividends or
distributions may be freely exchanged for 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 shares you own in another fund in the United Group for
Fund shares 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 exceptions and
special rules apply. Shares of these funds may be exchanged for Fund shares
only if (i) you have 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 the original purchase for at least six months.

Subject to the above rules regarding sales charges, you may have a specific
dollar amount of shares of United Cash Management, Inc. automatically exchanged
each month into 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 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 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.

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 we receive your written exchange request 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

For individual taxpayers meeting certain requirements, Waddell & Reed, Inc.
offers four retirement plan arrangements which provide tax deferral and
contribute to retirement assets. All four of them involve investment in Fund
shares (or the shares of certain other funds in the United Group).

First. A self-employed person may set up a plan that is commonly called a
Keogh 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
a maximum of $30,000.

Second. Investors having earned income may set up a plan that is commonly
called an IRA. Under an IRA, an investor can contribute each year up to 100% of
his or her earned income up to a maximum of $2,000. The maximum is $2,250 if an
investor's spouse has no earned income in a taxable year. If an investor's
spouse has at least $2,000 of earned income in a taxable year, the maximum is
$4,000 ($2,000 for each spouse).

These 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 participates, the
adjusted gross income does not exceed certain levels.

An investor may also use an IRA to receive a rollover contribution which is
either (a) a direct rollover 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 an 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 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.

Third. 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 custodial account under Section
403(b) of the Code.

Fourth. 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.

Waddell & Reed, Inc. also offers to businesses prototype employee benefit
plans qualified under Section 401 of the Code. Investments may be made in the
Fund in accordance with the terms of the plans.

More detailed information about these arrangements is in the applicable
forms which 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; the emergency
or other extraordinary conditions there indicated under which payment may be
delayed beyond seven days are certain emergency conditions determined by the
Securities and Exchange Commission, when the New York Stock Exchange is closed
other than for weekends or holidays, or when trading on the Exchange is
restricted. The extraordinary conditions mentioned in the Prospectus under
which redemptions may be made in portfolio securities are that the Fund's Board
of Directors can decide that conditions exist making cash payments undesirable.
If they should, redemption payments could be made in securities. They would be
valued at the value used in figuring net asset value. There would be brokerage
costs to the redeeming shareholder in selling such securities. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
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 discusses the reinvestment privilege under which, if you
redeem and then decide it was not a good idea, you may reinvest. If Fund shares
are then being offered, you can put all or part of your redemption payment back
into Fund shares 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 Fund shares. You do not use up this privilege by redeeming
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 of Directors 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 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.

Each of the Fund's Directors is also a Director of each of the other funds
in the United Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc.,
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund,
Inc. and each of its officers, with the exception of Mr. Avery, is also an
officer of one or more of these funds. The principal occupation of each
Director and officer during at least the past five years is given below. Each
of the persons listed through and including Mr. Wright is a member of the Fund's
Board of Directors. The other persons are officers but not Board members.

RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund; Chairman of the Board of
Directors of Waddell & Reed Financial Services, Inc., United Investors
Management Company and United Investors Life Insurance Company; Chairman of the
Board of Directors and Chief Executive Officer of Torchmark Corporation;
formerly, Chairman of the Board of Directors of Waddell & Reed, Inc.

KEITH A. TUCKER*
President of the Fund; President, Chief Executive Officer and Director of
Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors of
the Manager, Waddell & Reed, Inc., Waddell & Reed Services Company, Waddell &
Reed Asset Management Company and Torchmark Distributors, Inc., an affiliate of
Waddell & Reed, Inc.; Vice Chairman of the Board of Directors, Chief Executive
Officer and President of United Investors Management Company; Vice Chairman of
the Board of Directors of Torchmark Corporation; formerly, partner in Trivest, a
private investment concern; formerly, Director of Atlantis Group, Inc., a
diversified company.

HENRY L. BELLMON
Route 1
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the funds in the United
Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc., he served in
such capacity for the funds in the United Group and TMK/United Funds, Inc.

DODDS I. BUCHANAN
University of Colorado
Campus Box 419
Boulder, Colorado 80309
Professor of Marketing, College of Business, University of Colorado;
Advisory Director, The Hand Companies; President, Buchanan Ranch Corp.;
formerly, Senior Vice President and Director of Marketing Services, The Meyer
Group of Management Consultants; formerly, Chairman, Department of Marketing,
Transportation and Tourism, University of Colorado.

JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Partner in Dillingham Farms, a farming operation; formerly, President and
Director of Kansas City Stock Yards Company.

JOHN F. HAYES*
335 N. Washington
P.O. Box 2977
Hutchinson, Kansas 67504-2977
President of Gilliland & Hayes, P.A., a law firm; Director of Central Bank
and Trust.

GLENDON E. JOHNSON
7300 Corporate Center Drive
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Life Insurance Company.

WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund, each Fund in the United Group, TMK/United Funds, Inc., Waddell & Reed
Funds, Inc., Torchmark Government Securities Fund, Inc. and Torchmark Insured
Tax-Free Fund, Inc. (Mr. Morgan retired as Chairman of the Board of Directors
and President of these Funds on April 30, 1993); formerly, President, Director
and Chief Executive Officer of the Manager and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company, United Investors Management
Company and United Investors Life Insurance Company, affiliates of Waddell &
Reed, Inc.

DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management and
investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.

FREDERICK VOGEL, III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Formerly, President and Director of Univest Corporation, a real estate
investment company; formerly, Director of Classified Financial Corp., an
insurance company.

PAUL S. WISE
P.O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.

LESLIE S. WRIGHT
Samford University
800 Lakeshore Drive
Birmingham, Alabama 35209
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.

Robert L. Hechler
Vice President of the Fund; Vice President, Chief Operations Officer,
Director and Treasurer of Waddell & Reed Financial Services, Inc.; Executive
Vice President, Principal Financial Officer, Director and Treasurer of the
Manager; President, Chief Executive Officer, Principal Financial Officer,
Director and Treasurer of Waddell & Reed, Inc.; Director and Treasurer of
Waddell & Reed Asset Management Company; President, Director and Treasurer of
Waddell & Reed Services Company; Vice President, Treasurer and Director of
Torchmark Distributors, Inc.

Henry J. Herrmann
Vice President of the Fund; 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 the Manager and Waddell & Reed Asset Management Company; Senior Vice
President and Chief Investment Officer of United Investors Management Company.

Theodore W. Howard
Vice President and Treasurer of the Fund; Vice President of Waddell & Reed
Services Company.

Rodney O. McWhinney
Vice President, Assistant Secretary and General Counsel of the Fund; Vice
President, Secretary and General Counsel of Waddell & Reed Financial Services,
Inc.; Senior Vice President, Secretary and General Counsel of the Manager and
Waddell & Reed, Inc.; Director, Senior Vice President, Secretary and General
Counsel of Waddell & Reed Services Company; Director, Secretary and General
Counsel of Waddell & Reed Asset Management Company; Vice President, Secretary
and General Counsel of Torchmark Distributors, Inc.; Director of ICI Mutual
Insurance Company.

Sharon K. Pappas
Vice President, Secretary and Assistant General Counsel of the Fund;
Assistant Secretary and Assistant General Counsel of the Manager; Assistant
General Counsel of Waddell & Reed Financial Services, Inc., Waddell & Reed,
Inc., Waddell & Reed Asset Management Company and Waddell & Reed Services
Company; formerly, an associate with Stinson, Mag & Fizzell, a law firm.

Michael L. Avery
Vice President of the Fund; Vice President of the Manager; formerly, Vice
President of Waddell & Reed, Inc.

John M. Holliday
Vice President of the Fund; Senior Vice President of the Manager and of
Waddell & Reed Asset Management Company; formerly, Senior Vice President of
Waddell & Reed, Inc.

Carl E. Sturgeon
Vice President of the Fund; Vice President of the Manager; formerly, Vice
President of Waddell & Reed, Inc.

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

As of the date of this SAI, four of the Fund's Directors may be deemed to
be "interested persons" of its underwriter, Waddell & Reed, Inc. The Directors
who may be deemed to be "interested persons" as defined in the Investment
Company Act of 1940 are denoted 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 75 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 past services whether or not
services are rendered in his capacity as Director Emeritus, but has no authority
or responsibility with respect to management of the Fund.

The funds in the United Group, TMK/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $40,000 per year, plus $500 for each
meeting of the Board of Directors attended and $500 for each committee meeting
attended which is not in conjunction with a Board of Directors meeting, other
than Directors who are affiliates of Waddell & Reed, Inc. The fees to the
Directors who receive them are divided among these funds based on their relative
size. During the Fund's fiscal year ended December 31, 1993, its share was
$1,337. The officers are paid by the Manager or its affiliates.

Shareholdings

As of March 1, 1994, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund. As of such date no
person owned of record or was known by the Fund to own beneficially 5% or more
of the Fund's outstanding shares.

PAYMENTS TO SHAREHOLDERS

General

There are two sources for the payments the Fund makes to you as a
shareholder 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 the Fund receives on the securities it holds, less
its expenses. The second source is realized capital gains, which are derived
from the Fund's proceeds received from the sale of securities at a price higher
than the Fund's basis (usually cost) in such securities; 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 payments made to shareholders from net investment income, net short-
term capital gains and realized gains from certain foreign currency transactions
are called dividends. Payments, if any, from long-term capital gains (including
gains from other foreign currency transactions) are called distributions.

The Fund pays distributions only if it has net capital gains (the excess of
net long-term capital gain over net short-term capital loss). It may or may not
have such gains, depending on whether securities are sold and at what price. If
the Fund has net capital gains, it will distribute the gains in the latter part
of the fourth calendar quarter. Even if the Fund has net capital gains for a
year, it does not pay the gains out if it has applicable prior year losses to
offset the gains.

Choices you have on your Dividends and Distributions

In your application form, you can give instructions that (i) you want cash
for your dividends and distributions or (ii) you want cash for your dividends
and want your distributions reinvested in Fund shares. You can change your
instructions at any time. If you give neither instruction, your dividends and
distributions will be reinvested in Fund shares. All reinvestments are at net
asset value without any sales charge. The net asset value used for this purpose
is that computed as of the payment date for the dividend or distribution,
although this could be changed by the Directors.

Even if you get dividends and distributions in cash, you can thereafter
reinvest them (or distributions only) in Fund shares at net asset value (i.e.,
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

In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Code, the Fund must distribute to its shareholders for
each taxable year at least 90% 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) ("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 or
Forward Contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Fund must derive
less than 30% of its gross income each taxable year from the sale or other
disposition of securities, or any of the following, that were held for less than
three months--options or Futures, or foreign currencies or Forward Contracts
that are not directly related to the Fund's principal business of investing in
securities (or options and Futures with respect to securities) ("Short-Short
Limitation"); (3) at the close of each quarter of the 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 issuers outstanding voting securities (50% Diversification
Requirement"); and (4) 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.

Investments in precious metals would have adverse tax consequences for the
Fund if it either (1) derived more than 10% of its gross income in any taxable
year from the disposition of precious metals and from other income that does
qualify under the Income Requirement or (2) held precious metals in such
quantities that the Fund failed to satisfy the 50% Diversification Requirement
for any quarter. The Fund intends to manage its portfolio so as to avoid
failing to satisfy those requirements for these reasons.

Dividends and distributions declared by the Fund in December and payable to
shareholders of record on a date in that month are deemed to have been paid by
the Fund and received by you in that month even if the Fund pays them during the
following January.

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 purchaser 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 gains net income for the
one-year period ending on October 31 of that year, plus certain other amounts.

Income from Foreign Securities

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

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 foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of each 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 Currencies

The use of hedging strategies, such as writing (selling) and purchasing
options and Futures and entering into Forward Contracts, involves complex rules
that will determine for income tax purposes the character and timing of
recognition of the gains and losses the Fund realizes in connection therewith.
Income from foreign currencies (except certain gains therefrom that may be
excluded by future regulations), and income from transactions in options,
Futures and Forward Contracts derived by the Fund with respect to its business
of investing in securities, will qualify as permissible income under the Income
Requirement. However, income from the disposition of options and Futures will
be subject to the Short-Short Limitation if they are held for less than three
months. Income from the disposition of foreign currencies and Forward Contracts
that are not directly related to the Fund's principal business of investing in
securities (or options and futures with respect to securities) also will be
subject to the Short-Short Limitation if they are held for less than three
months.

If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all the Funds' hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of certain options, futures and Forward Contracts beyond the time
when it otherwise would be advantageous to do so, in order for the Fund to
continue to qualify as a RIC.

Any income the Fund earns from writing covered calls is taxed as short-term
capital gains. If the Fund enters into a closing purchase transaction (see "Put
and Call Options" under "Investment Objective and Policies"), it will have a
short-term capital gain or loss based on the difference between the premium it
received for the call it wrote and the premium it pays for the call it buys. If
a call written by the Fund expires without being exercised, the premium it
receives is also a short-term capital gain. If a call the Fund writes is
exercised and thus it sells the securities subject to the call, the premium it
received is added to the exercise price to determine the gain or loss on the
sale. The Fund will not write so many covered calls that it could fail to
continue to qualify as a RIC.

Certain options and Futures in which the Fund may invest will be "section
1256 contracts." Section 1256 contracts held by the Fund at the end of each
taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which the Fund has made an election not to have the
following rules apply, are "marked-to-market" (that is, treated as sold 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 gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, are
treated as long-term capital gain or loss, and the balance are treated as short-
term capital gain or loss. Section 1256 contracts also may be marked-to-market
for purposes of the Excise Tax and for other purposes.

Code section 1092 (dealing with "straddles") also may affect the taxation
of options and Futures in which the Fund may invest. Section 1092 defines a
"straddle" as offsetting positions with respect to personal property; for these
purposes, options and Futures 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. Section 1092 also provides 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 certain
"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.

PORTFOLIO TRANSACTIONS AND BROKERAGE

One of the duties undertaken by the Manager 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. When possible,
concurrent orders to purchase or sell the same security by more than one of the
funds or advisory accounts managed by the Manager or its affiliates are
combined. 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.

To effect the portfolio transactions of the Fund, the Manager 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 achieve "best
execution" (prompt and reliable execution at the best price obtainable) for
reasonable and competitive commissions. The Manager 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 ("brokerage services")
considered by the Manager to be useful or desirable for its investment
management of the Fund and/or the other funds and accounts over which the
Manager or its affiliates have investment discretion.

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 brokerage services may be
higher than another qualified broker would charge for effecting comparable
transactions if a good faith determination is made by the Manager that the
commission is reasonable in relation to the brokerage services provided. Subject
to the foregoing considerations the Manager may also consider the willingness of
particular brokers and dealers to sell shares of the Fund and other funds
managed by the Manager and its affiliates as a factor in its selection. No
allocation of brokerage or principal business is made to provide any other
benefits to the Manager or its affiliates.

The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of the Manager and its affiliates
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 the
Manager 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 the Manager.

Such investment research (which may be supplied by a third party at the
instance 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 the
Manager; serves to make available additional views for consideration and
comparisons; and enables the Manager to obtain market information on the price
of securities held in the Fund's portfolio or being considered for purchase.

In placing transactions for the Fund's portfolio, the Manager may consider
sales of shares of the Fund and other funds managed by the Manager and its
affiliates as a factor in the selection of brokers to execute portfolio
transactions. The Manager intends to allocate brokerage on the basis of this
factor only if the sale is $2 million or more and there is no sales charge.
This results in the consideration only of sales which by their nature would not
ordinarily be made by Waddell & Reed, Inc.'s direct sales force and is done in
order to prevent the direct sales force from being disadvantaged by the fact
that it cannot participate in Fund brokerage.

During the Fund's fiscal years ended December 31, 1993, 1992 and 1991, the
Fund paid brokerage commissions of $136,655, $97,688 and $160,990, respectively.
These figures do not include principal transactions or spreads or concessions on
principal transactions, 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 last fiscal year, the transactions, other than principal
transactions, which were directed to broker-dealers who provided research as
well as execution totaled $11,841,232 on which $33,125 in brokerage commissions
were paid. These transactions were allocated to these broker-dealers by the
internal allocation procedures described above.

Buying and Selling With Other Funds

Sometimes the Fund and one or more of the other funds in the United Group,
TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc. or accounts over
which Waddell & Reed Asset Management Company exercises investment discretion
frequently will buy or sell the same securities at the same time. If this
happens, the amount of each purchase or sale is divided. This is done on the
basis of the amount each fund or account wanted to buy or sell. 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.

OTHER INFORMATION

The Shares of the Fund

The Fund presently has only one kind (class) of shares. Each share has the
same rights to dividends, to vote and to receive assets if the Fund liquidates
(winds up). Each fractional share has the same rights, in proportion, as a full
share. Shares are fully paid and nonassessable when bought. The Board has the
authority to classify unissued shares into one or more additional classes but it
has no intention of doing so.