10-K

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2002

OR

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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-13913

WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

Delaware	51-0261715
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6300 Lamar Avenue
Overland Park, Kansas 66202
913-236-2000
(Address, including zip code, and telephone number of Registrant's principal executive offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class	Name of each exchange on which registered
Class A Common Stock, $.01 par value	New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None
(Title of class)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X   No       .

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. (    )

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   X   No       .

        The aggregate market value of the voting and non-voting common stock equity held by non-affiliates (i.e. persons other than officers, directors and stockholders holding greater than 5% of the registrant's common stock) based on the closing sale price on June 28, 2002 was $1.474 billion.

        Shares outstanding of each of the registrant's classes of common stock as of March 21, 2003

Class A common stock, $.01 par value: 80,684,163

DOCUMENTS INCORPORATED BY REFERENCE

        In Part III of this Form 10-K, portions of the definitive proxy statement for the 2003 Annual Meeting of Stockholders to be held April 30, 2003.

Index of Exhibits (Pages 94 through 97)
Total Number of Pages Included Are 97

WADDELL & REED FINANCIAL, INC.


INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2002

Part I		Page
Item 1.	Business	3
	Organization	3
	Overview	3
	Revenues from Operations	6
	Investment Management Agreements	6
	Funds and Asset Management	7
	Change in Assets Under Management	9
	Ending and Average Assets Under Management	10
	Funds Summary	11
	Underwriting and Distribution	12
	Distribution Channels	14
	Investment Product Sales	17
	Service Agreements	18
	Regulation	18
	Competition	20
	Intellectual Property	22
	Employees and Financial Advisors	22
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	Submission of Matters to a Vote of Security Holders	25
Part II
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	25
Item 6.	Selected Financial Data	29
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
	Critical Accounting Policies	31
	Liquidity and Capital Resources	45
	Risk Factors	49
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 8.	Financial Statements and Supplementary Data	54
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	54
Part III
Item 10.	Directors and Executive Officers of the Registrant	55
Item 11.	Executive Compensation	55
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	55
Item 13.	Certain Relationships and Related Transactions	55
Item 14.	Controls and Procedures	55
Part IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	56
SIGNATURES		57
CERTIFICATIONS		59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		61
INDEX TO EXHIBITS		94

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PART I

ITEM 1. Business

Organization

        Waddell & Reed Financial, Inc. (hereinafter referred to as the "Company," "we," "our" or "us") is a Delaware corporation that conducts business through its subsidiaries. One subsidiary, Waddell & Reed Investment Management Company ("WRIMCO"), is a registered investment adviser that provides investment management and advisory services to our mutual funds, institutions and other private clients. Both WRIMCO and Austin, Calvert & Flavin, Inc. ("ACF"), an investment management subsidiary based in San Antonio, Texas, manage investments for endowments, foundations, trusts, high net worth families and individuals, and pension plans of corporations, hospitals, schools, and labor unions. Another subsidiary, Waddell & Reed, Inc. ("W&R"), is a registered investment adviser and a registered broker-dealer that acts primarily as the national distributor and underwriter for shares of our mutual funds and the distributor of variable and other insurance products issued by Nationwide Life Insurance Company, a subsidiary of Nationwide Financial Services, Inc. ("Nationwide"), and others. Waddell & Reed Services Company ("WRSCO") provides transfer agency and accounting services to our mutual funds. On March 31, 2000, we completed the acquisition of The Legend Group ("Legend"), including its registered broker-dealer and registered investment adviser, Legend Equities Corporation ("LEC"), based in Palm Beach Gardens, Florida. Through its network of over 348 retirement advisors, Legend primarily serves employees of school districts and other not-for-profit organizations. On December 16, 2002, we completed the acquisition of the business of Mackenzie Investment Management Inc. ("MIMI"), a Florida-based investment management subsidiary of Toronto-based Mackenzie Financial Corporation ("MFC"). We operate MIMI's business through our subsidiary, Waddell & Reed Ivy Investment Company ("WRIICO"). WRIICO is a registered investment adviser and WRIICO's subsidiary, Ivy Mackenzie Distributors, Inc. ("IMDI"), is a registered broker-dealer for the Ivy Fund portfolios (the "Ivy Funds") sold in the United States. Waddell & Reed Financial, Inc., W&R, WRIMCO, WRSCO, ACF, Legend, WRIICO, and IMDI are hereafter collectively referred to as the "Company," "we," "us," or "our," unless the context requires otherwise.

        We file reports, proxy statements, and other information with the United States Securities and Exchange Commission (the "SEC"), copies of which can be obtained from the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

        Reports we file electronically with the SEC via the SEC's Electronic Data Gathering, Analysis and Retrieval system ("EDGAR") may be accessed through the Internet. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at http://www.sec.gov. During 2002 we made available on our website, http://www.waddell.com, free of charge our most recent annual report on Form 10-K and made our quarterly reports on Form 10-Q, current reports on Form 8-K, and other SEC filings available through our website via a link to http://www.10kwizard.com. In 2003, we began posting our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K on our website on the same day they are electronically filed with the SEC. In addition, our other SEC filings continue to be available through our website via the link to http://www.10kwizard.com. Additional information about Waddell & Reed Financial, Inc. can also be obtained under the "Corporate" section of our website.

Overview

        We were founded in 1937 to be a committed provider of sound investment products and services. We are one of the oldest mutual fund complexes in the United States, having introduced the Waddell & Reed Advisors Group of Mutual Funds (formerly, the United Group of Mutual Funds) in 1940. On June 30, 2000, we renamed two of our mutual fund families. The United Group of Mutual Funds was renamed the Waddell & Reed Advisors Group of Mutual Funds (the "Advisors Funds") and Waddell & Reed

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Funds, Inc. was renamed W&R Funds, Inc. (the "W&R Funds"). On October 16, 2000, Target/United Funds, Inc. was renamed W&R Target Funds, Inc. (the "Target Funds"). Excluding WRIICO, we have approximately 650,000 mutual fund customers having an average investment of $29,000 and over 81,000 variable account customers having an average investment of $36,000. We completed an initial public offering ("IPO") of our Class A common stock in 1998.

        Our mutual fund families offer a variety of investment options including equity, growth, international, income, value, asset allocation, fixed income, and money market funds. In October 2001, we also introduced Waddell & Reed InvestEd Portfolios, Inc. ("InvestEd"), the mutual funds composing our 529 college savings plan, the Waddell & Reed InvestEd Plan. InvestEd has been organized as a "fund of funds," with three portfolios made up of various Advisors Funds. We are the exclusive underwriter and distributor of 63 registered open-end mutual fund portfolios, including 20 portfolios in the Advisors Funds family, 12 portfolios in the W&R Funds family, 16 portfolios in the Ivy Fund family, 12 portfolios in the Target Funds family, and 3 portfolios in InvestEd (collectively, the "Funds"). In addition to performing investment management services for the Funds, we act as an investment advisor for institutional and other private investors. As of December 31, 2002, we had $28.1 billion of assets under management, of which $22.5 billion were mutual fund assets and $5.6 billion were institutional or separately managed accounts. We also offer to our customers variable annuity and life insurance products underwritten by Nationwide. Additionally, Nationwide provides a broad span of private label insurance and retirement products for use by our proprietary sales force. Through our insurance agency subsidiaries, our financial advisors also sell life insurance and disability products underwritten by various carriers through a general agency arrangement with BISYS Insurance Services, Inc. ("BISYS").

        Our traditional market has generally been professionals and working families with annual incomes between $40,000 and $100,000 who are saving for retirement. We serve individual investors in markets of all sizes with a historical focus on smaller metropolitan areas and center our efforts primarily on meeting the needs of investors in unsaturated communities within those areas. We focus on retirement markets and conduct investment seminars throughout the United States to reach a large number of potential clients. We also provide financial plans for clients, offering one-on-one consultations emphasizing long-term relationships through continuing service, rather than a one-time sale. We believe that we are well-positioned to benefit from a developing industry trend toward "assisted sales" (sales of mutual fund products through a sales person) driven by the array of options now available to investors and the need for financial planning advice. We believe that demographic trends and shifts in attitudes toward retirement savings will continue to support increased consumer demand for our products and services. According to U.S. Census Bureau projections, the number of Americans between the ages of 45 and 64 will grow from 61.9 million in 2000 to 79.6 million in 2010, making this "pre-retirement" age group the fastest growing segment of the U.S. population.

        We sell our investment products primarily to middle income Americans through our proprietary sales force that sells our products almost exclusively (the "Waddell & Reed Advisors"). Separately, certain of our products are marketed and sold through select wholesale third-party channels. The Advisors Funds, variable products offering the Target Funds, and InvestEd are available for sale generally only through Waddell & Reed Advisors and Legend retirement advisors; select Advisors Funds are also for sale through wholesale third-party distribution channels in limited circumstances. The W&R Funds and select Ivy Funds are available for sale through Waddell & Reed Advisors, Legend retirement advisors, and select wholesale third-party distribution channels. On December 31, 2002, the Waddell & Reed Advisors sales force consisted of 3,466 financial advisors, district managers, and district supervisors managed by regional vice presidents and division, district, and associate managers operating through division and district sales offices. We believe, based on industry data, that Waddell & Reed Advisors are currently one of the largest sales forces in the United States selling primarily mutual funds. As of December 31, 2002, 32% of Waddell & Reed Advisors have been with us for more than five years and 20% for more than ten years.

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        In an endeavor to accelerate sales growth and complement distribution through the Waddell & Reed Advisors channel, we have expanded distribution of our investment products into select non-proprietary wholesale distribution channels, or third-party channels. In 2002, we completed the second full year of distribution through third-party channels. Our third-party efforts focus principally on seeking subadvisory relationships and distributing the W&R Funds, Ivy Funds, and select Advisors Funds through various channels, including broker-dealer 401(k) platforms using multiple managers and institutional fund supermarkets serving fee-based financial advisors. We believe that the number of third-party selling agreements, and the number of relationships through which we obtain sales, will continue to increase in 2003.

        Waddell & Reed Advisors compete primarily with small broker-dealers and independent financial advisors. We believe we are unique in the mutual fund industry in large part due to our virtually exclusive Waddell & Reed Advisors sales force. Not only do the members of our sales force gain loyal customers by forming relationships with their clients, but they also typically create profit as they collect assets for us to manage. As a result, through Waddell & Reed Advisors, we typically make a distribution profit in a normal market environment, and we are generally able to earn investment management fees on those assets for a much longer period of time than many others in the industry due to client retention fostered by our financial advisors.

        We have a seasoned team of portfolio managers and an internal equity and fixed income investment research staff that have substantial resources available to them, including numerous on and off-site meetings annually with management of the companies in which they invest. In addition, we utilize research provided by brokerage firms and independent outside consultants. Generally, portfolio managers have had extensive experience as investment research analysts prior to acquiring money management assignments. Among broad investment management styles, our largest is growth equity; however, we have significant experience in ten other broad investment management styles. As of December 31, 2002, approximately 76% of our mutual fund assets under management were invested in equity Funds with the remainder in fixed income and money market Funds. This investment strategy generally emphasizes investments at attractive valuations in companies that the portfolio managers believe can produce above average growth in earnings.

        Our investment philosophy and financial planning approach emphasize long-term investments. Our portfolio managers strive for consistent long-term performance while seeking to provide downside protection in turbulent markets. As a result, we have developed a loyal customer base with clients maintaining their accounts for approximately 9 years on average as compared to 3 years for the mutual fund industry, as derived from statistics provided by the Investment Company Institute. This loyalty is evidenced by a relatively low long-term retail fund redemption rate (excluding Ivy Funds) for the five years ended December 31, 2002 of 8.2%, which is less than one-third of the industry average, and a relatively high dividend reinvestment rate of 89% for those Funds (excluding Ivy Funds) for the same period, which is consistently higher than the industry average. At December 31, 2002, approximately 53% of our mutual fund assets under management (excluding the Ivy Funds and the Target Funds) are in retirement accounts and, including variable annuity assets, 59% of our mutual fund assets are what we consider "stable assets," i.e., assets which are invested for a very long period of time.

        We derive our revenues primarily from providing investment management, distribution, and administrative services to the Funds and institutional and separately managed accounts. Investment management fees, our most substantial source of revenue, are based on the amount of assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Underwriting and distribution revenues, also a substantial source of revenue, consist of sales charges and commissions derived from sales of investment products, insurance products, and distribution and service fees, as well as advisory services. The products sold have various sales charge structures and the revenues received from product sales vary based on the type and amount sold. Rule 12b-1 of the Investment Company Act of 1940, as amended, (the "ICA") authorizes mutual funds to use their assets to pay for marketing and distribution expenses, such as compensating sales professionals. We collect Rule 12b-1

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distribution and service fee revenues from certain of our mutual fund shares, earned for distributing and servicing those shares, based upon a percentage of the mutual fund's assets, which fluctuate based on sales, redemptions, and financial market conditions. Other service fee revenues collected from our mutual funds include transfer agency fees, custodian fees for retirement plan accounts, and accounting fees.

Revenues from Operations

        Revenues from operations for the last three years were:

		For years ended December 31,
		2002		2001	2000
		(in thousands)
Revenues from:
	Investment management fees	$	186,038	214,242	253,774
	Underwriting and distribution fees		183,133	203,535	202,879
	Shareholder service fees		65,690	59,381	53,436
	Revenues excluding investment and other income		434,861	477,158	510,089
	Investment and other income		4,264	5,404	10,613
	Total revenues	$	439,125	482,562	520,702

Investment Management Agreements

        We earn investment management fee revenues by providing investment advisory and management services pursuant to an investment management agreement with each Fund. While the specific terms of the agreements vary, the basic terms are similar. The agreements provide that we render overall management services to each of the Funds, subject to the oversight of each Fund's board of directors or trustees and in accordance with each Fund's fundamental investment objectives and policies. The agreements permit us to enter into separate agreements for shareholder services or accounting services with the respective Funds.

        Each Fund's board of directors/trustees, including a majority of the directors/trustees who are not "interested persons" of the Fund or the Company within the meaning of the ICA ("disinterested members") and the Fund's shareholders must approve the investment management agreement between the respective Fund and the Company. These agreements may continue in effect from year to year if specifically approved at least annually by (i) the Fund's board, including a majority of the disinterested members, or (ii) the vote of a majority of the shareholders of the Fund and the vote of a majority of the disinterested members of each Fund's board, each vote being cast in person at a meeting called for such purpose. Each agreement automatically terminates in the event of its assignment, as defined by the ICA or the Investment Advisers Act of 1940, as amended, (the "Advisers Act"), and may be terminated without penalty by the Fund by giving us 60 days' written notice if the termination has been approved by a majority of the Fund's directors/trustees or the Fund's shareholders. We may terminate an investment management agreement without penalty on 120 days' written notice.

        In addition to performing investment management services for the Funds, we provide subadvisory services to other investment companies and we act as an investment adviser for institutional and other private investors. For our subadvisory services, we receive fees that are computed based on a percentage of daily assets under management. For our services as an investment adviser to institutional and other private investors, we receive a fee that is generally based on a percentage of assets under management at the end of a specified period and are generally paid in arrears. A limited number of separate accounts allow for additional fees contingent upon certain relative performance measurements being met. Such services are provided pursuant to various written agreements.

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Funds and Asset Management

        We serve as underwriter for, and investment adviser to, the Advisors Funds, the W&R Funds, the Target Funds, the Ivy Funds, and InvestEd and distribute variable annuity and variable life insurance products offering the Target Funds. We also serve as a registered investment adviser that provides investment management and advisory services to institutional clients and other separately managed accounts.

        We offer the Funds' shareholders a broad range of investment products designed to attract and retain clients with varying investment objectives. Among broad investment management styles, our largest is growth equity; however, we have significant experience in ten other broad investment management styles. The growth equity investment strategy emphasizes investments at attractive valuations in companies that the portfolio managers believe can produce above average growth in earnings. According to an annual Barron's/Lipper fund-family survey (the "Survey") ranking investment performance of mutual fund complexes, overall, the Waddell & Reed Investment Management complex ranked in the top 39th percentile and top 34th percentile for the five-year and ten-year periods ended December 31, 2002, respectively. To be included in the rankings, a complex must include one or more money-market funds, at least three U.S. stock funds, at least one foreign stock portfolio and one balanced or asset-allocation fund that invests in both bonds and stocks. Complexes also must offer at least two taxable bond funds and a least one municipal bond fund. There were 81 fund families ranked in the 2002 Survey. Lipper, Inc. ("Lipper") then ranks each fund's return versus those of others in the same category, placing the best performers in the first percentile. Lipper also weights all the funds in a given family that fit in a particular broad asset-class category by assets. Then each family's percentile rankings in the broad categories are combined in the weightings for the final result.

        For the twelve months ended December 31, 2002, our Funds had the following characteristics:

•

76% of assets under management invested in equity funds, 19% invested in fixed income funds and 5% invested in money market funds.



•

50% of our equity funds (excluding the Ivy Funds) ranked in the top quartile of funds with similar objectives, as ranked by Lipper.



•

41% of our equity funds (excluding the Ivy Funds) ranked in the top 10% of funds with similar objectives, as ranked by Lipper.



•

91% of our equity assets (excluding the Ivy Funds) rated by Morningstar have four or five stars. This ranks us fourth out of the top 40 fund complexes.



•

76% of our long-term assets (excluding money market assets and the Ivy Funds) rated by Morningstar have four or five stars, which ranks us sixth out of the top 40 fund complexes in the U.S.

        Our largest mutual fund, the Advisors Core Investment Fund, is focused on large capitalization in core equity and had the following fees and net asset values:

•

management fees of $33.3 million (8% of total Company revenues) and a net asset value of $4.6 billion for or as of the year ended December 31, 2002.



•

management fees of $42.3 million (9% of total Company revenues) and a net asset value of $6.8 billion for or as of the year ended December 31, 2001.



•

management fees of $50.0 million (10% of total Company revenues) and a net asset value of $8.5 billion for or as of the year ended December 31, 2000.

        Our base of assets under management consists of a broad range of domestic and international stock, bond, and money market mutual funds that meet the varied needs and objectives of our individual and

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institutional investors. We periodically introduce new products designed to complement and expand our investment product offerings, to respond to competitive developments in the financial marketplace and to meet the changing needs of clients.

        As part of broadening product distribution, through the acquisition of WRIICO in December of 2002, we added select Ivy Funds to our product offerings. We intend to maintain the Ivy Fund brand name, expand its product offerings, and use it for U.S. retail nonproprietary load fund distribution, while utilizing our investment management capabilities to strengthen the Ivy Fund product line. Select Ivy Funds are available to Waddell & Reed Advisors, where a number of styles offered by WRIICO are not part of our current proprietary product line. We have taken steps to bring Waddell & Reed's investment management team to the Ivy Funds, and in March 2003, we announced our future plans to merge the Ivy Fund and W&R Funds families under the Ivy brand name, thus creating a combined product line of considerably greater scale and breadth, which will utilize the W&R Funds' historical performance for marketing purposes. The performance of the Ivy Funds has been excluded from our other Funds' performance statistics throughout this annual report as the Ivy Funds were under our management for only 15 days in 2002, which in our opinion is too brief a time period to measure any performance statistics of these Funds resulting from our management expertise. With the merger of the Ivy Fund and W&R Funds families expected during 2003, we do not expect the past performance of the Ivy Funds to be indicative of future results under Waddell & Reed's management, which has historically been superior to that of the Ivy Funds. During 2001 we added the Target Value Portfolio and two additional products, InvestEd and the Strategic Portfolio Allocation product ("SPA"), both of which are discussed below.

        On July 1, 2001, we expanded our SPA product for use by all Waddell & Reed Advisors. For tax-advantaged portfolios, this product incorporates a predictive, dynamic asset allocation system that reallocates the asset classes within model portfolios. The system utilizes a form of "artificial intelligence" overseen by an advisory committee of our investment professionals to attempt to optimize return within specified parameters based on ongoing economic and financial information. Clients choose from five model portfolios, with objectives from conservative to aggressive, based on the individual's goals, risk tolerance, and other factors. Each of the portfolios is comprised of a variety of Advisors Funds ranging from money market and fixed income funds to domestic and international equity funds.

        On October 1, 2001, we launched InvestEd, our 529 college savings plan. InvestEd was established under the Arizona Family College Savings Program, created by the state of Arizona as a qualified state tuition program in accordance with Section 529 of the Internal Revenue Code. It is offered through a subcontract with Securities Management & Research, Inc., a Houston-based subsidiary of American National Insurance Company, of Galveston, Texas. Together, we were selected by the state of Arizona as the exclusive provider of mutual funds through the Arizona Family College Savings Program. InvestEd provides for post-secondary education savings that allow anyone to open an account and invest for higher education expenses. Investments in 529 plans grow tax-deferred until withdrawn and, beginning in 2002, withdrawals for qualified higher education expenses are free from Federal income tax. InvestEd is available nationally through Waddell & Reed Advisors and has been organized as a "fund of funds," with three portfolios made up of various Advisors Funds. InvestEd's Growth, Balanced and Conservative portfolios are customized based on the beneficiary's college time horizon and the investor's desired level of investment risk for that time horizon. The assets in our InvestEd portfolios are reflected in our Advisors Funds Class A, B and/or C shares.

        In addition to performing investment management services for the Funds, we act as an investment adviser for institutional and other private investors. We receive fees that are generally based on a percentage of assets under management at the end of a specified period and paid in arrears for our services as an investment adviser. A limited number of separate accounts allow for additional fees contingent upon certain relative performance measurements being met. Assets under management for institutional and separate accounts totaled $5.6 billion at December 31, 2002. For the years ended December 31, 2002, 2001, and 2000, overall investment management fees from institutional and separate accounts were approximately $24.3 million, $24.9 million, and $28.7 million, or approximately 13%, 12%, and 11% of total investment management fees, respectively.

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Change in Assets Under Management

        The following table summarizes the changes in our assets under management for the last three fiscal years. All sales are net of sales charges, also known as commissions. The activity includes all activity of the Funds and institutional and separate accounts, including money market funds and net asset value accounts for which we receive no sales commissions. Our wholesale third-party sales efforts, which began in January of 2001, are represented in total across all three columns, and although not broken out specifically, generated $605.1 million and $624.4 million of gross sales and $148.3 million and $444.8 million of net sales for the years ended December 31, 2002 and 2001, respectively.

				Institutional
	Retail			Y Shares		Separate Accounts		Total
	(amounts in millions)
December 31, 2002 YTD
Beginning Assets	$	26,943		373		5,490		32,806
Acquired Assets		665		—		971		1,636
Sales (net of sales charges)		3,003		147		934		4,084
Redemptions		(3,807	)	(169	)	(855	)	(4,831	)
Net Sales		(804	)	(22	)	79		(747	)
Net Exchanges		6		(29	)	1		(22	)
Reinvested Dividends and Capital Gains		198		3		103		304
Net Flows		(600	)	(48	)	183		(465	)
Market Depreciation		(4,775	)	(72	)	(1,015	)	(5,862	)
Ending Assets	$	22,233		253		5,629		28,115
December 31, 2001 YTD
Beginning Assets	$	31,375		417		4,933		36,725
Sales (net of sales charges)		3,754		154		1,449		5,357
Redemptions		(4,091	)	(116	)	(683	)	(4,890	)
Net Sales		(337	)	38		766		467
Net Exchanges		23		(24	)	63		62
Reinvested Dividends and Capital Gains		200		2		100		302
Net Flows		(114	)	16		929		831
Market Depreciation		(4,318	)	(60	)	(372	)	(4,750	)
Ending Assets	$	26,943		373		5,490		32,806
December 31, 2000 YTD
Beginning Assets	$	31,486		423		5,393		37,302
Sales (net of sales charges)		3,814		166		910		4,890
Redemptions		(3,294	)	(98	)	(1,700	)	(5,092	)
Net Sales		520		68		(790	)	(202	)
Net Exchanges		73		(74	)	—		(1	)
Reinvested Dividends and Capital Gains		(59	)	(4	)	159		96
Net Flows		534		(10	)	(631	)	(107	)
Market Appreciation/(Depreciation)		(645	)	4		171		(470	)
Ending Assets	$	31,375		417		4,933		36,725

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Ending and Average Assets Under Management

        Ending and average assets under management for the last three years are depicted in the following table. Assets in our InvestEd portfolios, which are organized as a "fund of funds" and are made up of various Advisors Funds, are included in the table. Our management of the Ivy Funds began on December 16, 2002.

		2002			2001		2000
		Ending		Average	Ending	Average	Ending	Average
		(in millions)
Advisors Funds
	Equity	$	13,347	15,546	18,358	19,376	22,524	24,008
	Fixed income		3,584	3,284	3,039	2,936	2,815	2,925
	Money market		1,001	1,047	1,081	1,044	1,045	827
			17,932	19,877	22,478	23,356	26,384	27,760
W&R Funds
	Equity		868	1,020	1,290	1,374	1,590	1,776
	Fixed income		118	92	74	68	65	69
	Money market		18	18	14	13	11	3
			1,004	1,130	1,378	1,455	1,666	1,848
Ivy Funds*
	Equity		575	24	—	—	—	—
	Fixed income		51	2	—	—	—	—
	Money market		22	1	—	—	—	—
			648	27	—	—	—	—
Target Funds
	Equity		2,377	2,672	3,059	3,112	3,465	3,456
	Fixed income		423	355	302	264	225	227
	Money market		102	97	99	79	52	55
			2,902	3,124	3,460	3,455	3,742	3,738
Total Mutual Funds
	Equity		17,167	19,262	22,707	23,862	27,579	29,240
	Fixed income		4,176	3,733	3,415	3,268	3,105	3,221
	Money market		1,143	1,163	1,194	1,136	1,108	885
			22,486	24,158	27,316	28,266	31,792	33,346
Institutional and Separate Accounts			5,629	5,066	5,490	5,065	4,933	5,642
Total Assets Under Management		$	28,115	29,224	32,806	33,331	36,725	38,988

*

The Ivy Funds were not acquired as part of the business of MIMI until December 16, 2002.

10

Funds Summary

        The following table sets forth, for 11 broad investment management styles, the net assets under management as of December 31, 2002, the name of the Fund, and the year in which each Fund was first offered to the public. The specific objectives of the Funds fall into 18 different categories as determined by Lipper.

Management Style	Net Assets at December 31, 2002 (in millions)		Fund	Year of Inception
Large Capitalization Growth	$	1,681	Advisors Accumulative	1940
		1,703	Advisors Science and Technology	1950
		1,355	Advisors Vanguard	1969
		650	Advisors Retirement Shares	1972
		35	Advisors Tax-Managed Equity	2000
		97	W&R Science and Technology	1997
		25	W&R Large Cap Growth	2000
		4	W&R Tax-Managed Equity	2000
		705	Target Growth	1987
		195	Target Science and Technology	1997
		117	Ivy Growth	1960
		10	Ivy Global Science & Technology	1996
	$	6,577
Mid Capitalization Growth	$	840	Advisors New Concepts	1983
		19	W&R Mid Cap Growth	2000
		28	Ivy US Emerging Growth	1993
	$	887
Small Capitalization Growth	$	595	Advisors Small Cap	1999
		340	W&R Small Cap Growth	1992
		279	Target Small Cap	1994
	$	1,214
Core Equity	$	4,586	Advisors Core Investment	1940
		250	W&R Core Equity	1992
		650	Target Core Equity	1991
		35	Ivy US Blue Chip	1998
	$	5,521
Value	$	321	Advisors Value	2000
		75	Target Value	2001
		31	Ivy Global Natural Resources	1997
		5	Ivy Cundill Global Value	2001
	$	432
International Equity	$	730	Advisors International Growth	1970
		70	W&R International Growth	1992
		139	Target International	1994
		210	Ivy International	1986
		5	Ivy Global Bond	1991
		9	Ivy Pacific Opportunities	1993
		4	Ivy Developing Markets	1994
		4	Ivy International Small Companies	1997
		45	Ivy International Value	1997
		70	Ivy European Opportunities	1999
		*	Ivy International Growth	2002
	$	1,286
Balanced and Asset Allocation	$	435	Advisors Continental Income	1970
		416	Advisors Asset Strategy	1995
		63	W&R Asset Strategy	1995
		168	Target Balanced	1994
		167	Target Asset Strategy	1995
	$	1,249

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Tax-Exempt Bonds	$	799	Advisors Municipal Bond	1976
		444	Advisors Municipal High Income	1986
		29	W&R Municipal Bond	1992
	$	1,272
High Yield Bonds	$	812	Advisors High Income	1979
		24	W&R High Income	1997
		128	Target High Income	1987
	$	964
Taxable Investment Grade Bonds	$	877	Advisors Bond	1964
		388	Advisors Government Securities	1982
		238	Advisors Global Bond	1986
		26	Advisors Limited-Term Bond	2002
		65	W&R Limited-Term Bond	1992
		248	Target Bond	1987
		47	Target Limited-Term Bond	1994
		51	Ivy Bond	1985
	$	1,940
Money Market	$	1,001	Advisors Cash Management	1979
		18	W&R Money Market	2000
		103	Target Money Market	1987
		22	Ivy Money Market	1985
	$	1,144
Total	$	22,486

*

Assets do not round to at least one million.

Underwriting and Distribution

        We earn underwriting and distribution fee revenues primarily by distributing the Funds pursuant to an underwriting agreement with each Fund (except the Target Funds). Under each underwriting agreement, we offer and sell the Fund's shares on a continuous basis (known as open-end funds) and pay certain costs associated with underwriting and distributing the Funds, including the costs of developing and producing sales literature and printing of prospectuses, which may be then either partially or fully reimbursed by the Fund. Our funds are sold in various classes which are substantially structured in ways that conform to industry standards.

        When a client purchases Class A shares (front-end load), the client pays an initial sales charge of between zero to 5.75% of the amount invested. The sales charge for the Class A shares typically declines as the investment amount increases. In addition, investors may combine their purchases of these shares to qualify for a reduced sales charge. Class A shares (except for the money market Funds) may also be charged a maximum of 0.25% of the average daily net assets of these shares under a Rule 12b-1 service fee plan as compensation (for the W&R Funds and InvestEd) or reimbursement (for the Advisors Funds and Ivy Funds) for expenses paid to broker-dealers and other sales professionals for their services in connection with providing ongoing services to Class A shareholders and/or maintaining Class A shareholder accounts.

        When a client purchases Class B shares (back-end load), we do not charge an initial sales charge, but we do charge a contingent deferred sales charge upon early redemption of shares of up to 5% of the lesser of the current market net asset value or the purchase cost of the redeemed shares in the first year, declining to zero for shares held for more than six years. The Funds also assess ongoing Rule 12b-1 distribution and service fees. For the Advisors Funds, W&R Funds, Ivy Funds, and InvestEd, Class B shares are charged a maximum of 0.75% of the average daily net assets of these shares under a Rule 12b-1 distribution plan (reimbursement plan for Ivy Funds) as compensation in connection with distributing shares of this class. Class B shares are also charged a maximum of 0.25% of the average daily net assets of

12

these shares under a Rule 12b-1 service plan as compensation for expenses paid to broker-dealers and other sales professionals for their services in connection with providing ongoing services to Class B shareholders and/or maintaining Class B shareholder accounts. Class B shares convert to Class A shares by the end of the eighth year.

        When a client purchases Class C shares (level-load), we do not charge an initial sales charge, but we do charge investors who redeem their Class C shares in the first year a contingent deferred sales charge of 1% of the lesser of the current market net asset value or the purchase cost of the shares redeemed. The Funds also assess ongoing Rule 12b-1 distribution and service fees. For the Advisors Funds, W&R Funds, Ivy Funds, and InvestEd, Class C shares are charged a maximum of 0.75% of the average daily net assets of these shares under a Rule 12b-1 distribution plan (reimbursement plan for Ivy Funds) as compensation to broker-dealers in connection with distributing shares of this class. Class C shares are also charged a maximum of 0.25% of the average daily net assets of these shares under a Rule 12b-1 service plan as compensation for expenses paid to broker-dealers and other sales professionals for their services in connection with providing ongoing services to Class C shareholders and/or maintaining Class C shareholder accounts. Class C shares do not convert to shares of any other class.

        Class Y shares of the Advisors Funds and W&R Funds, and Ivy Funds Class I and Advisor Class shares (all considered institutional-type shares), are designed for institutional investors or others investing through certain intermediaries. Investors in Class Y shares, Class I shares, and Advisor Class shares do not pay a sales charge. W&R Funds Class Y shares are charged a maximum of 0.25% of the average daily net assets of these shares under a Rule 12b-1 distribution and service plan as compensation for expenses paid to broker-dealers and other sales professionals for their services in connection with providing ongoing services to Class Y shareholders and/or maintaining Class Y shareholder accounts. The Advisors Funds Class Y shares and Ivy Funds Class I and Advisor Class shares do not pay a Rule 12b-1 distribution service fee.

        Each Rule 12b-1 distribution and service plan is subject to annual approval by each Fund's board, including a majority of the disinterested members, by votes cast in person at a meeting called for the purpose of voting on such approval. Each Fund may terminate the distribution and service plan at any time without penalty. Prior to our acquisition of WRIICO, a portion of WRIICO's deferred selling commissions related to Class B shares was sold to an unrelated party. Therefore, this unrelated party receives the Rule 12b-1 distribution fee revenue and any contingent deferred sales charge revenue upon redemption of the shareholder's investment.

        On July 1, 2001, we introduced the SPA product for tax-advantaged portfolios. This product incorporates a predictive, dynamic asset allocation system that reallocates the asset classes within model portfolios. The system utilizes a form of "artificial intelligence" overseen by an advisory committee of our investment professionals to attempt to optimize return within specified parameters based on ongoing economic and financial information. Clients investing in SPA can choose from five available model portfolios with objectives ranging from conservative to aggressive, based on their goals, risk tolerance, and other factors. Each of the model portfolios is comprised of a variety of Advisors Funds ranging from money market and fixed income funds to domestic and international equity funds in order to meet the client's investment objective. We charge an asset-based fee not to exceed 2.25% of each model portfolio's average daily net asset value as compensation for the periodic reallocation of assets within each model portfolio.

        We distribute variable products offering the Target Funds pursuant to a general agency arrangement with Nationwide. Commissions, marketing allowances, and other compensation are paid to us as stipulated by the agreements between the Company and Nationwide. In connection with this arrangement, the Target Funds are offered and sold on a continuous basis. Significant portions of the commissions we receive from the sale of variable products are paid to our financial advisors and sales managers. Under a Rule 12b-1 service plan, the Target Funds may charge a maximum of 0.25% of the average daily net assets as compensation for expenses paid to broker-dealers and other sales professionals for their services in connection with providing ongoing services to Target Funds shareholders and/or maintaining Target Funds

13

shareholder accounts. The Rule 12b-1 service plan is subject to annual approval by the Target Funds' board of directors, including a majority of the disinterested members, by votes cast in person at a meeting called for the purpose of voting on such approval. The service plan may be terminated at any time without penalty by the Target Funds.

        Prior to 2001, the issuer of most of the variable products offered through the Company was United Investors Life Insurance Company ("UILIC"). On February 28, 2001, UILIC terminated the Principal Underwriting Agreement by and between UILIC and the Company, effective April 30, 2001. Beginning May 1, 2001, Nationwide became the primary provider of variable products for distribution by Waddell & Reed Advisors. Effective December 31, 2001, UILIC terminated its General Agent Contract with us that authorized sales of non-variable insurance products. As a result, we are no longer authorized to sell any UILIC products. Please refer to Item 3. "Legal Proceedings" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion.

        In addition to distributing variable products, we distribute a number of other insurance products through our insurance agency subsidiaries, including individual and group term life, whole life, accident and health, long-term care, Medicare supplement, and disability insurance through our insurance agency subsidiaries. We receive commissions and compensation from various underwriters for distributing these products. Commissions and compensation paid to us by UILIC for distributing variable and insurance products issued by them prior to December 31, 2001 comprised 1%, 4%, and 14% of our total revenues for each of the years ended 2002, 2001, and 2000, respectively. Commissions and compensation paid to us by Nationwide for distributing variable and insurance products underwritten by them comprised 11% and 13% of our total revenues for the years ended 2002 and 2001, respectively.

Distribution Channels

        We consider the methods of distribution of our investment products to be divided into two substantial parts. One part, "Waddell & Reed Advisors," reflects the activity of our sales force. The other part, "Wholesale," reflects all other sales efforts, including institutional defined benefit, third-party intermediary, subadvisory, and Legend.

        We sell our investment products primarily to middle income Americans through Waddell & Reed Advisors. Separately, certain of our products are marketed and sold through select wholesale third-party channels. The Advisors Funds, variable products offering the Target Funds, and InvestEd are available for sale generally only through Waddell & Reed Advisors and Legend retirement advisors; select Advisors Funds are also for sale through wholesale third-party distribution channels in limited circumstances. The W&R Funds and select Ivy Funds are available for sale through Waddell & Reed Advisors, Legend retirement advisors, and through select wholesale third-party distribution channels.

Waddell & Reed Advisors

        On December 31, 2002, the Waddell & Reed Advisors sales force consisted of 3,466 financial advisors, including 235 district managers, and 130 district supervisors. Eight regional vice presidents and 137 division managers operating from 209 division and district sales offices located throughout the United States manage this sales force. In addition, we have 215 individual advisor offices. For the year ended December 31, 2002, Waddell & Reed Advisors sold over $2.0 billion of mutual fund and variable products. We believe, based on industry data, that Waddell & Reed Advisors are currently one of the largest in the United States selling primarily mutual funds. As of December 31, 2002, 32% of Waddell & Reed Advisors have been with us for more than 5 years and 20% for more than 10 years. Our presence in the market grew during the first two years following our IPO in March 1998 as we penetrated previously untapped geographic markets through the addition of new division offices in those areas. During 2002 and 2001, as the financial and economic markets declined, we concentrated less on adding new offices, closed less profitable offices, and focused more on recruiting additional quality financial advisors and placing new advisors in existing offices.

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        Since our IPO, we have undertaken several initiatives to increase the retention and productivity of Waddell & Reed Advisors. Notably, the New Financial Advisor Service Fee Program (the "Program"), which provides new advisors with a fixed source of earnings until they can develop the skills and client base necessary to earn a stable income from commissions, has played an important role in advisor retention. In 2002, 70% of the advisors in the Program were still with us after one year, compared with the 38% retention rate of the advisors who did not participate in the Program. Overall, for the years ended December 31, 2002, 2001, and 2000 we retained 56%, 59%, and 56%, respectively, of Waddell & Reed Advisors with us for one year and 27%, 23%, and 27%, respectively, with us for three years. These retention statistics compare favorably to the pre-IPO 1997 retention rate of 41% for advisors with us for one year and 14% for advisors with us for three years.

        In addition to the Program, we have undertaken a number of other initiatives to support Waddell & Reed Advisors. We have developed significantly enhanced financial plans for our advisors to make available to their clients. These improved comprehensive plans have resulted in higher average initial investments, more frequent repeat investments, and a higher close ratio. Additional initiatives, such as the Career Development Conference and the New Manager Training Program, have also contributed to the productivity of Waddell & Reed Advisors. In 2002, we enhanced eSource, the intranet site for our advisors, making it easier to navigate and adding key information on new products, services and training resources. The site, which has become a primary source of communication and support between our advisors and the home office, provides data such as daily share prices of our Funds, the Funds' performance measures, marketing tools, tax law changes, and a variety of other information. The site also offers resources to help our advisors build and manage their sales more effectively. During 2002, we also completed the implementation of a frame-relay system to provide faster and more reliable data interchange and connection between the home office and the field, further enhancing advisor communication and support.

        During 2002, we purchased Siebel software licenses and hired Tier 1 Innovations to help develop a comprehensive client relationship management system ("CORE"). CORE is being designed for use by Waddell & Reed Advisors to significantly enhance their communication with clients and the manner in which they provide client service. CORE will replace our current client contact management system while integrating several other systems utilizing the most current technology. The new system allows numerous query capabilities of client data that can be used for a variety of purposes including marketing and client contact management. CORE also allows for user-defined access methods to client data, extensive access to client history, the ability to track and monitor marketing activities, and much more. CORE will give Waddell & Reed Advisors the ability to provide the highest level of quality client service more accurately and efficiently. CORE is expected to be launched in 2003.

        In order to emphasize the importance of recruiting and developing Waddell & Reed Advisors, we utilize a manager compensation system that ties compensation of division managers to the development of new financial advisors and to division sales, rather than personal sales. We also provide training and motivational programs for Waddell & Reed Advisors. Sales training specialists provide training programs for new recruits as well as advanced training for experienced financial advisors. Programs for new recruits focus on prospecting techniques, product knowledge and sales skills. Field office classes provide guidance in identifying target markets, practical exercises to learn interviewing skills and data collection, instruction in basic financial planning software, and help in matching products with various client investment objectives. Sales presentation skills are taught and practiced in a classroom environment, as well as on joint sales calls with field sales management. The programs for experienced advisors focus on skills related to dealing with larger investment sums (such as IRA rollovers) and include training in the use of asset allocation and estate planning software. In addition, we offer select new financial advisors the opportunity to participate in a week-long training program at the home office covering such subjects as product features, financial planning, and the use of illustrative software packages.

        The year 2002 was the worst year for the equity markets of the United States since 1974. The S&P 500 declined 23%, posting negative returns across all economic sectors. These declines impacted sales of our

15

mutual funds and variable products. For the year ended December 31, 2002, our retail investment product sales declined for the second consecutive year. Proprietary retail investment product sales per advisor was $628 thousand, $936 thousand, and $1,081 thousand for the years ended December 31, 2002, 2001, and 2000, respectively. Consistent growth in the average number of Waddell & Reed Advisors, which numbered 3,198, 2,972, and 2,632 for the same time periods, respectively, was unable to provide an increase in retail investment product sales due to the downturn of financial and economic markets during 2002 and 2001.

        Gross production per advisor, an additional method of measuring advisor productivity, was introduced during 2001 to better reflect the activities of the advisor and to more closely align with industry standard methods of using gross commissions per sales representative to measure productivity. For purposes of this measure, gross production consists of front-end load sales and distribution fee revenues, as it would be received from an underwriter, from sales of both proprietary and other mutual funds. In addition, it includes fee revenues from our SPA products, financial plans, and commission revenues earned on insurance products. This measure excludes underwriting fee revenues, Rule 12b-1 service fee revenues, variable annuity distribution fee revenues, and all revenues related to Class Y shares and the activities of Legend, all of which do not relate to the distribution activities of Waddell & Reed Advisors. Gross production per advisor was $47.1 thousand, $57.2 thousand, and $64.8 thousand for the years 2002, 2001, and 2000, respectively.

Wholesale—Third-Party Channels

        In 2002 we completed the second full year of operation of our third-party distribution efforts, through which we have sought to expand distribution of our investment products into non-proprietary wholesale distribution channels in order to accelerate sales growth and complement distribution through Waddell & Reed Advisors. Our third-party efforts focus principally on seeking subadvisory relationships and distributing the W&R Funds and select Advisors Funds through various channels, including:

•

401(k) platforms using multiple managers;



•

institutional fund supermarkets serving fee-based financial advisors; and



•

broker-dealer fee-based programs, including wrap programs.

        Gross sales from these efforts were $605.1 million and $624.4 million for the years 2002 and 2001, respectively, with net sales totaling $148.3 million and $444.8 million, respectively. In 2002, sales were driven primarily by the distribution of selected third-party mutual funds through third-party distribution channels. Third-party mutual fund sales of composed 64% of total gross third-party sales and 87% of total net third-party sales. In 2001, sales were driven primarily by subadvisory relationships through which we were appointed to manage others' products. In late 2001, we began managing the HighMark Growth Fund, a large-cap growth fund offered and distributed by HighMark Capital Management, a subsidiary of Union Bank of California. This appointment resulted in gross and net sales of $306.3 million and $239.1 million, respectively, for 2001.

        We also continued to increase the breadth of our selling agreements with third-party organizations, which numbered 87, 47, and 6 for the years ended December 31, 2002, 2001, and 2000, respectively. We believe that the number of selling agreements, and the number of relationships through which we obtain sales, will continue to increase in 2003. All of these figures exclude the additional capacity of WRIICO, which sells exclusively through third-party channels.

Wholesale—WRIICO

        As part of the December 16, 2002 acquisition of the business of MIMI, which we operate through our subsidiary WRIICO, we have entered into new subadvisory and marketing agreements. These agreements extend MFC's subadvisory agreements with WRIICO and provide us with additional investment management opportunities in Canada. Pursuant to the subadvisory agreements, we will receive investment

16

management fees covering multiple funds whose assets were approximately $948.5 million (USD) at December 31, 2002. Pursuant to the marketing agreement, MFC will provide us opportunities to launch new funds and/or assume additional existing subadvisory mandates under the Universal brand name in Canada, and will facilitate our relationship with MFC's parent company, Investors Group Inc. and its affiliates. At December 31, 2002, WRIICO's third-party selling agreements numbered approximately 400.

        As part of broadening our product distribution, we also added select Ivy Funds to our product offerings. We intend to maintain the Ivy Fund brand name, expand its product offerings, and use it for U.S. retail non-proprietary load fund distribution, while utilizing our investment management capabilities to strengthen the Ivy Fund product line. Select Ivy Funds are available for sale by Waddell & Reed Advisors, where a number of styles offered by WRIICO are not part of our current proprietary product line.

        We have taken steps to bring Waddell & Reed's investment management team to the Ivy Funds, and in March 2003, we announced our future plans to merge the Ivy Fund and W&R Funds families under the Ivy brand name, thus creating a combined product line of considerably greater scale and breadth, which will utilize W&R Funds' historical performance for marketing purposes. The performance of the Ivy Funds has been excluded from our other Funds' performance statistics throughout this annual report as the Ivy Funds were under our management for only 15 days in 2002, which in our opinion is too brief a time period to measure any performance statistics of these Funds resulting from our management expertise. With the merger of the Ivy Fund and W&R Funds families expected during 2003, we do not expect the past performance of the Ivy Funds to be indicative of future results under Waddell & Reed's management, which has historically been superior to that of the Ivy Funds.

Wholesale—Institutional Accounts

        WRIMCO and ACF market their investment advisory services directly to institutions. However, in many cases the institutions use consultants to assist with their manager selection process. Most of our business is defined benefit pension plans, but a significant amount of assets are managed for defined contribution pension plans, foundations, endowments, Taft-Hartley plans, high-net worth individuals, and insurance companies' general accounts. Minimum account sizes are significantly larger than those of mutual funds and investment advisory fee rates are usually equal to or lower than those charged to mutual funds. A small marketing staff supports this business.

Wholesale—Legend

        Legend retirement advisors distribute our Funds and variable products, among other products, through Legend's retirement advisor sales force. At December 31, 2002, Legend had 348 registered retirement advisors in 42 Legend offices located primarily in the eastern part of the United States. These retirement advisors are not included in our discussion of Waddell & Reed Advisors. For the years ended December 31, 2002, 2001, and 2000, Legend retirement advisors sold $53.6 million, $39.9 million, and $38.1 million of our mutual funds, respectively.

Investment Product Sales

        The following table illustrates commissionable proprietary investment product sales, including sales of our InvestEd portfolios which are organized as a "fund of funds." Total retail product sales reflects the activity of Waddell & Reed Advisors. Sales are shown gross of commissions and they exclude sales of Legend retirement advisors, money market Funds, other non-proprietary mutual funds, Ivy Funds, insurance products, and investment products sold at net asset value for which we receive no commission. The decline in equity markets during 2002 impacted the sales of our mutual funds and variable products.

17

For the year ended December 31, 2002, our retail investment product sales declined for the second consecutive year.

		2002		2001	2000
		(in millions)
Front-end load sales (Class A)		$	1,138	1,322	1,591
Variable annuity products			568	1,111	656
	Front-load product total		1,706	2,433	2,247
Back-end load sales (Class B)			197	238	368
Level-load sales (Class C)			106	112	234
	Deferred-load product total		303	350	602
	Total retail	$	2,009	2,783	2,849
Institutional and separate accounts			1,081	1,603	1,076
	Total sales	$	3,090	4,386	3,925

Service Agreements

        We earn service fee revenues by providing various services to the Funds and their shareholders pursuant to shareholder servicing agreements with each Fund (except the Target Funds) and accounting service agreements with each Fund. Pursuant to the shareholder servicing agreements, we perform shareholder servicing functions for which those Funds pay us a monthly fee, including:

•

maintaining shareholder accounts;



•

issuing, transferring, and redeeming shares, distributing dividends and paying redemptions;



•

furnishing information related to the Fund; and



•

handling shareholder inquiries.

        Pursuant to the accounting service agreements, we provide the Funds with bookkeeping and accounting services and assistance for which the Funds pay us a monthly fee, including:

•

maintaining the Fund's records;



•

pricing the Fund's shares; and



•

preparing prospectuses for existing shareholders, proxy statements, and certain other shareholder reports.

        A Fund's shareholder servicing agreements and accounting service agreements may be adopted or amended with the approval of the disinterested members of each Fund's board. Each of the shareholder servicing agreements and accounting service agreements have annually renewable terms of one year.

Regulation

        The securities industry is subject to extensive regulation covering all aspects of the securities business. Virtually all aspects of our business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and shareholders of registered investment companies. Under such laws and regulations, agencies and organizations that regulate investment advisers, broker-dealers, and transfer agents like us have broad administrative powers, including the power to limit, restrict, or prohibit an investment adviser, broker-dealer, or transfer agent from carrying on its business in the event that it fails to comply with applicable laws and regulations. In such event, the possible sanctions that may be imposed include, but are not limited to, the suspension of individual employees or agents, limitations on engaging in certain lines of business for specified periods of time, revocation of investment adviser and other registrations, censures, and fines.

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        The SEC is the federal agency responsible for the administration of the federal securities laws. Certain of our subsidiaries are registered with the SEC as investment advisers under the Advisers Act. The Advisers Act imposes numerous obligations on registered investment advisers including, among other things, fiduciary duties, recordkeeping and reporting requirements, operational requirements and disclosure obligations, as well as general anti-fraud prohibitions. Investment advisers are subject to periodic examination by the SEC. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from censure to termination of an investment adviser's registration. A finding that one of our registered subsidiaries has failed to comply with applicable SEC requirements could have a material adverse effect on us.

        Our Funds are registered with the SEC under the ICA and various filings are made with states under applicable state rules and regulations. The ICA regulates the relationship between a mutual fund and its investment adviser and prohibits or severely restricts principal transactions and joint transactions. Various regulations cover certain investment strategies that may be used by the Funds for hedging and/or speculative purposes. To the extent that the Funds purchase futures contracts, options on futures contracts, and foreign currency contracts, the Funds are subject to the commodities and futures regulations of the Commodity Futures Trading Commission.

        We derive a large portion of our revenues from investment management agreements. Under the Advisers Act, our investment management agreements terminate automatically if assigned without the client's consent. Under the ICA, advisory agreements with registered investment companies such as the Funds terminate automatically upon assignment. The term "assignment" is broadly defined and includes direct assignments as well as assignments that may be deemed to occur, under certain circumstances, upon the transfer, directly or indirectly, of a controlling interest in the Company.

        Three of our subsidiaries, W&R, LEC, and IMDI, are also registered as broker-dealers with the SEC and the states. Much of the regulation of broker-dealers has been delegated by the SEC to self-regulatory organizations, principally the Municipal Securities Rulemaking Board, the National Association of Securities Dealers (the "NASD") and the New York Stock Exchange (the "NYSE"). The NASD is the primary regulator of our subsidiaries' broker-dealer activities. These self-regulatory organizations adopt rules (subject to approval by the SEC) that govern the industry and conduct periodic examinations of our operations over which they have jurisdiction. Securities firms are also subject to regulation by state securities administrators in those states in which they conduct business. Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales practices, market making and trading among broker-dealers, use and safekeeping of clients' funds and securities, capital structure, recordkeeping, and the conduct of directors, officers, and employees. Broker-dealers are examined periodically by the NASD and the SEC. Violation of applicable regulations can result in the revocation of broker-dealer licenses, the imposition of censures or fines, and the suspension or expulsion of a firm, its officers, or employees. A finding that one of our registered subsidiaries has failed to comply with applicable broker-dealer regulations could have a material adverse effect on us.

        These three registered broker-dealer subsidiaries are also each subject to certain net capital requirements pursuant to the Exchange Act. Uniform Net Capital Rule 15c3-1 of the Exchange Act (the "Net Capital Rule") specifies the minimum level of net capital a registered broker-dealer must maintain and also requires that part of its assets be kept in a relatively liquid form. The Net Capital Rule is designed to ensure the financial soundness and liquidity of broker-dealers. Any failure to maintain the required minimum net capital may subject us to suspension or revocation of our registration or other limitations on our activity by the SEC, and suspension or expulsion by the NASD or other regulatory bodies, and ultimately could require the broker-dealer's liquidation. The maintenance of minimum net capital requirements may also limit our ability to pay dividends. At December 31, 2002, 2001, and 2000 our net capital exceeded all minimum requirements. Another of our subsidiaries, WRSCO, is registered as a transfer agent under the Exchange Act.

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        Pursuant to the requirements of the Securities Investor Protection Act of 1970, our broker-dealer subsidiaries are members of the Securities Investor Protection Corporation ("SIPC"). SIPC provides protection against lost, stolen, or missing securities (but not loss in value due to a rise or fall in market prices) for clients in the event of the failure of a broker-dealer. Accounts are protected up to $500,000 per client with a limit of $100,000 for cash balances. However, since the Funds, and not our broker-dealer subsidiaries, maintain customer accounts, SIPC protection would not cover mutual fund shareholders.

        On October 26, 2001, President Bush signed the USA PATRIOT Act, aimed at giving the government new powers in the war on terrorism. Title III of this new legislation, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, imposes significant new anti-money laundering requirements on all financial institutions, including domestic banks and domestic operations of foreign banks, broker-dealers, futures commission merchants and investment companies.

        Additional legislation and regulations, including those relating to the activities of investment advisers and broker-dealers, changes in rules imposed by the SEC or other U.S. or foreign regulatory authorities and self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules may adversely affect our business and profitability. Our businesses may be materially affected not only by regulations applicable to it as an investment adviser or broker-dealer, but also by regulations of general application. For example, the volume of our principal investment advisory business in a given time period could be affected by, among other things, existing and proposed tax legislation and other governmental regulations and policies (including the interest rate policies of the Federal Reserve Board) and changes in the interpretation or enforcement of existing laws and rules that affect the business and financial communities.

Competition

        The financial services industry is highly competitive and has increasingly become a global industry. There are approximately 8,300 open-end investment companies of varying sizes, investment policies and objectives whose shares are being offered to the public in the U.S. We face substantial competition in all aspects of our business. Factors affecting our business include brand recognition, business reputation, investment performance, quality of service and the continuity of both client relationships and assets under management. Competition is based on the methods of fund share distribution, the ability to develop investment products for certain market segments, the ability to meet the changing needs of investors, the ability to achieve superior investment management performance, the type and quality of shareholder services, and the success of marketing efforts.

        We compete with hundreds of other mutual fund management, distribution, and service companies that distribute their fund shares through a variety of methods, including affiliated and unaffiliated sales forces, broker-dealers, and direct sales to the public of shares offered at a low or no sales charge. Many larger mutual fund complexes have developed relationships with brokerage houses with large distribution networks, which may enable these fund complexes to reach broader client bases. We compete with a large number of investment management firms offering services and products similar to ours, as well as other independent financial advisors. In addition, we compete with brokerage and investment banking firms, insurance companies, commercial banks and other financial institutions, and businesses offering other financial products in all aspects of their businesses. Although no single company or group of companies dominates the mutual fund management and services industry, many are larger than us, have greater resources and offer a wider array of financial services and products. We believe that competition in the mutual fund industry will increase as a result of increased flexibility afforded to banks and other financial institutions to sponsor mutual funds and distribute mutual fund shares. In addition, barriers to entry into the investment management business are relatively few, and thus, we potentially face a growing number of competitors, especially during periods of strong financial and economic markets. Many of our competitors in the mutual fund industry are larger, better known, have penetrated more markets and have more resources than us.

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        The distribution of mutual fund and other investment products has undergone significant developments in recent years, which has increased the competitive environment in which we operate. These developments include the introduction of new products, including hedge funds and exchange traded funds, introduction of service fees payable to broker-dealers that provide continual service to clients in connection with their mutual fund investments, development of complex distribution systems with multiple classes of shares, development of Internet websites allowing investors the ability to invest on-line, introduction of separately managed accounts—previously available only to institutional investors—to individuals, and growth in the number of mutual funds offered. We believe our business model targets customers seeking personal assistance from financial advisors or planners where the primary competition is companies distributing products through a financial advisor or broker-dealer sales force. Waddell & Reed Advisors compete primarily with large and small broker-dealers, independent financial advisors, and insurance representatives. The market for financial planning and advice is extremely fragmented, consisting primarily of relatively small companies with fewer than 100 investment professionals. Competition is based on sales techniques, personal relationships and skills, and the quality of financial planning products and services offered.

        In recent years, there has been a number of investment companies that offer their products available for sale on the Internet for no front-end sales load charges. The effects of this sales technique are not particularly apparent in our business. Our market is that of clients seeking personal assistance through a financial advisor, whereas purchasing products directly through the Internet is considered more appropriate for "do-it-yourself" type of investors. We view the Internet as a useful communication tool that does not replace the benefits of a personalized financial advisor. It is not our management approach to make no-load funds available for sale through the Internet; however, in limited situations, the Internet is available to our customers, through their financial advisor, for the purchase of our products.

        We continue to focus on client relationships, performance of our investment products, our distribution network, and our marketing efforts. In 2002, we enhanced eSource, the intranet site for Waddell & Reed Advisors, making it easier to navigate and adding key information on new products, services and training resources. The site, which has become a primary source of communication and support between our advisors and the home office, provides data such as daily share prices of our Funds, the Funds' performance measures, marketing tools, tax law changes, and a variety of other information. The site also offers resources to help our advisors build and manage their sales more effectively. During 2002, we completed the implementation of a frame-relay system to provide faster and more reliable data interchange and connection between the home office and the field, further enhancing advisor communication and support. Our national advertising campaign, launched in 1998, the year of our IPO, highlights the important aspects of our business and has helped increase our name recognition. Although in 2001 and 2002, our advertising expenditures were less than in prior years, we still provided promotional support in all of the approximately 150 markets where we have proprietary division offices.

        During 2002, we purchased Siebel software licenses and hired Tier 1 Innovations to help develop a comprehensive client relationship management system, CORE. CORE is being designed for use by Waddell & Reed Advisors to significantly enhance their communication with clients and the manner in which they provide client service. CORE will replace our current client contact management while integrating several other systems utilizing the most current technology. The new system allows numerous query capabilities of client data that can be used for a variety of purposes including marketing and client contact management. CORE also allows for user-defined access methods to client data, extensive access to client history, the ability to track and monitor marketing activities, and much more. CORE will give Waddell & Reed Advisors the ability to provide the highest level of quality client service more accurately and efficiently. CORE is expected to be launched in 2003.

        We also face competition in attracting and retaining qualified financial advisors and employees. The ability to continue to compete effectively in our business depends in part on our ability to compete

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effectively in the labor market. In order to maximize this ability, we offer competitive compensation, a wide range of benefits, and have several stock-based compensation incentive programs.

Intellectual Property

        We regard our name as material to our business, and have registered certain service marks associated with our business with the U.S. Patent and Trademark Office.

Employees and Financial Advisors

        At December 31, 2002, we had 1,514 full-time employees, consisting of 629 home office employees, 137 division managers, 8 regional vice presidents, 183 field office support personnel, 192 employees of acquired subsidiaries, and 365 district managers and district supervisors who are counted as both employees and financial advisors.

        The Waddell & Reed Advisors sales force is comprised of 3,466 financial advisors, including 3,101 financial advisors who are independent contractors and 365 district managers and district supervisors who are considered both employees with respect to their management responsibilities of the sales force and independently contracted financial advisors with respect to their selling activities. Legend also had 348 retirement advisors considered to be independent contractors at December 31, 2002. The combined total of Waddell & Reed Advisors and Legend retirement advisors was 3,814.

ITEM 2. Properties

        Prior to March 7, 2001, we owned and occupied two home office buildings used in the normal course of business as our corporate headquarters, including a 115,000 square foot building located at 6300 Lamar Avenue, Overland Park, Kansas, and another 113,000 square foot building located at 6301 Glenwood Avenue, Overland Park, Kansas. On March 7, 2001, we entered into a sale-leaseback arrangement, in which we sold our two home office buildings and the associated land to an unrelated third party and leased them back for a period of fifteen years. The leaseback has been accounted for as an operating lease. The net proceeds from this sale were $28.2 million and resulted in an unrealized gain of approximately $1.3 million, which was deferred and is being amortized over the term of the operating lease. We also lease 13,843 square feet in the immediate area for additional corporate headquarter operations. W&R leases division and district office space, totaling 649,565 square feet, for Waddell & Reed Advisors in various cities and towns in the United States. Legend occupies two leased office buildings, one at 4600 East Park Drive and the other at 3920 RCA Boulevard, both in Palm Beach Gardens, Florida, used in the normal course of business totaling 25,475 square feet. Legend leases various additional office space totaling 15,247 square feet for its sales force of retirement advisors. ACF occupies one leased office building at 755 East Mulberry, San Antonio, Texas, used in the normal course of business totaling 15,090 square feet. WRIICO occupies one leased building at 925 South Federal Highway, Boca Raton, Florida, used in the normal course of business totaling 40,786 square feet. We do not own any real estate property. Total leased square footage was 988,006 at December 31, 2002.

ITEM 3. Legal Proceedings

        The Company and/or certain of our subsidiaries are involved from time to time in various legal proceedings and claims incident to the normal conduct of business. On the basis of information presently available and advice received from counsel, other than the items listed below, it is the opinion of management that such legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on our financial condition or results of operations.

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United Investors Life Insurance Company Litigation

        We have been in litigation with United Investors Life Insurance Company ("UILIC") in the Circuit Court of Jefferson County, Alabama (CV-002720) over the terms of a disputed compensation agreement executed in July 1999 by UILIC and our broker-dealer subsidiary, Waddell & Reed, Inc. ("W&R") (the "Letter Agreement") and our customers' replacement of UILIC variable annuity policies with Nationwide variable annuity policies. More specifically, UILIC sought the return of all compensation pursuant to the Letter Agreement on all UILIC variable annuity policy assets under management sold by our financial advisors and also sought damages against us for various causes of action including, among others, conversion, breach of fiduciary duty, fraud, and tortious interference regarding the exchange of the variable annuity policies.

        On March 19, 2002, after the conclusion of a five-week trial, the jury in this case found for UILIC, awarding compensatory damages of $50 million. Jurors rejected UILIC's demand for punitive damages and our demands for counterclaim damages. The jury did not allocate the compensatory damages between the two major causes of action—tortious interference and validity of the contract. The amount collected pursuant to the Letter Agreement before the jury verdict was approximately $11.0 million.

        On June 25, 2002, the Court entered an order denying our post-trial motions regarding the jury verdict, including our motions to disregard it and for a new trial. In addition, the Court found that there was not a binding agreement between the companies regarding variable annuity basis point compensation pursuant to the Letter Agreement. Finally, the Court ruled in favor of the Company in denying a request by UILIC for an injunction preventing the replacement of UILIC variable annuity policies with Nationwide variable annuity policies by our customers.

        Pursuant to a ruling received on April 30, 2001 and the Court's ruling on June 25, 2002, we are prohibited from collecting annual compensation of 0.20% on all UILIC variable annuity policy assets under management sold by our financial advisors before January 1, 2000 and annual compensation of 0.25% on all variable annuity policies' assets under management on UILIC variable annuity policies sold by our financial advisors after January 1, 2000.

        On July 24, 2002, the Company filed its Notice of Appeal with the Alabama Supreme Court. The Notice of Appeal requested an appellate review of the jury's verdict and the finding of the Court regarding the Letter Agreement, including its previous ruling on basis point compensation that became effective on April 30, 2001. The Appeal has been fully briefed by the parties. Oral arguments were heard before the Alabama Supreme Court on February 19, 2003. It is anticipated that the Supreme Court will render a ruling by the end of 2003.

        The $50 million jury verdict accrues interest at 12% per annum from June 25, 2002. The judgment has been stayed with the posting of an appeal bond in the amount of $62.5 million in cash with the Court on July 24, 2002. This deposit is recorded in "Prepaid expenses and other current assets" on the consolidated balance sheet and we earned interest on it at 2.01% per annum during 2002. We are currently earning interest based on the daily federal funds rate.

        Management believes that the jury verdict is not supported by the evidence or case law in Alabama. In the opinion of management, the size and nature of the judgment, if any, is unknown and not reasonably determinable; therefore, no liability has been recorded in the consolidated financial statements of Waddell & Reed Financial, Inc.

        On or about October 10, 2001, UILIC sued the Company and its California financial advisors (collectively, the "W&R Defendants") in the California Superior Court in and for the County of Los Angeles (hereafter "State Court") (BC25943). UILIC's complaint was based upon California Business and Professions Code, Section 17200 et seq., and sought restitution of amounts received, an accounting and the imposition of a constructive trust. In addition, as in the Alabama suit, UILIC also requested an injunction essentially preventing the replacement of UILIC variable annuity policies with Nationwide variable annuity

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policies by our customers. In its pleadings, UILIC claimed that it is not seeking damages, restitution or any remedy on its own behalf, but that the claim was brought on behalf of the general public and those persons who either currently own or previously owned variable annuity policies sold by the W&R Defendants. Specifically, UILIC claimed that the W&R Defendants violated California's Unfair Business Practices Act by replacing existing UILIC variable annuity contracts with variable annuity contracts issued by Nationwide, by purportedly failing to conduct proper suitability analyses, making material misrepresentations, withholding material information about the Nationwide variable annuity contracts, and refusing to service existing UILIC variable annuity contracts.

        On November 9, 2001, the W&R Defendants removed the action to the United States District Court for the Central District of California (hereafter "Federal Court") (CV 01-09684 TJH). Thereafter, the W&R Defendants filed a motion to dismiss UILIC's complaint on the grounds that it is preempted by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). SLUSA requires the dismissal of a covered state law class action that alleges an untrue, manipulative, or deceptive statement or omission in connection with the purchase or sale of a covered security. On or about July 19, 2002, the Federal Court issued a one page minute order, without opinion, denying the motion to dismiss and, on its own motion, remanding the case back to State Court. On or about July 24, 2002, the W&R Defendants filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit (the "Ninth Circuit") from the Federal Court's Order. On January 24, 2003, the Ninth Circuit ordered the parties to further brief the issues. It is anticipated that the issue will be fully briefed by June of 2003 with a decision regarding dismissal to be rendered by the Ninth Circuit before the end of the third quarter of 2003.

NASD Arbitration

        An NASD Dispute Resolution Arbitration Panel (the "Panel") entered an award of $27.6 million against W&R on August 7, 2001 (97-03642). The award was made upon the conclusion of an arbitration proceeding conducted in New York arising from a complaint by Stephen Sawtelle, a former W&R financial advisor. In the arbitration, this advisor claimed that following his termination on February 10, 1997, W&R engaged in conduct that tortiously interfered with his prospective business relations and violated provisions of the Connecticut Unfair Trade Practices Act ("CUTPA"). The Panel found W&R liable and directed payment of approximately $1.8 million in compensatory damages, plus attorneys fees of $747,000. It also held that W&R had violated CUTPA and ordered the payment of punitive damages in the amount of $25.0 million. On August 8, 2001, the former advisor filed a petition with the Supreme Court of the State of New York, County of New York, seeking to confirm the award (115056/01). Shortly thereafter, W&R filed a motion to have the award vacated or modified.

        On or about June 3, 2002, the New York Supreme Court reduced the compensatory damage and attorneys fee award from $2.5 million to $1.8 million and confirmed the original punitive damage award of $25.0 million. The judgment was stayed with the posting of an appeal bond with the Court in the amount of $28.7 million backed by a letter of credit in the amount of $36 million, which in turn is collateralized by investment securities.

        In September of 2002, the Company made a strategic legal decision to no longer appeal the compensatory damage and attorneys fees portion of the award after it was reduced from $2.5 million to $1.8 million. This decision was made at the time our appeal briefs were filed with the Appellate Division of the New York Supreme Court and reflected our strategy to focus on contesting the related punitive damage award of $25.0 million. During this year's third quarter, we recorded a $2.0 million charge to general and administrative expense for the estimated cost of the payment of the compensatory damage and attorneys fees portion of the award. The inclusion of pre- and post-judgment interest on the award increased the total charge to $2.0 million.

        On February 11, 2003, the Appellate Division of the New York Supreme Court vacated the Panel's punitive damage award of $25.0 million and remanded the matter back to the Panel for reconsideration of

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the issue of punitive damages. The Court upheld the lower court's previous rulings on compensatory damages and attorneys' fees. We satisfied the outstanding judgment on these awards on February 25, 2003. On March 5, 2003, Mr. Sawtelle petitioned the Panel for reconsideration of the issue of punitive damages as allowed by the order of the Appellate Division of the New York Supreme Court and requested a pre-hearing conference with the Panel as soon as possible. On March 14, 2003, Mr. Sawtelle filed a Motion for Permission to Appeal the Appellate Division's February 11, 2003 order to the New York Court of Appeals.

        No charge has been recorded in the consolidated financial statements of Waddell & Reed Financial, Inc. for the punitive damage award or interest thereon since, in the opinion of management, the size and probability of the punitive damage award, if any, is unknown and not reasonably determinable.

ITEM 4. Submission of Matters to a Vote of Security Holders

        During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of the Company's security holders, through the solicitation of proxies or otherwise.

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

        Our Class A common stock is traded on the New York Stock Exchange ("NYSE") under the ticker symbol "WDR." The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our Class A common stock, as reported by the NYSE, as well as the cash dividends paid for these time periods:

Class A
Market Price

	2002						2001
Quarter	High		Low		Dividends Per Share		High		Low		Dividends Per Share
1	$	32.69	$	29.76	$	.1326	$	36.01	$	27.00	$	.0884
2		30.18		21.75		.1326		34.50		24.71		.0884
3		22.69		16.30		.1326		33.89		24.03		.0884
4		20.91		15.43		.1326		32.20		24.31		.0884

        Year-end closing prices of our Class A common stock for 2002 and 2001, respectively were: $19.67 and $32.20.

        The closing price of our Class A common stock on March 21, 2003 was $19.19. According to the records of our transfer agent, we had 4,650 holders of record of Class A common stock as of March 21, 2003, compared to 4,731 holders of record of Class A common stock as of March 21, 2002. We believe that a substantially larger number of beneficial stockholders hold such shares in depository or nominee form.

Dividends

        In 2002, our Board of Directors approved a 50% increase in our cash dividend. We paid cash dividends of $.1326 per share on our Class A common stock in each fiscal quarter of 2002. In 2001, we paid cash dividends of $0.0884 per share on our Class A common stock in each fiscal quarter and $0.0884 per share on our Class B common stock (which was converted into Class A common stock) in each fiscal quarter up to, and including, the second quarter of 2001.

        The declaration of dividends is subject to the discretion of our Board of Directors. We intend, from time to time, to pay cash dividends on our common stock as our Board of Directors deems appropriate,

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after consideration of our operating results, financial condition, cash and capital requirements, compliance with covenants in our revolving credit facility and such other factors as the Board of Directors deems relevant. To the extent assets are used to meet minimum net capital requirements under the Net Capital Rule, they are not available for distribution to stockholders as dividends. See Item 1. "Business—Regulation." We anticipate that quarterly dividends will continue to be paid.

Common Stock Repurchases

        Our Board of Directors has authorized the repurchase of our common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in our stock-based compensation programs. Since the inception of our common stock repurchase program in 1998, we have repurchased 24.8 million shares, or 25% of the shares outstanding at the time of our initial public offering. We have used cash flow from operations and proceeds from our 2001 debt offering to fund the purchases of these shares.

Other Market Information

        On April 25, 2001, our stockholders approved an Agreement and Plan of Merger by and between the Company and WDR Sub, Inc., a wholly-owned subsidiary of the Company, with the Company to remain as the surviving corporation. The merger effected a combination of our Class A and Class B common stock on a one-for-one basis. Prior to the merger, our Class A and Class B common stock had the same rights, powers and preferences, except that the Class A common stock was entitled to one vote per share and the Class B common stock was entitled to five votes per share. Effective as of the end of business on April 30, 2001, each share of our Class B common stock was converted into one share of Class A common stock and the number of Class A authorized shares increased from 150,000,000 to 250,000,000 to account for the termination of the 100,000,000 authorized Class B shares. We terminated the Class B common stock registration under the Exchange Act and it is no longer listed or traded on the NYSE. During the first quarter of 2001, the high and low closing prices of our Class B common stock were $35.70 and $26.77, respectively. During the second quarter of 2001, the high and low closing prices of our Class B common stock were $31.33 and $24.73, respectively, through the date of April 30, 2001, at which time the combination discussed above was effected. On April 30, 2001, our Class B common stock closed at a price of $30.43. Dividends paid on Class B common stock (which was converted into Class A common stock) were $0.884 per share for the first and second quarters of 2001. Our Class A common stock continues to be registered under the Exchange Act and continues to be listed and traded on the NYSE under the symbol "WDR." All per-share and share outstanding data in the consolidated financial statements and notes thereto have been restated to reflect this combination.

        On May 31, 2000, Standard & Poor's added Waddell & Reed Financial, Inc. to its S&P MidCap 400 Index of mid-range capitalization U.S. stocks. Within the index, we are included in the Financial Economic sector and the Investment Banking/Brokerage industry group.

        On February 23, 2000, we declared a three-for-two stock split on our Class A and then outstanding Class B common stock payable on April 7, 2000 to stockholders of record as of March 17, 2000. All per-share and share outstanding data in the consolidated financial statements and related notes retroactively reflect the stock split for all periods presented.

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Equity Compensation Plan Information

        We have a Company Stock Incentive Plan (the "SIP Plan") that allows us to grant equity compensation, including non-qualified stock options and restricted stock, among other awards, as part of our overall compensation program to attract and retain key personnel and encourage a greater personal financial investment in the Company. A maximum of 30,000,000 shares of common stock are authorized for issuance under the SIP Plan. We also have a Company Executive Deferred Compensation Stock Award Plan (the "EDC Plan") and a Company Non-Employee Director Stock Award Plan (the "NED Plan") (collectively, the "Plans") that allow us to grant non-qualified stock options and/or restricted stock to promote the long-term growth of the Company. A maximum of 3,750,000 and 1,200,000 shares of common stock are authorized for issuance under the EDC Plan and NED Plan, respectively. In addition, we make incentive payments under the Company Executive Incentive Plan (the "EIP") in the form of cash, stock options or restricted stock. Incentive awards paid under the EIP in the form of stock options or restricted stock are issued out of shares reserved for issuance under the EDC Plan. Generally, shares of common stock covered by terminated, surrendered or canceled options, by forfeited restricted stock, or by the forfeiture of other awards that do not result in issuance of shares of common stock, are again available for awards under the plan from which they were terminated, surrendered, canceled, or forfeited.

        Under all of our stock incentive plans, the exercise price of each option is equal to the market price of the stock on the date of grant. The maximum term of non-qualified options granted under the SIP Plan is ten years and two days and the options generally vest in 33¹/3% increments beginning on the second, third and fourth anniversaries of the grant date. The maximum term of non-qualified options granted under the EDC Plan and NED Plan is eleven years and the options generally vest 10% each year, beginning on the first anniversary of the grant date.

        On December 31, 2002, we granted 315,598 shares of restricted stock with a fair market value of $19.67 per share under the SIP Plan and EDC Plan. These shares have no purchase price and vest over four years in 33¹/3% increments beginning on the second anniversary of the grant date. Under the Plans, unvested shares of restricted stock may be forfeited upon the termination of employment with the Company or service on the board of directors, dependent upon the circumstances of termination. Except for restrictions placed on the transferability of the restricted stock, holders of restricted stock have full stockholders' rights during the term of restriction, including voting rights and the right to receive cash dividends. Based upon the fair market value of these restricted shares on the grant date, we recorded deferred compensation totaling $6.2 million for the year ended December 31, 2002. Deferred compensation is included as a component of stockholders' equity and will be recognized as expense over the four year vesting period.

        All of the Plans have been approved by our stockholders and all equity compensation provided by the Company has been issued in accordance with the Plans. The following table sets forth information with respect to these plans as of December 31, 2002.

Plan category	Number of securities to be issued upon exercise of outstanding options		Weighted average exercise price of outstanding options	Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by stockholders	16,964,751	(a)	24.77	12,657,405	(b)
Equity compensation plans not approved by stockholders	N/A		N/A	N/A
Total	16,964,751		24.77	12,657,405

(a)

Does not include 276,900, 38,698 and 0 shares of restricted stock issued under the Stock Incentive Plan, the EDC Plan and the NED Plan, respectively, on December 31, 2002.

(b)

Includes 9,555,316, 2,031,372 and 754,119 shares that may be issued in the form of restricted stock under the Stock Incentive Plan, the EDC Plan and the NED Plan, respectively.

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Tender Offer

        In an effort to enhance long-term value for our stockholders, reduce the total number of options outstanding and improve our ability to retain and provide incentives to our talented and valuable employees, on February 12, 2003, we offered to exchange all of the outstanding stock options (whether vested or unvested) held by our employees, consultants, financial advisors and directors, except Keith A. Tucker, Chairman and CEO, with a strike price of $25.4375 or greater for shares of restricted stock.

        Option holders participating in the tender offer received a number of shares of restricted stock for each option tendered dependent on the strike price of the options tendered. The shares of restricted stock received for options ranged from .1707 shares for each option tendered (for options with a strike price of $34.1875) to .2591 shares for each option tendered (for options with a strike price of $25.87). Participants tendered 93% of all options eligible to be tendered. The Company issued a total number of 1,541,552 shares of restricted stock upon the expiration of the tender offer at 11:59 p.m. on March 14, 2003. Of the total number of restricted shares issued, the Company repurchased 609,805 shares from the participants upon their direction for payment of their individual income tax liabilities. As a result, 931,747 net shares of restricted stock were issued. We expect to record a charge of $26.8 million for non-cash equity compensation in the first quarter of 2003.

        All shares of restricted stock issued pursuant to the tender offer were issued under the SIP Plan and are fully vested (i.e., they cannot be forfeited), but are subject to transfer restrictions. The transfer restrictions will expire in 33¹/3% increments beginning on the second anniversary of the grant date. As part of the terms of the tender offer, participating division and district managers entered into a non-solicitation agreement with the Company and all participants agreed to waive any and all future participation in the Company's Stock Option Restoration Program.

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ITEM 6. Selected Financial Data

        The following table sets forth our selected consolidated financial data at the dates and for the periods indicated. Selected financial data should be read in conjunction with, and is qualified in its entirety by, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this report.

		For the Years Ended December 31,
		2002		2001	2000	1999	1998
		(in thousands, except per share data and number of financial advisors)
Revenues from:
	Investment management fees	$	186,038	214,242	253,774	178,612	137,823
	Underwriting and distribution fees		183,133	203,535	202,879	126,318	106,615
	Shareholder service fees		65,690	59,381	53,436	41,525	33,808
	Revenues excluding investment and other income		434,861	477,158	510,089	346,455	278,246
	Total revenues		439,125	482,562	520,702	356,657	287,289
Net income (1)(2)(3)(4)			87,425	107,167	139,005	81,767	83,735
	per common share—basic (1)(2)(3)(4)		1.09	1.33	1.67	0.91	0.85
	per common share—diluted (1)(2)(3)(4)		1.07	1.28	1.60	0.89	0.84
Dividends per common share		$	0.53	0.35	0.35	0.35	0.35
Advisor and productivity data (excluding Legend and WRIICO):
	Retail investment product sales	$	2,008,599	2,782,947	2,847,447	2,149,842	1,827,526
	Number of Waddell & Reed Advisors (end of period)		3,466	3,165	2,865	2,611	2,370
	Average number of Waddell & Reed Advisors		3,198	2,972	2,632	2,432	2,175
	Investment product sales per advisor	$	628	936	1,081	884	840

		As of December 31,
		2002		2001	2000	1999	1998
		(in millions)
Assets under management		$	28,115	32,806	36,725	37,302	27,744
Balance sheet data:
	Goodwill		193.7	173.7	180.2	113.0	95.9
	Total assets		560.5	433.1	422.2	335.1	327.2
	Short-term debt		58.0	28.0	—	125.3	40.1
	Long-term debt		213.1	198.3	175.0	—	—
	Total liabilities		411.2	319.3	280.6	208.7	120.0

(1)

Includes a pre-tax write-down in 2002 of $7.1 million ($4.4 million net of tax) relating to an other than temporary decline in the value of certain investment securities and $2.0 million ($1.3 million net of tax) for a special charge related to the NASD arbitration.

(2)

Includes a pre-tax write-off in 2001 of $8.2 million ($5.1 million net of tax) relating to expected forgiveness of stock loans.

(3)

Includes a pre-tax write-off in 1999 of $19.0 million relating to restructuring mutual fund products and a pre-tax loss of $4.6 million from the sale of real estate properties, for a combined effect of $14.6 million (net of tax).

(4)

Includes impact of interest relating to notes with Torchmark Corporation ("Torchmark") for 1998 that were prepaid with proceeds from our IPO, net after tax amount of $4.3 million.

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Item includes statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. All statements, other than statements of historical fact included in this Form 10-K regarding our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. All forward-looking statements included in this Form 10-K are based on information available to us on the date hereof, and we assume no obligation to update such forward-looking statements. Although we believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct or that we will take any actions that may presently be planned. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the "Risk Factors" section of this Form 10-K, which include, without limitation, the adverse effect from a decline in securities markets or a decline in our products' performance, failure to renew investment management agreements, adverse results of litigation and/or arbitration, acts of terrorism and/or war, competition, changes in government regulation, availability and terms of capital, and acquisition strategy. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors.

        The following should be read in conjunction with the "Selected Financial Data" and our Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.

Overview

        We derive our revenues primarily from providing investment management, distribution, and administrative services to the Funds and institutional and separately managed accounts. Investment management fees, our most substantial source of revenues, are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions, and the composition of assets. Underwriting and distribution revenues, another substantial source of revenues, consist of sales charges and commissions derived from sales of investment and insurance products and distribution fees, as well as Legend's advisory services. The products sold have various sales charge structures and the revenues received from sales of products vary based on the type and amount sold. Rule 12b-1 distribution fees earned for distributing certain mutual fund shares are based upon a percentage of assets and fluctuate based on sales, redemptions, and financial market conditions. Service fees include transfer agency fees, custodian fees for retirement plan accounts, and portfolio accounting fees.

Mackenzie Acquisition

        On December 16, 2002, we completed our acquisition of the business of Mackenzie Investment Management Inc. ("MIMI"), a Florida-based U.S. investment management subsidiary of Toronto-based Mackenzie Financial Corporation ("MFC") and adviser of the Ivy Funds sold in the United States. The transaction was approved by the boards of directors of Waddell & Reed Financial, Inc., MIMI, and MFC in August of 2002 and by the shareholders of MIMI and Ivy Fund in early December 2002. We continue to operate MIMI's business through our subsidiary, Waddell & Reed Ivy Investment Company ("WRIICO").

        The acquisition was accounted for as a purchase business combination and accordingly, the results of WRIICO's operations have been included with ours since the acquisition date. In the 15 days of our ownership during the fourth quarter of 2002, WRIICO contributed $0.7 million of revenue and $0.1 million of pretax earnings.

        Based on the terms of the purchase agreement, we paid approximately $28.2 million to purchase the business of MIMI, plus approximately $33.2 million for excess working capital. Of the total $61.4 million purchase price, $3.4 million was held in escrow at December 31, 2002, to be paid following final working capital adjustments. On March 11, 2003, we paid $3.2 million of the escrow balance. The final purchase price is subject to working capital adjustments. As part of the transaction, we have entered into new

30

subadvisory and marketing agreements. These agreements extend MFC's subadvisory agreements with WRIICO and provide us with additional investment management opportunities in Canada. Pursuant to the subadvisory agreements, we will receive investment management fees covering multiple funds whose assets were approximately $948.5 million (USD) at December 31, 2002. Pursuant to the marketing agreement, MFC will provide us with opportunities to launch new funds and/or assume additional existing subadvisory mandates under the Universal brand name in Canada, and will facilitate our relationship with MFC's parent company, Investors Group Inc. and its affiliates.

        With respect to WRIICO's U.S. business, we will maintain the Ivy Fund brand name, expand its product offerings and use it for U.S. retail nonproprietary load fund distribution, while utilizing our investment management capabilities to strengthen the Ivy Fund product line. Select Ivy Funds are also available to Waddell & Reed Advisors, where a number of styles offered by WRIICO are not part of our current proprietary product line. At December 31, 2002, the Ivy Funds had $647.6 million in assets.

        We have taken steps to bring Waddell & Reed's investment management team to the Ivy Funds, and in March 2003, we announced our future plans to merge the Ivy Fund and W&R Funds families under the Ivy brand name, thus creating a combined product line of considerably greater scale and breadth, which will utilize W&R Funds' historical performance for marketing purposes. The performance of the Ivy Funds has been excluded from our other Funds' performance statistics throughout this annual report as the Ivy Funds were under our management for only 15 days in 2002, which in our opinion is too brief a time period to measure any performance statistics of these Funds resulting from our management expertise. With the merger of the Ivy Fund and W&R Funds families expected during 2003, we do not expect the past performance of the Ivy Funds to be indicative of future results under Waddell & Reed's management, which has historically been superior to that of the Ivy Funds.

Critical Accounting Policies and Estimates

        Our discussion and analysis of the financial condition and results of operations are based upon our consolidated financial statements. Our consolidated financial statements and accompanying footnotes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. Accounting principles generally accepted in the United States require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses in the consolidated financial statements and accompanying notes and related disclosures of commitments and contingencies. We continually evaluate the accounting policies and estimates we use to prepare the consolidated financial statements. We rely on historical experience, third party professionals, and various other assumptions that we believe to be reasonable to make judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. We have identified the following critical accounting policies and estimates used by management in the preparation of our consolidated financial statements: valuation of long-lived assets, intangible assets and goodwill, income taxes, pension and postretirement benefits, and litigation contingencies. Additionally, see Note 2. "Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements for a summary of significant accounting policies.

Valuation of long-lived assets

        We regularly review the carrying value of certain long-lived assets with respect to any events or circumstances that indicate impairment or an adjustment to the amortization period is necessary. If circumstances suggest the recorded amounts cannot be recovered, calculated based upon estimated future undiscounted cash flows estimated to be generated by those assets, the carrying values of these assets are reduced to fair value.

Accounting for intangible assets and goodwill

        As a result of the acquisition of MIMI on December 16, 2002, we recorded $22.9 million of indefinite lived intangible assets and an increase to goodwill of $20.1 million. Two significant issues arise with respect

31

to these assets that require management estimates and judgment: (i) the valuation in connection with the initial purchase price allocation, and (ii) the ongoing evaluation of impairment.

        In connection with all of our acquisitions, a valuation is completed to determine reasonable purchase price allocations. Specifically, upon completion of the allocation process in the case of our acquisition of MIMI in 2002, approximately 53% of the excess of the purchase price over the tangible net assets was assigned to various identifiable intangible assets. Considering that identifiable intangible assets are contracts related to the management of mutual funds which will be continually offered and which are not expected to be terminated in the foreseeable future, such intangible assets were determined to be non-amortizable under Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). The purchase price allocation process requires management estimates and judgment as to expectations for the various products, distribution channels, and business strategies. For example, certain growth rates and operating margins were assumed for different products and distribution channels. If actual growth rates or operating margins, among other assumptions, differ from the estimates and judgments used in the purchase price allocation, the amounts recorded in the financial statements for identifiable intangible assets and goodwill could be subject to charges for impairment in the future.

        In connection with the June 2001 issuance of SFAS 142, we stopped amortizing goodwill effective January 1, 2002. In lieu of amortization, we performed the required transitional impairment test for goodwill recorded as of January 1, 2002. Upon the completion of this test, we concluded that no impairment of goodwill existed at the date of adoption. At least annually, or in the case of certain factors being present, we complete an ongoing review of the recoverability of goodwill and intangible assets using a fair-value based approach. The approach for the review of goodwill has two steps, the first being to identify a potential impairment and a second step to measure the amount of the impairment loss, if any. Intangible assets with indefinite lives are tested for impairment annually using a one-step approach that compares the fair value to the carrying amount of the asset. Factors that are considered important in determining whether an impairment of goodwill or intangible assets might exist include significant continued underperformance compared to peers, significant changes in our business and products, material and ongoing negative industry or economic trends, or other factors specific to each asset or subsidiary being evaluated. Because of the significance of goodwill to our consolidated balance sheets, the annual impairment analysis is critical. Any changes in key assumptions about our business and our prospects, or changes in market conditions or other externalities, could result in an impairment charge and such a charge could have a material adverse effect on our financial condition and results of operations. See Note 4. "Goodwill and Identifiable Intangible Assets" of the Notes to the Consolidated Financial Statements for additional information.

Accounting for income taxes

        The provision for income taxes is based upon our estimate of taxable income for each respective accounting period. We recognize an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, including the determination of any valuation allowances that might be required against deferred tax assets. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of assets are recovered or liabilities are settled. We have not recorded a valuation allowance on deferred tax assets as of the current reporting period based on our belief that operating income will, more likely than not, be sufficient to realize the benefit of these assets over time. In the event that actual results differ from these estimates or if our historical trend of positive operating income changes, we may be required to record a valuation allowance on deferred tax assets, which could have a material adverse effect on our consolidated financial condition and results of operations.

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Pensions and other postretirement benefits

        Our pension and other postretirement benefits costs and liabilities are calculated using various actuarial assumptions and methodologies prescribed under Statement of Financial Accounting Standards No. 87 "Employers' Accounting for Pensions" ("SFAS 87") and Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Other Postretirement Benefits Other than Pensions" ("SFAS 106"). We use certain assumptions, including but not limited to, the selection of: (i) the discount rate used to calculate the present value of plan liabilities, (ii) the expected return on plan assets, and (iii) the expected health care cost trend rate. The discount rate assumption is based upon the review of high quality corporate bond rates and the change in these rates during the year. The expected return on plan assets and health care cost trend rates are based upon an evaluation of our historical trends and experience, taking into account current and expected future market conditions. In the event that actual results differ from estimates, future pension costs and funding requirements may change materially.

Litigation Contingencies

        As discussed in Note 19. "Contingencies" of the Notes to the Consolidated Financial Statements, there are legal proceedings pending in various jurisdictions against us, for which it is impossible to predict the outcome. In one matter, an unfavorable decision awarding compensatory damages against us has been returned and is being appealed. In another matter, an arbitration panel ordered us to pay punitive damages, which was subsequently vacated and remanded back to the arbitration panel for reconsideration. It is possible that there could be further adverse developments in these cases. Except as otherwise disclosed, management believes that the amount or range of loss that could result from an unfavorable outcome of these matters cannot be reasonably estimated and we have not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any, other than what has been described in Note 19. It is possible that our business, results of operations, cash flows, or financial position could be materially adversely affected by an unfavorable outcome of certain pending litigation. We believe that we have valid bases for appeal of all adverse decisions. All such cases are, and will continue to be, vigorously defended.

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Summary of Operating Results (1)(2)(3)(4)

        For the years ended December 31, 2002, 2001, and 2000:

        (Please see Item 6. Selected Financial Data)

		2002			2001		2000
		Amount		% of revenues	Amount	% of revenues	Amount	% of revenues
		(in thousands)
Operating revenues:
	Investment management fees	$	186,038	42.4	214,242	44.4	253,774	48.7
	Underwriting and distribution fees		183,133	41.7	203,535	42.2	202,879	39.0
	Shareholder service fees		65,690	14.9	59,381	12.3	53,436	10.3
	Revenues excluding investment and other income		434,861	99.0	477,158	98.9	510,089	98.0
	Investment and other income		4,264	1.0	5,404	1.1	10,613	2.0
	Total revenues		439,125	100.0	482,562	100.0	520,702	100.0
Operating expenses:
	Underwriting and distribution (3)		185,032	42.1	185,575	38.4	183,222	35.1
	Compensation and related costs		58,302	13.3	57,229	11.8	57,331	11.0
	General and administrative (2)		35,313	8.0	29,940	6.2	28,498	5.5
	Amortization of goodwill		0	0.0	6,649	1.4	5,502	1.1
	Depreciation		6,441	1.5	5,567	1.2	3,613	0.7
	Total operating expenses (1)(2)(3)(4)		285,088	64.9	284,960	59.0	278,166	53.4
Other Items:
	Interest expense		12,298	2.8	18,286	3.8	14,590	2.8
	Total expenses (1)(2)(3)(4)		297,386	67.7	303,246	62.8	292,756	56.2
	Income before income taxes (1)(2)(3)(4)	$	141,739	32.3	179,316	37.2	227,946	43.8

(1)

Excludes a pre-tax write-down in 2002 of $7.1 million ($4.4 million net of tax) relating to an other than temporary decline in the value of certain investment securities.

(2)

Excludes a special charge of $2.0 million pre-tax ($1.3 million net of tax) in 2002 related to the NASD arbitration.

(3)

Excludes an $8.2 million pre-tax ($5.1 million net of tax) charge in 2001 for write-off of the expected forgiveness of stock loans.

(4)

Including 2002 special charges, for the year ended 2002 operating expenses were $294.2 million, total expenses were $306.5 million, and income before income taxes was $132.6 million. Including 2001 special charges, for the year ended 2001 operating expenses were $293.2 million, total expenses were $311.4 million, and income before income taxes was $171.1 million.

Results of Operations

Total Revenues

2002 over 2001

        Revenues excluding investment and other income decreased $42.3 million, or 9%, to $434.9 million in 2002. Approximately 65% of the decrease in revenue was attributable to lower investment management fee revenues. The decline in investment management fee revenues and underwriting and distribution fee revenues were partially offset by increased shareholder service fee revenues. Investment and other income declined $1.1 million, or 21%. Total revenues, which include investment and other income, decreased

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$43.4 million, or 9%, to $439.1 million for 2002. Income before income taxes and special charges decreased 21% to $141.7 million in 2002.

2001 over 2000

        Revenues excluding investment and other income decreased $32.9 million, or 6%, to $477.2 million in 2001. Lower investment management fees were partially offset by higher shareholder service fee revenues and underwriting and distribution fee revenues. Investment and other income declined $5.2 million, or 49%. Total revenues, which include investment and other income, were $482.6 million in 2001, a 7% decrease from 2000. Legend, acquired on March 31, 2000, contributed $37.8 million to 2001 revenues, an increase of $1.3 million from 2000. ACF contributed $8.6 million to 2001 revenues, a decrease of $2.2 million. Income before income taxes and 2001 special charges decreased 21% to $179.3 million in 2001 compared to 2000. Income before income taxes and 2001 special charges as a percentage of total revenues was 37.2% in 2001 and 43.8% in 1999.

Investment Management Fee Revenues

Investment management fee revenues are earned for providing investment advisory services to the Funds and to institutional and separate accounts.

2002 over 2001

        Investment management fee revenues decreased $28.2 million, or 13%, in 2002 due to lower average assets under management. Our average assets, primarily equity assets, followed the decline in the U.S. equity market as reflected by the 17% decrease in the daily average close of the S&P 500 Index. Management fees from mutual funds were down $27.7 million, or 15%, mirroring the 15% decline in related average assets. Management fee rates remained relatively unchanged at 66.9 basis points in 2002 compared to 67.0 basis points in 2001. Although our 2002 long-term retail redemption rate (excluding the Ivy Funds) increased to 10.4% from 8.4% last year, more than 75% of the increase was due to lower long-term retail average assets, the denominator in the calculation. While long-term retail average assets declined 15% for the year, the dollar value of long-term retail redemptions increased only 5%, or $102.6 million. Given the volatility in the market during 2002, our long-term retail redemptions were relatively stable, increasing only 0.4% of related average assets. We have consistently maintained a solid record of strong relative performance of managing assets, even in volatile equity markets. As of December 31, 2002, Morningstar rates most of our equity funds with 4 or 5 stars—76% of our equity funds (excluding the Ivy Funds) and 91% of our equity assets (excluding Ivy Fund assets) for the current period and 78% of our equity funds (excluding the Ivy Funds) and 85% of our equity assets (excluding Ivy Fund assets) for the last five years.

        Management fee revenues from institutional and separate accounts declined $0.5 million, or 2%, for 2002 primarily due to lower management fee rates. Institutional and separate account average assets under management were flat compared to 2001. Growth in institutional and separate account assets under management offset market depreciation on the related average assets. Management fee rates for institutional and separate accounts declined from 47.4 basis points to 46.4 basis points in the current year. Fee rates for institutional and separate account business vary by contract. We continue to develop new initiatives to expand this element of our business. As part the acquisition of MIMI (WRIICO), we have entered into new subadvisory and marketing agreements advancing the institutional component of our business. These agreements extend MFC's subadvisory agreements with WRIICO and provide us with additional investment management opportunities in Canada. Pursuant to these subadvisory agreements, we receive investment management fees covering multiple funds whose assets were approximately $948.5 million (USD) at December 31, 2002. Pursuant to a marketing agreement, MFC will provide us with opportunities to launch new funds and/or assume additional existing subadvisory mandates under the

35

Universal brand name in Canada, and will facilitate our relationship with MFC's parent company, Investors Group Inc. and its affiliates.

2001 over 2000

        Investment management fee revenues decreased $39.5 million, or 16%, in 2001 reflecting the 15% decrease in average assets under management. The 16% decline in the market, represented by the daily average close of the S&P 500 Index in 2001 compared to 2000, is the primary cause of the decrease in average assets under management. Approximately $35.7 million, or 90%, of the decline in revenue was directly attributable to the decline in mutual fund management fees caused by the 15% decrease in average mutual fund assets. In 2001, mutual fund management fee rates declined slightly from 67.5 basis points in 2000 to 67.0 basis points of average mutual fund assets under management.

        Management fee revenues from institutional and separate accounts declined $3.9 million, or 14%, compared to 2000. Institutional and separate account average assets under management declined 10% during 2001. In 2001, performance based fees earned on institutional and separately managed accounts were $2.8 million lower than in the same period last year, thereby causing a larger decline in revenue than the related average assets. Removing the impact of performance based fees in 2000 and 2001, management fees for institutional and separate accounts decreased 4%. In 2001, the average management fee rate for institutional and separate accounts improved to 47.4 basis points from 44.6 basis points as new business with higher fee rates offset lower performance based fees and lost business with substantially lower rates.

Underwriting and Distribution Fee Revenues

Underwriting and distribution fee revenues are derived primarily from sales commissions charged on front-end load mutual funds, variable annuities, and other insurance products, and to a lesser extent from financial planning fees. Revenues are also derived from Rule 12b-1 asset-based distribution fees earned on deferred-load products, and asset-based fees earned on the Strategic Portfolio Allocation product ("SPA") and other variable annuity products.

2002 over 2001

        Underwriting and distribution fee revenues decreased $20.4 million, or 10%, to $183.1 million in 2002. Sales volume of front-end load products (Class A mutual fund shares, variable products, financial plans, and other front-end load mutual funds) generates front-load commission revenue. Front-load product revenues declined $35.0 million, or 27%, in 2002 as a result of a 30% decline in related sales. Sales of variable products were down in 2002 due to the large volume of commissionable variable annuity exchanges that took place in 2001. Included in 2001 variable product sales were $589.5 million of commissionable variable annuity exchanges. The increase in the 2001 commissionable variable annuity exchanges resulted from our clients exchanging their UILIC policies into Nationwide policies that offered more attractive features and service. This activity is viewed as a one-time occurrence resulting from the availability of a superior product. Sales of insurance products, specifically fixed annuities, term insurance, and Medicare supplement insurance, were up substantially for 2002, resulting in an increase in insurance revenues of $7.7 million, or 33%, reaching $31.1 million for the year. While our principal sales focus is on investment products, our financial planning process—which incorporates the sale of insurance products—continues to ensure that our financial advisors serve their clients' needs regardless of economic conditions.

        Asset-based fee revenues earned on deferred-load products (from Class B and Class C shares), declined 11%, or $1.5 million, primarily due to the 11% decline in related assets under management. This decline in assets was largely the result of stock market depreciation. Asset-based fee revenues earned on our SPA products introduced in the third quarter of 2001 contributed an increase of $10.2 million to 2002 revenues.

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2001 over 2000

        Underwriting and distribution fee revenues increased $0.7 million in 2001. Legend, acquired on March 31, 2000, contributed $32.0 million to the current year's underwriting and distribution fee revenues, an increase of $0.6 million compared with 2000.

        Certain investment product sales, namely Class A share mutual funds and variable annuity products, both with front-end load charges, generate commission revenues based on sales volume. Other front-load product revenues are fees collected for financial plans and commissions collected from the sale of other mutual funds. In 2001, commission revenues from front-load investment products were $130.7 million, a decrease of $3.8 million, or 3%, from 2000, while sales of these products increased 8%. The primary reason commission revenues decreased while front-end load sales increased was the volume and product mix of variable product sales. Sales of variable products were $1.1 billion in 2001 compared with $0.7 billion in 2000, an increase of 69%. Included in variable product sales in 2001 is $589.5 million of commissionable variable annuity exchanges. Front-load revenues decreased while the related sales increased due to significantly lower commission rates on these commissionable variable annuity exchanges and a larger number of new sales in 2001 of variable products with a lower commission structure. Overall, commission rates on variable annuity products declined from 7.7% in 2000 to 5.8% in 2001. The increase in commissionable variable annuity exchanges resulted primarily from our clients exchanging their UILIC policies into Nationwide policies that offered more attractive features and service.

        Asset-based fee revenues earned on deferred-load products (from Class B and Class C shares), declined 9%, or $1.6 million, primarily due to the 11% decline in related assets under management. This decline in assets was largely the result of stock market depreciation. Asset-based fee revenues earned on our SPA products introduced in the third quarter of 2001 contributed $2.0 million to 2001 revenues. Additionally, greater insurance product sales during the current year generated an increase in distribution revenue of $3.3 million.

Shareholder Service Fee Revenues

Shareholder service fee revenues primarily include transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting fees.

2002 over 2001

        Shareholder service fee revenues increased $6.3 million, or 11%, to $65.7 million for 2002. Fee revenues earned from transfer agency services and custodial services composed 96% of total shareholder service fee revenue in 2002. Fee revenues earned from transfer agency services increased $6.7 million, or 15%. Although a portion of the increase in transfer agency service fees can be attributed to growth in the number of shareholder accounts, the primary reason for the increase in revenue was a per-account service fee rate increase that commenced in December 2001. The impact of the per-account service fee increase was approximately $3.5 million for 2002. The average number of shareholder accounts increased 6% to 2.18 million (excluding Ivy Fund accounts) from 2.06 million last year. Revenues earned from custodial services decreased $0.5 million primarily due to a decline in custodial assets that generate fee revenues for Legend.

2001 over 2000

        Shareholder service fee revenues increased $5.9 million, or 11%, to $59.4 million in 2001 due primarily to the increase in the average number of accounts serviced. The average number of shareholder accounts increased 10% to 2.06 million in 2001. Fee revenues earned from transfer agency services and custodial services composed 95% of total shareholder service fee revenue in 2001 and increased $4.6 million, or 12%, and $1.0 million, or 9%, respectively.

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Underwriting and Distribution Expense

Underwriting and distribution expense includes costs associated with the marketing, promotion, and distribution of our products. The primary costs are commissions and other compensation paid to financial advisors, sales force management and other marketing personnel, plus overhead expenses relating to field offices, sales programs, and marketing and advertising.

2002 over 2001

        Underwriting and distribution expenses declined $8.7 million, or 5%, in 2002 to $185.0 million. In the third quarter of 2001, we recorded a special charge of $8.2 million pre-tax, or $5.1 million after-tax, for the write-off of stock loans. This non-cash charge relates to promissory notes that were extended to a select group of financial advisors and sales managers to facilitate their ownership of our stock at our IPO in March of 1998 and drive future advisor productivity and retention growth. This charge resulted from financial advisors and sales managers having collectively met the productivity requirements of the stock loan program, such that the notes were expected to be forgiven. Excluding this charge, the decrease in expense was $0.5 million, or virtually flat.

        Total direct expenses (expenses relating to sales volume such as commissions, advisor incentive compensation, and commission overrides paid to field management) decreased $13.0 million, or 10%. Direct expenses associated with the sale of front-end load products declined $20.6 million, or 27%, in direct correlation with the 27% decline in front-end load commission revenues. Other than from front-end load proprietary products, direct selling costs related to investment products (i.e. deferred-load mutual funds, SPA asset allocation, insurance, direct selling costs of Legend, and advisor incentive compensation) increased $7.6 million due chiefly to higher advisor payout expenses resulting from increased revenues due to SPA asset growth and increased insurance product sales. Offsetting these increases in direct selling costs was $1.3 million lower advisor incentive compensation for 2002. Certain sales force incentive compensation is based on annual productivity and is accrued during the year based on estimated sales activity. This incentive compensation was structured to exclude payment for commissionable variable annuity exchanges. Because of the volume of commissionable variable annuity exchanges in 2001 ($589.5 million), actual incentive compensation recognized in 2002 was only slightly lower than that of 2001.

        Indirect expenses (expenses that do not fluctuate directly with sales volume or sales revenues) increased $4.2 million, or 6%, and composed 40% of total underwriting and distribution expenses in 2002 compared with 36% in 2001. In 2001, we recorded a non-cash charge of $8.2 million to write-off stock loans made to certain financial advisors and sales managers since the productivity requirements of the loan program were considered to have been collectively met such that the notes were expected to be forgiven. In fact, these notes have been subsequently forgiven. Excluding this charge, indirect expenses increased $12.4 million. Lower Rule 12b-1 expense reimbursements received from the Funds due to lower average asset levels resulted in an increase in indirect expense of $3.4 million. Some of the other more significant increases in indirect expenses for 2002 were for increases in technology related costs related to computer services, data transmission, and software maintenance and licensing of $3.1 million, field office facilities costs of $2.0 million, group health and accident insurance costs for the field of $1.4 million, increases of $1.1 million for legal costs allocated to underwriting and distribution based on their nature, and a $1.4 million increase in indirect selling expenses at Legend due to a change in office structure.

        Beginning in 2002, management decided to open new Legend offices structured similar to that of Waddell & Reed Advisors. Legend's typical office structure supports veteran retirement advisors whereby the expenses of operating the offices are borne by the advisors and managers and not by the Company. In turn, commission rates paid to these advisors are relatively higher. Six Legend offices were opened in 2002 in which regional vice presidents were hired to recruit and manage relatively inexperienced advisors. The commission rates paid to these advisors are lower and the office expenses are borne by the Company.

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While this caused an increase in indirect expenses and lower distribution margins in the short term, the benefits come from a faster growing sales force, broader market penetration and higher direct margins.

        Our distribution margin was -1.0% for 2002 and 4.8% for 2001. While prior to the acquisition of WRIICO, wholesale third-party distribution efforts did not produce underwriting and distribution fee revenues, the collection of assets results in future investment management fee revenues. Underwriting and distribution costs related to third-party distributors were $2.1 million for each of the years 2002 and 2001. The Waddell & Reed Advisors distribution margin, which excludes third-party distribution costs, WRIICO, and the 2001 special charge for stock loans and therefore, better reflects the activity of Waddell & Reed Advisors, declined from 9.9% in 2001 to 0.2% in 2002, primarily due to lower sales volume.

2001 over 2000

        Underwriting and distribution expenses, composed of direct and indirect costs, were $193.8 million for 2001, an increase of $10.5 million, or 6%, compared with 2000. In the third quarter of 2001, we recorded a special charge of $8.2 million pre-tax, or $5.1 million after-tax, for the write-off of stock loans. This non-cash charge relates to promissory notes that were extended to a select group of financial advisors and sales managers to facilitate their ownership of our stock at our IPO in March of 1998 and drive future advisor productivity and retention growth. This charge resulted from financial advisors and sales managers having collectively met the productivity requirements of the stock loan program, such that the notes were expected to be forgiven. In fact, these notes have been subsequently forgiven. Excluding this charge, the increase in expense was $2.3 million, or 1%.

        Total direct expenses (expenses relating to sales volume such as commissions, advisor incentive compensation, and commission overrides paid to field management) decreased $6.3 million, or 5%. Direct expenses associated with the sale of front-end load products declined $1.1 million, or 1%, correlating with the 3% decline in front-end load commission revenues. Other than from front-end load proprietary products, direct selling costs related to investment products (i.e., deferred-load mutual funds, SPA asset allocation, insurance, direct selling costs of Legend, and advisor incentive compensation) decreased $5.2 million primarily due to a decrease in advisor incentive compensation. Certain sales force incentive compensation is based on annual productivity and is accrued during the year based on estimated sales activity. The final productivity at the end of the year is used to determine the amount of incentive compensation paid to financial advisors. The number of advisors earning incentive compensation in 2001 decreased substantially from 2000. This incentive compensation is also structured to discourage commissionable variable annuity exchanges.    The decrease in advisor incentive compensation was partially offset by increases in direct costs related to deferred-load products and higher advisor payout expenses resulting from increased revenues due to SPA asset growth and increased insurance product sales.

        Indirect expenses (expenses that do not fluctuate directly with sales volume or sales revenues) increased $16.8 million, or 32%, and comprised 36% of underwriting and distribution expenses in 2001 compared with 29% in 2000. Some of the more significant increases in indirect expenses for 2001 were $8.2 million for stock loans, $2.8 million for facilities costs related to field offices, $2.2 million for general and administrative costs associated with marketing our products, and $1.3 million for field office sales administration support compensation. Legend, acquired on March 31, 2000, contributed an increase to indirect expenses in 2001 of $1.7 million, reflecting a full year of contribution to our operations. Our distribution margin for 2001 was 4.8% and 9.7% in 2000. Excluding the one-time charge for stock loans, this margin was 8.8%.

        In 2001, we incurred expenses of $2.1 million for underwriting related to third-party distributors. While wholesale third-party distribution efforts do not produce underwriting and distribution fee revenues, the collection of assets results in future investment management fee revenues. The distribution margin excluding this expense and the special charge for stock loans was 9.9%.

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Compensation and Related Costs

Compensation and related costs are expenses incurred to compensate our home office employees and the home office employees of Legend and ACF. The primary expenses are base salaries and incentive compensation, but also include payroll taxes, group health and life insurance, and pension and 401(k) savings plan costs.

2002 over 2001

        Compensation and related costs for 2002 increased $1.1 million, or 2%, to $58.3 million. Average headcount and base salaries were relatively flat compared with 2001. Group health and accident insurance costs and incentive bonus compensation increased $0.4 million and $0.7 million, respectively, over last year.

2001 over 2000

        Compensation and related costs for 2001 were essentially flat at $57.2 million, compared with $57.3 million for 2000. Over 80% of compensation costs are base salaries and incentive compensation. Average headcount for 2001 increased 11%, which contributed to the increase in base salaries of 14%. The increase in base salaries was offset with a somewhat larger decrease in incentive bonus compensation. The other components of compensation, group insurance and savings plan costs, increased slightly due to the increase in headcount.

General and Administrative Expense

General and administrative expenses are operating costs other than those related to compensation and to distribution efforts, including, but not limited to, computer services and software costs, telecommunications, facilities costs of our home offices, costs of professional services, and insurance. We recover certain of our general and administrative costs related to underwriting and distribution through Rule 12b-1 service and/or distribution fees, which are paid by the Funds.

2002 over 2001

        General and administrative expenses increased $7.4 million, or 25%, for 2002 reaching $37.3 million. The majority of the increase resulted from increased legal costs of $4.5 million. Also, in the third quarter of 2002, we recorded a $2.0 million pre-tax special charge for the estimated cost of the payment of the compensatory damage and attorneys fees portion of the NASD arbitration award. This charge was recorded when we made the strategic legal decision to no longer appeal the compensatory damage and attorneys fees portion of the award after it was reduced from $2.5 million to $1.8 million by the New York Supreme Court. The inclusion of pre- and post-judgment interest on this amount increased the total charge to $2.0 million. The $2.0 million compensatory damage and attorneys fees award was paid on February 25, 2003. Please refer to Item 3. "Legal Proceedings" for additional information. Facilities costs increased $1.1 million from last year—$0.5 million due to increased security costs over 2001 and the remainder attributable to increased space rent. Costs for various discretionary overhead items, such as business meeting and travel costs, temporary contracted business services, telecommunications, and postage and freight costs were reduced approximately $1.1 million from 2001.

2001 over 2000

        General and administrative expenses increased 5%, or $1.4 million, to $29.9 for 2001. Cost containment in certain discretionary overhead items was offset by an increase in legal costs and facilities costs. On March 7, 2001, we completed the sale of our two home office buildings to an unrelated third party and entered into an agreement with them to lease the buildings back for a period of fifteen years, thereby resulting in additional expense of $2.0 million during 2001 for rent.

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Investment and Other Income

2002 over 2001

        Investment and other income decreased $1.1 million, or 21%, to $4.3 million for 2002. While average balances invested in commercial paper were relatively flat compared with 2001, income earned on those investments decreased $1.1 million due to lower average interest rates. The average commercial paper rate declined from 3.9% to 1.7% in 2002. Overall, average invested cash and marketable securities were $155.4 million in 2002 compared with $142.9 million in 2001. On July 24, 2002, we deposited $62.5 million in cash with the Circuit Court of Jefferson County, Alabama, for an appeal bond related to the previously disclosed UILIC case. This deposit earned interest at 2.01% per annum throughout the rest of 2002. During 2002, we recorded $0.6 million in interest income related to this deposit. Offsetting the appeal bond interest, we earned $0.5 million less in dividends from our investments in affiliated mutual funds during 2002.

2001 over 2000

        Investment income declined $5.2 million, or 49%. In 2001, realized gains from the sale of investment securities were $2.1 million less than in 2000. In 2000, investment and other income included $2.5 million of realized gains from the sale of investment securities sold to partially fund the Legend acquisition. Less interest was earned on investments in the current year due to lower average interest rates. The average investment in commercial paper was $50.6 million in 2001 compared with $53.9 million in 2000. The decreased average investment in commercial paper paired with lower short-term interest rates yielded a $1.6 million decline in income on these investments. The average commercial paper rate declined from 6.6% in 2000 to 3.9% in 2001. Overall, average invested cash and marketable securities were $142.9 million in 2001 compared with $136.7 million in 2000.

Depreciation

2002 over 2001

        Depreciation of property and equipment increased $0.9 million, or 16%, to $6.4 million for 2002. Increases in depreciation costs resulted from depreciable leasehold improvements made to our home office buildings and additions to capitalized computer software and internal software development costs.

2001 over 2000

        Depreciation of property and equipment increased $2.0 million, or 54%, in 2001 to $5.6 million. With the construction of a second home office building placed into service in late 2000, we purchased additional furniture and fixtures, which have relatively short useful lives, contributing an increase to depreciation expense of $0.8 million in 2001. Both home office buildings were sold in a sale-leaseback arrangement on March 7, 2001. The additional furniture and fixtures purchased in 2001 more than offset the decrease in depreciation expense associated with the sale-leaseback of the buildings. Other less significant sources of increase in depreciation expense were additions to capitalized software, leasehold improvements, and machinery and equipment.

Interest Expense

2002 over 2001

        Interest expense decreased $6.0 million, or 33%, to $12.3 million for 2002 mainly due to interest savings related to an interest rate swap agreement we entered into in March of 2002. On March 12, 2002, our $200.0 million 7.5% fixed rate senior notes maturing in February 2006 (the "Notes") were effectively converted to variable rate debt by entering into an interest rate swap agreement whereby we have agreed with another party to exchange, at specified intervals, the difference between the fixed-rate and various

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floating-rate interest amounts, calculated using a notional amount of $200.0 million. The difference in the floating-rate interest paid and the 7.5% fixed-rate interest received is recorded as an adjustment to interest expense during the period that the related debt is outstanding. At December 31, 2002, the floating rate being paid was 3.9%. The average floating rate paid on the interest rate swap for the year ended December 31, 2002 was 4.2%.

        Additionally, interest expense declined due to lower average short-term debt balances and borrowing rates in 2002. Average short-term borrowing rates fell from 4.9% for 2001 to 2.1% for 2002.

2001 over 2000

        Interest expense increased $3.7 million, or 25%, in 2001. The average balance on the combined short-term and long-term debt outstanding was $246.2 million for 2001 and $195.8 million for 2000. The average interest rate applied, excluding other costs, was 7.1% for 2001 and 7.0% for 2000. The total outstanding debt balance at December 31, 2001 was $226.3 million, of which $28.0 million was short-term.

Write-down of Investment Securities

        Our investments are comprised of U.S., state, and government obligations, corporate debt securities, and investments in affiliated mutual funds. Substantially all investments are classified as available-for-sale. Unrealized holding gains and losses on these securities, net of related tax effects, are excluded from earnings until realized and are reported as a separate component of comprehensive income. All investments are reviewed by the Company for declines in fair value. If such declines are considered other than temporary, the cost basis of the individual security or mutual fund is written down to fair value as a new cost basis, and the amount of the write-down is included in earnings. During the third quarter of 2002, we recorded a charge to earnings of $7.1 million, pre-tax, to reflect the other than temporary decline in value of certain holdings in affiliated mutual funds.

Amortization of Goodwill

        We stopped amortizing goodwill effective January 1, 2002, in connection with the adoption of SFAS 142. Goodwill amortization was $6.6 million for 2001.

Income Taxes

        Our effective income tax rate was 34.1%, 37.4%, and 39.0%, in 2002, 2001 and 2000, respectively. The effective tax rate in 2002 was lower than the statutory rate due to state credits earned from past construction of one of our home office buildings and favorable resolution of previous years' tax liabilities with tax authorities. The 2002 rate was also affected by discontinuing the amortization of goodwill and the State of Kansas passing new state income tax legislation favorable to the mutual fund industry. The change relates to the methodology used to source company taxable income to the State of Kansas in a fashion similar to that used in 11 other states. The law phases in the effect, such that 50% of the benefit was applicable in the year 2002 and 100% is applicable in 2003 and thereafter.

Restricted Stock Awards

        We have a Company Stock Incentive Plan (the "SIP Plan") that allows us to grant equity compensation, including non-qualified stock options and restricted stock, among other awards, as part of our overall compensation program to attract and retain key personnel and encourage a greater personal financial investment in the Company. A maximum of 30,000,000 shares of common stock are authorized for issuance under the SIP Plan. We also have a Company Executive Deferred Compensation Stock Award Plan (the "EDC Plan") and a Company Non-Employee Director Stock Award Plan (the "NED Plan") (collectively, the "Plans") that allow us to grant non-qualified stock options and/or restricted stock to promote the long-term growth of the Company. A maximum of 3,750,000 and 1,200,000 shares of common stock are

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authorized for issuance under the EDC Plan and NED Plan, respectively. Generally, shares of common stock covered by terminated, surrendered or canceled options, by forfeited restricted stock, or by the forfeiture of other awards that do not result in issuance of shares of common stock, are again available for awards under the plan from which they were terminated, surrendered, canceled, or forfeited.

        Under all of our stock incentive plans, the exercise price of each option is equal to the market price of the stock on the date of grant. The maximum term of non-qualified options granted under the SIP Plan is ten years and two days and the options generally vest in 33¹/3% increments beginning on the second, third and fourth anniversaries of the grant date. The maximum term of non-qualified options granted under the EDC Plan and NED Plan is eleven years and the options generally vest 10% each year, beginning on the first anniversary of the grant date. All of the Plans have been approved by our stockholders and all equity compensation provided by the Company has been issued in accordance with these Plans.

        On December 31, 2002, we granted 315,598 shares of restricted stock under the SIP Plan and EDC Plan. These shares have no purchase price and vest over four years in 33¹/3% increments beginning on the second anniversary of the grant date. Under the Plans, unvested shares of restricted stock may be forfeited upon the termination of employment with the Company or service on the board of directors, dependent upon the circumstances of termination. Except for restrictions placed on the transferability of restricted stock, holders of restricted stock have full stockholders' rights during the term of restriction, including voting rights and the rights to receive cash dividends. Based upon the fair market value of these restricted shares on the grant date, we recorded deferred compensation totaling $6.2 million for the year ended December 31, 2002. Deferred compensation is included as a component of stockholders' equity and will be recognized as expense over the four year vesting period. The 2002 grant is expected to result in additional non-cash compensation expense of $1.6 million, pre-tax, per year. It is anticipated that annual grants of restricted shares will increase in future years as we increase our reliance on restricted shares and cash compensation instead of options. As such, annual non-cash equity compensation expense is expected to rise above $1.6 million, pre-tax, in years after 2003.

Tender Offer

        In an effort to enhance long-term value for our stockholders, reduce the total number of options outstanding and improve our ability to retain and provide incentives to our talented and valuable employees, on February 12, 2003, we offered to exchange all of the outstanding stock options (whether vested or unvested) held by our employees, consultants, financial advisors and directors, except Keith A. Tucker, Chairman and CEO with a strike price of $25.4375 or greater for shares of restricted stock.

        Option holders participating in the tender offer received a number of shares of restricted stock for each option tendered dependent on the strike price of the options tendered. The shares of restricted stock received for options ranged from .1707 shares for each option tendered (for options with a strike price of $34.1875) to .2591 shares for each option tendered (for options with a strike price of $25.87). Participants tendered 93% of all options eligible to be tendered. The Company issued a total number of 1,541,552 shares of restricted stock upon the expiration of the tender offer at 11:59 p.m. on March 14, 2003. Of the total number of restricted shares issued, the Company repurchased 609,805 shares from the participants upon their direction for payment of their individual income tax liabilities. As a result, 931,747 net shares of restricted stock were issued. We expect to record a charge of $26.8 million for non-cash equity compensation in the first quarter of 2003.

        All shares of restricted stock issued pursuant to the tender offer were issued under the SIP Plan and are fully vested (i.e., they cannot be forfeited), but are subject to transfer restrictions. The transfer restrictions will expire in 33¹/3% increments beginning on the second anniversary of the grant date. As part of the terms of the tender offer, participating division and district managers entered into a non-solicitation agreement with the Company and all participants agreed to waive any and all future participation in the Company's Stock Option Restoration Program.

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Contingent Purchase Price Payments for Acquisitions

        On March 31, 2000, we acquired Legend in a business combination accounted for as a purchase. Legend was a privately-held mutual fund distribution and retirement planning company based in Palm Beach Gardens, Florida. Legend serves employees of school districts and other not-for-profit organizations nationwide and uses strategic asset allocation services based on proprietary systems. The purchase agreement provided for additional purchase price payments contingent upon the achievement by Legend of specified earnings levels for the years 2000, 2001 and 2002. For 2000, the specified earnings level was met and an additional purchase price payment in the amount of $4.0 million was made and recorded as an addition to goodwill. Because earnings levels were not met during 2001 or 2002, there were no purchase price payments required to be made under the agreement. As of December 31, 2002, we are no longer obligated to make additional contingent purchase price payments to the former owners of Legend.

        On August 9, 1999, we acquired ACF, a privately-held investment management firm based in San Antonio, Texas. ACF manages investments for trusts, high net worth families and individuals, and pension plans of corporations, hospitals, schools, labor unions, endowments and foundations. The purchase agreement provided for additional contingent purchase price payments in two situations. First, these payments could be made if ACF achieved specified earnings levels for the years 2000 through 2004, aggregating to as much as $8.7 million, plus interest. Second, payments could also be made if ACF earned a specified performance fee from Encino Investment Partners GP LLC ("Encino") for the management of Encino Partners LP, a private investment fund, for the years 2000 through 2004, aggregating to as much as $2.0 million, plus interest. In 2000, ACF met both payment requirements in the purchase agreement and a contingent purchase price payment was earned and recorded as an addition to goodwill in the aggregate amount of $9.3 million. As of December 31, 2001, we were no longer obligated to make any additional contingent purchase price payments to ACF based on their achievement of specified earnings levels as the maximum amount of $8.7 million was earned in 2000. For the year ended December 31, 2001, ACF did not meet the specified performance requirements necessary to earn a payment for their management of Encino Partners LP. Encino Partners LP was liquidated during 2002 and as a result, we are no longer obligated to make future contingent purchase price payments to the former owners of ACF.

        We are not obligated to make contingent purchase price payments in connection with the acquisition of the business of MIMI on December 16, 2002.

Sale-leaseback of Real Estate

        On March 7, 2001, we entered into a sale-leaseback arrangement, in which we sold our two home office buildings and the associated land to an unrelated third party and leased them back for a period of fifteen years. The leaseback has been accounted for as an operating lease. The net proceeds from this sale were $28.2 million and resulted in an unrealized gain of approximately $1.3 million, which was deferred and is being amortized over the term of the operating lease. For the years ended December 31, 2002 and 2001, we recognized $96 thousand and $61 thousand, respectively, of this deferred gain as a reduction of rent expense.

Debt Offering

        On January 18, 2001, we completed a debt offering of $200.0 million in principal amount 7.5% senior notes (the "Notes") due in 2006, resulting in net proceeds of approximately $197.6 million (net of discounts, commissions and estimated expenses.) The Notes represent senior unsecured obligations and are rated "Baa2" by Moody's and "BBB" by Standard & Poor's. The Notes pay interest semi-annually on January 18 and July 18 at a rate of 7.5% per annum. Proceeds from the Notes were used to repay short-term debt and for general corporate purposes. On March 12, 2002, the Notes were effectively converted to variable rate debt by entering into an interest rate swap agreement whereby we have agreed with another party to exchange, at specified intervals, the difference between the fixed-rate and various

44

floating-rate interest amounts, calculated using a notional amount of $200.0 million. The difference in the floating-rate interest paid and the 7.5% fixed-rate interest received is recorded as an adjustment to interest expense during the period that the related debt is outstanding. Total long-term debt outstanding as of December 31, 2002 and 2001 was $213.1 million and $198.3 million, respectively.

Product Introductions

        On July 1, 2001, we expanded our Strategic Portfolio Allocation product ("SPA") for use by Waddell & Reed Advisors. For tax-advantaged portfolios, the SPA product incorporates a predictive, dynamic asset allocation system that reallocates the asset classes within model portfolios. The system utilizes a form of "artificial intelligence" overseen by our portfolio managers to optimize return within specified parameters based on ongoing economic and financial information. Clients choose from five model portfolios, with objectives from conservative to aggressive, based on the individual's goals, risk tolerance, and other factors. Each of the portfolios is comprised of a variety of Advisors Funds ranging from money market and fixed income funds to domestic and international equity funds.

        On October 1, 2001, we launched InvestEd, our 529 college savings plan. InvestEd was established under the Arizona Family College Savings Program, created by the state of Arizona as a qualified state tuition program in accordance with Section 529 of the Internal Revenue Code. It is offered through a partnering arrangement with Securities Management & Research, Inc., a Houston-based subsidiary of American National Insurance Company, of Galveston, Texas. Together, we were selected by the state of Arizona as the exclusive provider of investment products and services through the Arizona Family College Savings Program. Our InvestEd plan provides for post-secondary education savings that allow anyone to open an account and invest for higher education expenses. Investments in 529 plans grow tax-deferred until withdrawn and, beginning in 2002, withdrawals for qualified higher education expenses are free from Federal income tax. InvestEd is available nationally through Waddell & Reed Advisors and has been organized as a "fund of funds," with three portfolios made up of various Advisors Funds. InvestEd's Growth, Balanced and Conservative portfolios are customized based on the beneficiary's college time horizon and the investor's desired level of investment risk for that time horizon. The assets in our InvestEd portfolios are reflected in our Advisors Funds Class A, B and/or C shares.

Nationwide and BISYS

        On October 23, 2000, we executed an agreement with Nationwide Financial Services, Inc. ("Nationwide") to provide a broad span of private label insurance and retirement products for use by Waddell & Reed Advisors and Legend retirement advisors. The selection of Nationwide to provide insurance and retirement products increases the breadth and competitiveness of such products available to our financial advisors. Nationwide has developed several different products for distribution by Waddell & Reed Advisors including variable annuities, fixed annuities, life insurance and retirement products. During 2001, we also entered into an agreement with BISYS. BISYS distributes a number of life insurance and disability products underwritten by various carriers that are offered for sale through Waddell & Reed Advisors. Effective December 31, 2001, UILIC terminated its General Agent Contract with us. As such, we are no longer authorized to sell UILIC products.

Liquidity and Capital Resources

        Our primary source of liquidity is cash provided by operations. Cash and cash equivalents were $53.4 million at December 31, 2002, a decrease of $38.3 million from December 31, 2001. Cash and cash equivalents included reserves of $13.9 million and $20.4 million held for the benefit of customers in compliance with securities regulations at December 31, 2002 and 2001, respectively. Cash and cash equivalents, investment securities available-for-sale, and current receivables decreased $5.0 million to $177.9 million at December 31, 2002 from $184.2 million for the same period last year.

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        We are contingently liable under a standby letter of credit in the amount of $36.0 million that expires in June of 2003. As collateral for performance of obligations of the bank under the letter of credit, we have pledged a portion of our investment securities with a combined market value of $44.7 million at December 31, 2002. These securities are recorded in "Investment securities—available for sale" on the consolidated balance sheet. This standby letter of credit was issued in connection with an appeal bond posted with the New York Supreme Court related to the NASD arbitration award. The appeal bond was purchased in the form of a surety bond, the only available means to post an appeal bond in the State of New York. On February 11, 2003, the $25.0 million punitive damage award was vacated and the matter was remanded back to the NASD arbitration panel by the Appellate Division of the New York Supreme Court.

        Net operating cash inflows for 2002 were $40.2 million lower than 2001. This decrease can be primarily attributed to declines in net income as well as other changes in working capital.

        Net investing cash outflows increased $113.0 million to $123.3 million for 2002 compared to $10.3 million during 2001. A majority of the cash, $62.5 million, was used to make an interest-bearing deposit to fund an appeal bond as previously discussed regarding the UILIC litigation, for which we earned interest at 2.01% per annum in 2002. This deposit is recorded in "Prepaid expenses and other current assets" on the consolidated balance sheet. During the current year, we also purchased $32.2 million of additional investment securities required as collateral for the standby letter of credit discussed above. Cash used for capital expenditures decreased $5.3 million from last year, to $13.8 million, the majority of which, $8.7 million, was related to the development of innovative customer relationship management software that will be used by our financial advisors starting in 2003. In December of 2002, we paid $24.1 million (net of cash acquired) to purchase the business of MIMI. On March 11, 2003, we paid $3.2 million of the $3.4 million held in escrow at December 31, 2002, to be paid following final working capital adjustments related to the acquisition. During 2001, we received net proceeds of $28.2 million related to the sale of our two home office buildings, which were subsequently leased back for a period of fifteen years. The increase in cash provided by real estate sales in the prior year was offset by additional purchase price payments for previous acquisitions of $13.3 million made to previous owners of acquired businesses for attaining certain earnings levels during 2000 as specified in purchase agreements. These specified earnings levels were not met during 2001 or 2002 and therefore, no additional purchase price cash payments were required. During 2000, we sold $45.3 million of investment securities to partially fund the Legend acquisition, for which we paid $60.3 million (net of cash acquired) in the same year.

        Cash flow used in financing activities during 2002 was $16.5 million and consisted primarily of increased short-term borrowings from our money market program of $30.0 million offset by cash paid for dividends of $39.1 million and treasury stock repurchases of 706,632 common shares outstanding, the aggregate cost of which was $16.2 million. The average price per share of these repurchases was $22.97. Cash flow used in last year's financing activities was $107.9 million. On January 18, 2001, we issued $200.0 million in principal amount 7.5% senior notes due in 2006, resulting in net proceeds of approximately $197.6 million (net of discounts, commissions, and other expenses). We used these borrowings to repay amounts borrowed under the money market loan program, repurchase common shares outstanding, and for general corporate purposes. Net cash provided by all borrowings totaled $51.0 million in 2001. In 2001, we used debt proceeds to repurchase 4.8 million common shares outstanding, the aggregate cost of which was $141.8 million. The average price per share of these repurchases was $29.65. We also paid $28.6 million in cash dividends in 2001. At December 31, 2002, our outstanding long-term debt was $213.1 million, which included a $14.4 million fair market value adjustment related to our interest rate swap, and our outstanding short-term debt was $58.0 million, increases from December 31, 2001 of $14.8 million and $30.0 million, respectively. Increased short-term borrowings were used to partially fund the appeal bond deposited with the Alabama Court. As of December 31, 2002, we had 19.1 million common shares in treasury at a cost of $407.4 million. Total common shares outstanding as of December 31, 2002 were 80.6 million.

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        We renewed our 364-day revolving credit facility, effective October 11, 2002, with various lenders for a total of $200.0 million, whereby the lenders could, at their option upon our request, expand the facility to $300.0 million. There are no balances outstanding under this line of credit at December 31, 2002 or at any time during 2002.

        Management believes its available cash, marketable securities, and expected cash flow from operations will be sufficient to fund dividends, operations, advance sales commissions, obligations, and other reasonably foreseeable cash needs. We may also continue to repurchase shares of our common stock from time to time, as management deems appropriate. The share repurchases could be financed by our available cash and investments and/or the use of our revolving credit facility or utilization of the money market loan program.

Contractual Obligations and Commitments

        The following table summarizes our commitments and obligations at December 31, 2002 to be paid during the next five years:

	2003		2004	2005	2006	2007
	(in thousands)
Non-cancelable operating lease commitments	$	16,126	12,697	9,620	7,078	5,163
Final acquisition payment to be made upon final working capital calculation		3,417
Change in control and severance payment liability related to acquisition		9,175	—	—	—	—
Long-term debt obligations		—	—	—	200,000	—
	$	28,718	12,697	9,620	207,078	5,163

        Our obligations to be paid in 2003 include an obligation for the final payment of the purchase price of the business of MIMI and obligations to pay employees of MIMI certain severance related payments under various change in control agreements and employee retention plans, which we assumed as part of the purchase of MIMI's business.

        For a discussion of obligations and commitments relating to outstanding litigation, please refer to Item 3. "Legal Proceedings" for additional information.

Recently Issued Accounting Standards

        In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. It also specifies the types of acquired intangible assets that require recognition and reporting separately from that of goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions in the statement. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144 "Accounting for Impairment of Long-Lived Assets" ("SFAS 144").

        We adopted the provisions of SFAS 141 upon its issuance and SFAS 142 effective January 1, 2002. As of January 1, 2002, we are no longer amortizing goodwill. On the date we adopted SFAS 142, we performed an evaluation of our goodwill that was acquired in prior business combinations to identify

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intangible assets that require recognition and reporting apart from that of goodwill and concluded that we have no separately identifiable intangible assets requiring recognition apart from goodwill. Also, on the date we adopted SFAS 142, in accordance with that standard, we performed a goodwill impairment assessment and concluded that no impairment of goodwill existed at the date of adoption.

        We had unamortized goodwill in the amount of $173.7 million at December 31, 2001. As a result of the adoption of SFAS 142, amortization expense related to goodwill was $6.6 million lower for 2002 than that which would have been recognized under prior accounting rules. During 2002, we recognized no amortization expense related to goodwill. Amortization expense related to goodwill was $6.6 million and $5.5 million for the years ended December 31, 2001 and 2000, respectively.

        In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations"("SFAS 143"). SFAS 143, which is effective for fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We have adopted SFAS 143 as of January 1, 2003. We do not expect the implementation of this standard to have any impact on our consolidated financial condition or results of operations.

        In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The implementation of SFAS 144 did not have an impact on our consolidated financial condition or results of operations.

        In April, 2002 the FASB issued Statement of Financial Accounting Standards No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002" ("SFAS 145") which is effective for fiscal years beginning after May 15, 2002. SFAS 145 rescinds SFAS 4 and SFAS 64, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, gains and losses from debt extinguishment are to be classified as extraordinary only if they meet the criteria in Accounting Principles Board Opinion 30 "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 145 also requires that sale-leaseback accounting be used for transactions that are similar in form and substance to sale-leaseback transactions. We do not expect implementation of this statement to have a material impact on our consolidated financial condition or results of operations.

        In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that a liability, measured initially at fair value, for a cost associated with an exit or disposal activity be recognized when the liability is incurred. A fundamental concept of SFAS 146 is that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. Early application is encouraged and previously issued financial statements are not required to be restated. We expect to adopt SFAS 146 for any such exit or disposal activities effective January 1, 2003.

        In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148 amends Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002, and the disclosure requirements are effective

48

for interim periods beginning after December 15, 2002. We currently plan to continue to apply the intrinsic-value based method to account for stock options and will comply with the new disclosure requirements.

Seasonability and Inflation

        We do not believe our operations are subject to significant seasonal fluctuations. We do not believe that inflation has had a significant impact on operations.

Risk Factors

        We Are At Risk Of Litigation Which Could Result In Substantial Costs To Us And Adversely Impact Our Earnings.    We are in litigation with United Investors Life Insurance Company ("UILIC"), and other related parties over terms of a compensation agreement we entered into in July 1999. Pursuant to the agreement, UILIC was to pay us compensation at varying rates on variable annuities underwritten by UILIC and distributed by us. In May 2000, UILIC challenged the validity and duration of that agreement and subsequently asserted various contractual and tort damage claims against us regarding our replacement of UILIC variable policies with Nationwide variable policies.

        In August 2001, a NASD Dispute Resolution Arbitration Panel entered an award of $27.6 million against Waddell & Reed, Inc. The award arose from a complaint by a former financial advisor of the Company. The Panel directed payment of approximately $1.8 million in compensatory damages, plus attorneys fees of $747,000. It also ordered the payment of punitive damages in the amount of $25.0 million. On February 11, 2003, the Appellate Division of the New York Supreme Court vacated the Panel's punitive damage award of $25.0 million and remanded the matter back to the Panel for reconsideration of the issue of punitive damages. The Court upheld the lower court's previous rulings on compensatory damages and attorneys' fees. We satisfied the outstanding judgment on these awards on February 25, 2003. On March 5, 2003, the former financial advisor petitioned the Panel for reconsideration of the issue of punitive damages as allowed by the order of the Appellate Division of the New York Supreme Court and requested a pre-hearing conference with the Panel as soon as possible. On March 14, 2003, the former financial advisor filed a Motion for Permission to Appeal the Appellate Division's February 11, 2003 order to the New York Court of Appeals.

        These, and other, litigation matters could result in substantial costs to the Company and divert resources and management's attention from operations. Such costs and diversions could have an adverse impact on our business and results of operations. See Item 3. "Legal Proceedings."

        We Could Experience Adverse Effects On Our Revenues, Profits And Market Share Due To Strong Competition From Numerous And Sometimes Larger Companies.    We compete with stock brokerage firms, investment banking firms, insurance companies, banks, Internet investment sites, and other financial institutions and individual registered investment advisers. Many of these companies not only offer mutual fund investments and services but also offer an ever-increasing number of other financial products and services. Many of our competitors have more products and product lines, services, and brand recognition and may also have substantially greater assets under management. Many larger mutual fund complexes have developed relationships with brokerage houses with large distribution networks, which may enable those fund complexes to reach broader client bases. In recent years, there has been a trend of consolidation in the mutual fund industry resulting in stronger competitors with greater financial resources than us. There has also been a trend toward online Internet financial services. If existing or potential customers decide to invest with our competitors instead of with us, our market share, revenues, and income could decline.

        The Terms Of Our Credit Facility Impose Restrictions On Our Operations That May Adversely Impact Our Prospects And The Operations Of Our Business. There Are No Assurances We Will Be Able To Raise Additional Capital If Needed Which Could Negatively Impact Our Liquidity, Prospects And Operations.    We have entered into a 364-day revolving credit facility with various lenders for a total of $200.0 million, whereby the

49

lenders could, at their option upon our request, expand the facility to $300.0 million. In August 2000, we also began utilizing money market loans, which function similarly to commercial paper. At December 31, 2002, there was no balance outstanding under the line of credit and the outstanding balance related to the money market loans was $58.0 million. The terms and conditions of our revolving credit facility and the money market loans impose restrictions that affect, among other things, our ability to incur additional debt, make capital expenditures and acquisitions, merge, sell assets, pay dividends, and create or incur liens. Our ability to comply with the financial covenants set forth in the credit facility can be affected by events beyond our control and there can be no assurance that we will achieve operating results that will comply with such terms and conditions, a breach of which could result in a default under the credit facility. In the event of a default, the banks could elect to declare the outstanding principal amount of our credit facility, all interest thereon, and all other amounts payable under our credit facility to be immediately due and payable.

        Our ability to meet our cash needs and satisfy our debt obligations will depend upon our future operating performance, asset values, perception of our creditworthiness, and indirectly, the market value of our stock. These factors will be affected by prevailing economic, financial and business conditions and other circumstances, some of which are beyond our control. We anticipate that borrowings from our existing credit facility or its refinancing, money market loans, and/or cash provided by operating activities will provide sufficient funds to finance our business plans, meet our operating expenses, and service our debt obligations as they become due. However, in the event that we require additional capital, there can be no assurance that we will be able to raise such capital when needed or on satisfactory terms, if at all, and there can be no assurance that we will be able to refinance our credit facility upon its maturity or on favorable terms. If we are unable to raise capital or obtain financing, we may be forced to incur unanticipated costs or revise our business plan. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

        Regulatory Risk Is Substantial In Our Business. Non-Compliance With Regulations Or Changes In Regulations Could Have A Significant Impact On The Conduct Of Our Business And Our Prospects, Revenues And Earnings.    Our investment management business is heavily regulated, primarily at the Federal level. Noncompliance with applicable laws or regulations could result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market or the revocation of licenses. Noncompliance with applicable laws or regulations could adversely affect our reputation, prospects, revenues, and earnings. In addition, changes in current legal, regulatory, accounting, tax, compliance requirements or in governmental policies could adversely affect our operations, revenues, and earnings by increasing expenses and reducing investor interest in certain products offered by the Company, among other things.

        There Are No Assurances That We Will Pay Future Dividends Which Could Adversely Affect Our Stock Price.     Our Board of Directors currently intends to continue to declare quarterly dividends on our Class A common stock; however, the declaration and payment of dividends is subject to the discretion of our Board. Any determination as to the payment of dividends, as well as the level of such dividends, will depend on, among other things, general economic and business conditions, our strategic plans, our financial results and condition, and contractual, legal, and regulatory restrictions on the payment of dividends by us or our subsidiaries. We are a holding company and, as such, our ability to pay dividends is subject to the ability of our subsidiaries to provide us with cash. There can be no assurance that the current quarterly dividend level will be maintained or that we will pay any dividends in any future period(s). Any change in the level of our dividends or the suspension of the payment thereof could adversely affect our stock price.

        Our Ability To Hire And Retain Key Personnel And Financial Advisors Is Significant To Our Success And Growth.     Our continued success depends to a substantial degree on our ability to attract and retain qualified personnel to conduct our fund management and investment advisory business. The market for

50

qualified fund managers, investment analysts, and financial advisors is extremely competitive. We are dependent on Waddell & Reed Advisors and select third-party distributors to sell our mutual funds and other investment products. Our growth prospects will be directly affected by the quality, quantity, and productivity of financial advisors we are able to successfully recruit and retain. There can be no assurances that we will be successful in our efforts to recruit and retain the required personnel.

        There May Be Adverse Effects On Our Revenues And Earnings If Our Funds' Performance Declines.    Success in the investment management and mutual fund businesses is dependent on the investment performance of client accounts relative to market conditions and the performance of competing funds. Good relative performance stimulates sales of the Funds' shares and tends to keep redemptions low. Sales of the Funds' shares in turn generate higher management fees and distribution revenues. Good relative performance also attracts institutional and separate accounts. Conversely, poor relative performance results in decreased sales, increased redemptions of the Funds' shares and the loss of institutional and separate accounts, resulting in decreases in revenues. Failure of our Funds to perform well could, therefore, have a material adverse effect on our revenues and earnings.

        Our Revenues, Earnings And Prospects Could Be Adversely Affected If The Securities Markets Continue To Decline.    Our results of operations are affected by certain economic factors, including the level of the securities markets. These adverse economic factors may be exacerbated by war or terrorism. The securities markets have declined in the past years, and investors have exhibited concerns over the integrity of the U.S. financial markets as a result of recent, highly publicized financial scandals. The continuation of adverse market conditions and lack of investor confidence, together with uncertainty surrounding terrorist threats and geopolitical tensions could result in investors withdrawing from the markets or decreasing their rate of investment, either of which could adversely affect our revenues, earnings, and growth prospects. Because our revenues are, to a large extent, investment management fees based on the value of assets under management, a decline in the value of these assets adversely affects our revenues. Our growth is dependent to a significant degree upon our ability to attract and retain mutual fund assets, and in an adverse economic environment, this may prove difficult. Our growth rate has varied from year to year and there can be no assurance that the average growth rates sustained in the recent past will continue. The combination of adverse markets reducing sales and investment management fees could compound on each other and materially affect earnings. Adverse conditions in the U.S. domestic stock market are particularly material to us due to high concentration of assets under management in that market. It is uncertain when these market and economic conditions will improve.

        Potential Misuse Of Funds And Information In The Possession Of Our Employees And/Or Advisors Could Result In Liability To Our Clients And Subject Us To Regulatory Sanctions.    Our financial advisors handle a significant amount of funds for our clients as well as financial and personal information. Although we have implemented a system of controls to minimize the risk of fraudulent taking or misuse of funds and information, there can be no assurance that our controls will be adequate or that taking or misuse by our employees and/or financial advisors, can be prevented. We could have liability in the event of a taking or misuse by our employees and/or financial advisors and we could also be subject to regulatory sanctions. Although we believe that we have adequately insured against these risks, there can be no assurance that our insurance will be maintained or that it will be adequate to meet any future liability.

        Systems Failure May Disrupt Our Business And Result In Financial Loss And Liability To Our Clients.    Our business is highly dependent on communications and information systems, including our mutual fund transfer agency system maintained by a third-party service provider. We are highly dependent on our ability to process a large number of transactions on a daily basis and the proper functioning of computer systems of third parties. We rely heavily on financial, accounting, and other data processing systems. If any of these systems do not function properly, we could suffer financial loss, business disruption, liability to clients, regulatory intervention, or damage to our reputation. If our systems are unable to accommodate an increasing volume of transactions, our ability to expand could be affected. Although we have back-up

51

systems in place, we cannot be sure that any systems failure or interruption, whether caused by a fire, other natural disaster, power or telecommunications failure, acts of terrorism/war or otherwise will not occur, or that back-up procedures and capabilities in the event of any failure or interruption will be adequate.

        There May Be An Adverse Effect On Our Revenues And Profits If Our Investors Remove The Assets We Manage On Short Notice.    A majority of our revenues are derived from investment management agreements with our Funds that, as required by law, are terminable on 60 days' notice. Each investment management agreement must be approved and renewed annually by the disinterested members of each Fund's board or its shareholders, as required by law. Some of these investment management agreements may be terminated or may not be renewed, and new agreements may be unavailable. In addition, mutual fund investors may redeem their investments in the Funds at any time without any prior notice. Investors can terminate their relationship with us, reduce the aggregate amount of assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing interest rates, and financial market performance. The decrease in revenues that could result from any such event could have a material adverse effect on our business.

        Our Stockholders Rights Plan Could Deter Takeover Attempts Which Some Of Our Stockholders May Believe To Be In Their Best Interest.    Under certain conditions, the rights under our stockholders rights plan entitle the holders of such rights to receive shares of our Class A common stock having a value equal to two times the exercise price of the right. The rights are attached to each share of our outstanding Class A common stock and generally are exercisable only if a person or group acquires 15% or more of the voting power represented by our Class A common stock. Our stockholders rights plan could impede the completion of a merger, tender offer, or other takeover attempt even though some or a majority of our stockholders might believe that a merger, tender offer, or takeover is in their best interests, and even if such a transaction could result in our stockholders receiving a premium for their shares of our stock over the then current market price of our stock.

        Provisions Of Our Organizational Documents Could Deter Takeover Attempts Which Some Of Our Stockholders May Believe To Be In Their Best Interest.    Under our Certificate of Incorporation, our Board has the authority, without action by our stockholders, to fix certain terms and issue shares of our Preferred Stock, par value $1.00 per share. Actions of our Board pursuant to this authority may have the effect of delaying, deterring, or preventing a change in control of the Company. Other provisions in our Certificate of Incorporation and in our Bylaws impose procedural and other requirements that could be deemed to have anti-takeover effects, including replacing incumbent directors. Our Board is divided into three classes, each of which is to serve for a staggered three-year term after the initial classification and election, and incumbent directors may not be removed without cause, all of which may make it more difficult for a third party to gain control of our Board. In addition, as a Delaware corporation we are subject to section 203 of the Delaware General Corporation Law. With certain exceptions, section 203 imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our voting stock.

        We May Have Difficulty Executing Our Acquisition Strategy Or Integrating Our Acquired Companies, Which Could Negatively Impact Our Growth And Profits.    Our business strategy continues to contemplate our selective pursuit of acquisitions and alliances that will add new products or alternative distribution systems to accelerate earnings growth. There can be no assurance that we will continue to find suitable acquisition candidates at acceptable prices, have sufficient capital resources to realize our acquisition strategy or be successful in entering into definitive agreements for desired acquisitions. In addition, we may not be successful in the integration of acquired companies. An acquisition may not prove to add new products or distribution systems or otherwise be advantageous to us.

        Our Holding Company Structure Results In Structural Subordination And May Affect Our Ability To Fund Our Operations And Make Payments On Our Debt.    We are a holding company and, accordingly, substantially all of our operations are conducted through our subsidiaries. As a result, our cash flow and our ability to

52

service our debt, including $200.0 million of our senior notes, is dependent upon the earnings of our subsidiaries, and we are dependent on the distribution of earnings, loans, or other payments by our subsidiaries to us. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts due on our debt or provide us with funds for our payment obligations, whether by dividends, distributions, loans, or other payments. In addition, any payment of dividends, distributions, loans, or advances to us by our subsidiaries could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries' earnings and business considerations. Our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right of the holders of our debt to participate in those assets, would be effectively subordinated to the claims of that subsidiary's creditors, including trade creditors. In addition, even if we were a creditor of any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

        We utilize various financial instruments with certain inherent market risks, primarily related to interest rates and securities prices. The principal risks of loss arising from adverse changes in market rates and prices to which we are exposed relate to interest rates on debt and marketable securities. Generally, these instruments have not been entered into for trading purposes. Management actively monitors these risk exposures. A portion of our risk is hedged with a derivative instrument, but fluctuations could impact our results of operations and financial position. As a matter of policy, we only execute derivative transactions to manage exposures arising in the normal course of business and not for speculative or trading purposes. The following information, together with information included in other parts of Management's Discussion and Analysis of Financial Condition and Results of Operations, which are incorporated herein by reference, describe the key aspects of certain financial instruments that have market risk to us.

Interest Rate Sensitivity

        Our interest sensitive liabilities include our long-term fixed rate senior notes and obligations for any balances outstanding under our credit facility or other short-term borrowings. Increases in market interest rates would generally cause a decrease in the fair value of the senior notes and an increase in interest expense associated with short-term borrowings and borrowings under the credit facility. Decreases in market interest rates would generally cause an increase in the fair value of the senior notes and a decrease in interest expense associated with short-term borrowings and borrowings under the credit facility. Based upon short-term borrowings outstanding at December 31, 2002, a 1% fluctuation in market rates would impact interest expense by approximately $0.6 million annually. Based upon long-term borrowings outstanding at December 31, 2002, a 1% fluctuation in market rates would impact interest expense by approximately $2.0 million annually.

        On March 12, 2002, our $200.0 million 7.5% fixed rate senior notes maturing in February 2006 (the "Notes") were effectively converted to variable rate debt by entering into an interest rate swap agreement whereby we have agreed with another party to exchange, at specified intervals, the difference between the fixed-rate and various floating-rate interest amounts, calculated using a notional amount of $200.0 million. The difference in the floating-rate interest paid and the 7.5% fixed-rate interest received is recorded as an adjustment to interest expense during the period that the related debt is outstanding. As of December 31, 2002, the floating rate being paid was 3.9%. The average floating rate paid on the interest rate swap for the year ended December 31, 2002 was 4.2%. The change in the fair value of the interest rate swap is recorded on the consolidated balance sheet by adjusting the carrying amounts of the Notes by an offsetting amount for the swap.

        Under SFAS 133, we account for the interest rate swap as a fair value hedge of the Notes. This interest rate swap is considered effective in hedging the changes in the fair value of the Notes arising from changes

53

in interest rates, and accordingly, there has been no impact on earnings resulting from any ineffectiveness associated with this transaction. Interest expense savings realized as a result of the hedge was approximately $5.2 million for 2002. As of December 31, 2002, we have recorded a cumulative increase in "Other assets" of $14.4 million to reflect the fair value of the interest rate swap and a cumulative increase in "Long-term debt" of $14.4 million to reflect the fair value of the Notes.

Available-for-Sale Investments Sensitivity

        We maintain an investment portfolio of various holdings, types and maturities. Our portfolio is diversified and consists primarily of investment grade debt securities and equity mutual funds. These investments are generally classified as available-for-sale investments pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" and, are consequently recorded on the consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of other comprehensive income, net of tax. Any unrealized gain or loss is recognized upon the sale of the investment. At any time, a sharp increase in interest rates or a sharp decline in the U.S. stock market could have a material adverse impact on the fair value of our investment portfolio. If a decline in fair value is determined to be other-than-temporary by management, the cost basis of the individual security or mutual fund is written down to fair value as a new cost basis, and the amount of the write-down is included in earnings. Conversely, declines in interest rates or a significant rise in the U.S. stock market could have a material positive impact on our investment portfolio. However, unrealized gains are not recognized until the investment is sold. We do not currently hedge these exposures.

Securities Price Sensitivity

        Our revenues are dependent on the underlying assets under management in the Funds to which investment advisory services are provided. The Funds include portfolios of investments comprised of various combinations of equity, bond, and other types of securities. Fluctuations in the value of these securities are common and are generated by numerous factors, including, without limitation, market volatility, the overall economy, inflation, changes in investor strategies, availability of alternative investment vehicles, government regulations and others. Accordingly, declines in any one or a combination of these factors, or other factors not separately identified, may reduce the value of investment securities and, in turn, the underlying assets under management on which our revenues are earned. These declines have an impact in our investment sales, thereby compounding the impact on our earnings.

ITEM 8. Financial Statements and Supplementary Data

        Reference is made to the Consolidated Financial Statements referred to in the Index on page 61 setting forth our consolidated financial statements, together with the report of KPMG LLP dated February 21, 2003 on page 62.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        No disagreements with accountants on any matter of accounting principles or practices, financial statement disclosure, auditing scope or procedure have occurred within our two most recent fiscal years.

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PART III

ITEM 10. Directors and Executive Officers of the Registrant

        Information required by this Item 10 is incorporated herein by reference to our definitive proxy statement for our 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.

ITEM 11. Executive Compensation

        Information required by this Item 11 is incorporated herein by reference to our definitive proxy statement for our 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        Information required by this Item 12 is incorporated herein by reference to our definitive proxy statement for our 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act. See "Equity Compensation Plan Information" under Item 5. "Market for Registrant's Common Equity and Related Stockholder Matters" in Part II of this report.

ITEM 13. Certain Relationships and Related Transactions

        Information required by this Item 13 is incorporated herein by reference to our definitive proxy statement for our 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.

ITEM 14. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures.    The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management timely. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing of this annual report (the "Evaluation Date"), have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

(b)

Changes in Internal Controls.    The Company's internal controls are designed to provide reasonable assurances that the accounting for financial and non-financial information are processed accurately. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

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PART IV

ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1)	Financial Statements.
	Reference is made to the Index to Consolidated Financial Statements on page 61 for a list of all financial statements filed as part of this Report.
(a)(2)	Financial Statement Schedules.
	None.
(b)	Reports on Form 8-K.
	A Current Report on Form 8-K dated August 30, 2002 was filed to announce our intention to acquire Mackenzie Investment Management Inc., a Florida-based U.S. investment management subsidiary of Mackenzie Financial Corporation and adviser of the Ivy Funds sold in the United States.
	A Current Report on Form 8-K dated December 27, 2002 was filed to announce the completion of our acquisition of Mackenzie Investment Management Inc., a Florida-based U.S. investment management subsidiary of Mackenzie Financial Corporation and adviser of the Ivy Funds sold in the United States. No financial statements were required to be filed.
(c)	Exhibits.
	Reference is made to the Index to Exhibits on page 94 for a list of all exhibits filed as part of this Report.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Overland Park, State of Kansas, on March 26, 2003.

WADDELL & REED FINANCIAL, INC.
By:	/s/  KEITH A. TUCKER Keith A. Tucker Chairman of the Board and Chief Executive Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

Name	Title	Date
/s/  KEITH A. TUCKER Keith A. Tucker	Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)	March 26, 2003
/s/  HENRY J. HERRMANN Henry J. Herrmann	President, Chief Investment Officer and Director	March 26, 2003
/s/  JOHN E. SUNDEEN, JR. John E. Sundeen, Jr.	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)	March 26, 2003
/s/  MARK A. SCHIEBER Mark A. Schieber	Vice President and Controller (Principal Accounting Officer)	March 26, 2003
/s/  ROBERT L. HECHLER* Robert L. Hechler	Director	March 26, 2003
/s/  JERRY W. WALTON* Jerry W. Walton	Director	March 26, 2003
/s/  RONALD C. REIMER* Ronald C. Reimer	Director	March 26, 2003
/s/  WILLIAM L. ROGERS* William L. Rogers	Director	March 26, 2003

57

/s/  DENNIS E. LOGUE* Dennis E. Logue	Director	March 26, 2003
/s/  ALAN W. KOSLOFF* Alan W. Kosloff	Director	March 26, 2003
/s/  JAMES M. RAINES* James M. Raines	Director	March 26, 2003
/s/  DANIEL C. SCHULTE Daniel C. Schulte	Attorney-in-fact	March 26, 2003

*By: Attorney-in-fact

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CERTIFICATIONS

I, Keith A. Tucker, certify that:

1.

I have reviewed this annual report on Form 10-K of Waddell & Reed Financial, Inc.;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 26, 2003
	/s/  KEITH A. TUCKER Keith A. Tucker Chairman of the Board and Chief Executive Officer

59

I, John E. Sundeen, Jr., certify that:

1.

I have reviewed this annual report on Form 10-K of Waddell & Reed Financial, Inc.;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 26, 2003
	/s/  JOHN E. SUNDEEN, JR. John E. Sundeen, Jr. Senior Vice President, Chief Financial Officer and Treasurer

60

WADDELL & REED FINANCIAL, INC.

Index to Consolidated Financial Statements

	Page
Waddell & Reed Financial, Inc.:
Independent Auditors' Report	62
Consolidated Balance Sheets at December 31, 2002 and 2001	63
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2002	64
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2002	65
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2002	66
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002	67
Notes to Consolidated Financial Statements	68

61

Independent Auditors' Report

The Board of Directors
Waddell & Reed Financial, Inc.:

        We have audited the accompanying consolidated balance sheets of Waddell & Reed Financial, Inc. and subsidiaries, as of December 31, 2002 and 2001 and the related consolidated statements of income, stockholders' equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Waddell & Reed Financial, Inc. and subsidiaries as of December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Note 1. of the Notes to the Consolidated Financial Statements, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002.

/s/ KPMG LLP

Kansas City, Missouri
February 21, 2003

62

WADDELL & REED FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

			2002			2001
			(in thousands)
Assets:
	Cash and cash equivalents		$	53,418		91,682
	Investment securities			84,118		62,693
	Receivables:
		Funds and separate accounts		12,444		13,329
		Customers and other		27,928		16,520
	Deferred income taxes			3,515		33
	Prepaid expenses and other current assets			69,277		5,938
		Total current assets		250,700		190,195
	Property and equipment, net			49,323		41,750
	Deferred sales commissions, net			16,464		12,949
	Goodwill (net of accumulated amortization of $38,644 and $38,644)			193,749		173,684
	Intangible assets			22,946		—
	Deferred income taxes			—		2,376
	Other assets			27,310		12,151
		Total assets	$	560,492		433,105
Liabilities:
	Accounts payable		$	49,196		34,686
	Accrued sales force compensation			11,785		13,478
	Accrued other compensation			19,494		8,051
	Short-term notes payable			58,000		28,000
	Income taxes payable			6,002		14,056
	Other current liabilities			37,057		12,459
		Total current liabilities		181,534		110,730
	Long-term debt			213,057		198,336
	Accrued pensions and post-retirement costs			10,258		8,991
	Deferred income taxes			5,234		—
	Other			1,104		1,250
		Total liabilities		411,187		319,307
Stockholders' equity:
	Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 80,637 shares outstanding (80,204 in 2001)			997		997
	Additional paid-in capital			243,277		252,261
	Retained earnings			322,857		285,206
	Deferred compensation			(7,045	)	(1,262	)
	Cost of 19,064 shares in treasury (19,497 in 2001)			(407,384	)	(420,681	)
	Accumulated other comprehensive loss			(3,397	)	(2,723	)
		Total stockholders' equity		149,305		113,798
Total liabilities and stockholders' equity			$	560,492		433,105

See accompanying notes to consolidated financial statements.

63

WADDELL & REED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2002, 2001 and 2000

			2002		2001	2000
			(in thousands, except per share data)
Revenues:
	Investment management fees		$	186,038	214,242	253,774
	Underwriting and distribution fees			183,133	203,535	202,879
	Shareholder service fees			65,690	59,381	53,436
	Investment and other income			4,264	5,404	10,613
		Total revenues		439,125	482,562	520,702
Expenses:
	Underwriting and distribution			185,032	193,771	183,222
	Compensation and related costs			58,302	57,229	57,331
	General and administrative			37,313	29,940	28,498
	Depreciation			6,441	5,567	3,613
	Amortization of goodwill			—	6,649	5,502
	Interest expense			12,298	18,286	14,590
	Write-down of investment securities			7,141	—	—
		Total expenses		306,527	311,442	292,756
Income before provision for income taxes				132,598	171,120	227,946
Provision for income taxes				45,173	63,953	88,941
	Net income		$	87,425	107,167	139,005
Net income per share:
	Basic		$	1.09	1.33	1.67
	Diluted		$	1.07	1.28	1.60
Weighted average shares outstanding—basic				80,382	80,592	83,362
—diluted				81,874	83,423	86,895
Dividends declared per common share			$	0.53	0.35	0.35

See accompanying notes to consolidated financial statements.

64

WADDELL & REED FINANCIAL, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended December 31, 2002, 2001 and 2000

(in thousands)

	Common Stock															Accumulated other comprehensive loss
				Additional Paid-in Capital			Retained Earnings			Deferred compensation			Treasury stock						Total Stockholders' equity
	Shares	Amount
Balance at December 31, 1999	99,701	$	997	$	238,434		$	97,129		$	(11,246	)	$	(198,360	)	$	(611	)	$	126,343
Net income	—		—		—			139,005			—			—			—			139,005
Recognition of deferred compensation	—		—		—			—			1,625			—			—			1,625
Issuance of restricted shares and other	—		—		—			—			(1,329	)		—			—			(1,329	)
Dividends accrued	—		—		—			(29,545	)		—			—			—			(29,545	)
Exercise of stock options	—		—		(19,499	)		—			—			1,771			—			(17,728	)
Tax benefit from exercise of options	—		—		33,055			—			—			—			—			33,055
Treasury stock repurchases	—		—		—			—			—			(108,419	)		—			(108,419	)
Unrealized gain on investment securities	—		—		—			—			—			—			664			664
Reclassification for amounts included in net income	—		—		—			—			—			—			(2,061	)		(2,061	)
Balance at December 31, 2000	99,701		997		251,990			206,589			(10,950	)		(305,008	)		(2,008	)		141,610
Net income	—		—		—			107,167			—			—			—			107,167
Recognition of deferred compensation	—		—		424			—			9,688			—			—			10,112
Dividends accrued	—		—		—			(28,550	)		—			—			—			(28,550	)
Exercise of stock options	—		—		(14,690	)		—			—			26,145			—			11,455
Tax benefit from exercise of options	—		—		14,537			—			—			—			—			14,537
Treasury stock repurchases	—		—		—			—			—			(141,818	)		—			(141,818	)
Unrealized loss on investment securities	—		—		—			—			—			—			(680	)		(680	)
Reclassification for amounts included in net income	—		—		—			—			—			—			(35	)		(35	)
Balance at December 31, 2001	99,701		997		252,261			285,206			(1,262	)		(420,681	)		(2,723	)		113,798
Net income	—		—		—			87,425			—			—			—			87,425
Recognition of deferred compensation	—		—		758			—			425			—			—			1,183
Issuance of restricted stock	—		—		(536	)		—			(6,208	)		6,744			—			—
Dividends accrued	—		—		—			(49,774	)		—			—			—			(49,774	)
Exercise of stock options	—		—		(13,960	)		—			—			22,800			—			8,840
Tax benefit from exercise of options	—		—		4,754			—			—			—			—			4,754
Treasury stock repurchases	—		—		—			—			—			(16,247	)		—			(16,247	)
Unrealized loss on investment securities	—		—		—			—			—			—			(2,078	)		(2,078	)
Reclassification for amounts included in net income	—		—		—			—			—			—			4,842			4,842
Minimum pension liability adjustment	—		—		—			—			—			—			(3,438	)		(3,438	)
Balance at December 31, 2002	99,701	$	997	$	243,277		$	322,857		$	(7,045	)	$	(407,384	)	$	(3,397	)	$	149,305

See accompanying notes to consolidated financial statements.

65

WADDELL & REED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2002, 2001 and 2000

	2002			2001		2000
	(in thousands)
Net income	$	87,425		107,167		139,005
Other comprehensive income:
Minimum pension liability, net of income taxes of $(2,107), $0, and $0		(3,438	)	—		—
Net unrealized appreciation (depreciation) of investments during the period, net of income taxes of $(1,270), $(416), and $428		(2,078	)	(680	)	664
Reclassification adjustment for amounts included in net income, net of income taxes of $2,968, $(21), and $(1,290)		4,842		(35	)	(2,061	)
Comprehensive income	$	86,751		106,452		137,608

See accompanying notes to consolidated financial statements.

66

WADDELL & REED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2002, 2001 and 2000

				2002			2001		2000
				(in thousands)
Cash flows from operating activities:
	Net income			$	87,425		107,167		139,005
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			7,683		12,798		9,268
		(Gain) loss on investments			52		(31	)	(2,111	)
		Write-down of investment securities			7,141		—		—
		Recognition of deferred compensation			1,183		10,112		1,625
		Loss on sale and retirement of property and equipment			129		263		22
		Capital gains and dividends reinvested			(222	)	(252	)	(1,394	)
		Deferred income taxes			3,152		(901	)	5,559
		Changes in assets and liabilities net of acquisition:
			Receivables from funds and separate accounts		1,197		634		(1,435	)
			Other receivables		(10,671	)	4,957		373
			Other assets		(1,654	)	(6,711	)	(10,291	)
			Accounts payable		13,197		(6,872	)	7,520
			Other liabilities		(7,070	)	20,627		25,794
Net cash provided by operating activities					101,542		141,791		173,935
Cash flows from investing activities:
		Additions to investment securities			(32,209	)	(10,204	)	(15,609	)
		Proceeds from sales of investment securities			167		952		45,307
		Proceeds from maturities of investment securities			9,043		3,069		1,185
		Additions to property and equipment			(13,761	)	(19,072	)	(30,402	)
		Appeal bond deposit			(62,500	)	—		—
		Proceeds from sale-leaseback of real estate			—		28,233		—
		Acquisition of subsidiaries, (net of cash acquired)			(24,057	)	—		(60,290	)
		Additional subsidiary purchase price payments			—		(13,269	)	—
Net cash used in investing activities					(123,317	)	(10,291	)	(59,809	)
Cash flows from financing activities:
		Proceeds from long-term borrowings			—		198,013		—
		Net short-term borrowings (repayments)			30,000		(147,000	)	50,000
		Cash dividends			(39,082	)	(28,550	)	(29,545	)
		Purchase of treasury stock			(16,247	)	(141,818	)	(108,419	)
		Exercise of stock options			10,199		15,751		8,327
		Other stock transactions			(1,359	)	(4,296	)	(27,384	)
Net cash used in financing activities					(16,489	)	(107,900	)	(107,021	)
Net increase in cash and cash equivalents					(38,264	)	23,600		7,105
Cash and cash equivalents at beginning of year					91,682		68,082		60,977
Cash and cash equivalents at end of year				$	53,418		91,682		68,082
Cash paid for:
	Income taxes			$	44,938		35,618		55,346
	Interest				17,364		10,488		14,013

See accompanying notes to consolidated financial statements.

67

WADDELL & REED FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002, 2001, and 2000

1. Description Of Business

        Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the "Company," "we," "our" and "us") derive revenues primarily from investment management, investment product underwriting and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Group of Mutual Funds (the "Advisors Funds"), W&R Funds, Inc. (the "W&R Funds"), W&R Target Funds, Inc. (the "Target Funds"), the Ivy Fund portfolios (the "Ivy Funds"), and Waddell & Reed InvestEd Portfolios, Inc. ("InvestEd") (collectively, the "Funds"), and institutional and separately managed accounts. The Funds and the institutional and separately managed accounts operate under various rules and regulations set forth by the Securities and Exchange Commission (the "SEC"). Services to the Funds are provided under contracts that set forth the fees to be charged for these services. The majority of these contracts are subject to annual review and approval by each Fund's board of directors/trustees and shareholders. Our revenues are largely dependent on the total value and composition of assets under management, which include mainly domestic equity securities, but also include debt securities and international equities. Accordingly, fluctuations in financial markets and composition of assets under management impact revenues and results of operations. At December 31, 2002, our largest fund was the Advisors Core Investment Fund which had a net asset value of $4.6 billion. For 2002, management fees from the Advisors Core Investment Fund were $33.3 million, or 8%, of total Company revenues.

2. Summary of Significant Accounting Policies

Basis of Presentation

        The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Amounts in the accompanying financial statements and notes are rounded to the nearest thousand unless otherwise stated. Certain amounts in the prior years' financial statements have been reclassified for consistent presentation.

Use of Estimates

        Accounting principles generally accepted in the United States of America require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses in the consolidated financial statements and accompanying notes and related disclosures of commitments and contingencies. Estimates are used for, but are not limited to, depreciation and amortization, taxes, valuation of assets, pension and postretirement obligations, and contingencies. Actual results could differ from those estimates.

Cash and Cash Equivalents

        Cash and cash equivalents include cash on hand and short-term investments. We consider all highly liquid investments with original or remaining maturities of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents at December 31, 2002 and 2001 include amounts of $13.9 million and $20.4 million, respectively, for the benefit of customers in compliance with securities industry regulations. Substantially all cash balances are in excess of federal deposit insurance limits.

68

        Cash deposited with the Circuit Court of Jefferson County, Alabama as an appeal bond in connection with our litigation with UILIC in the amount of $62.5 million is excluded from "Cash and cash equivalents" and is included in "Prepaid expenses and other current assets" on the consolidated balance sheet.

Disclosures About Fair Value of Financial Instruments

        Fair value for certain of our financial instruments, including cash and cash equivalents, short-term investments, receivables, payables, and long-term debt approximates carrying value. Fair values for investment securities are based on quoted market prices, where available. Otherwise, fair values are based on quoted market prices of comparable instruments.

Investment Securities and Investments in Affiliated Mutual Funds

        Our investments are composed of U.S., state, and government obligations, corporate debt securities, and investments in affiliated mutual funds. All investments are classified as available-for-sale or trading. Unrealized holding gains and losses on securities available-for-sale, net of related tax effects, are excluded from earnings until realized and are reported as a separate component of comprehensive income. For trading securities, unrealized holding gains and losses, net of related tax effects, are included in earnings. Realized gains and losses are computed using the specific identification method for investment securities, other than mutual funds. For mutual funds, realized gains and losses are computed using the average cost method.

        Our investments available-for-sale are reviewed and adjusted for other than temporary declines in value. When a decline in fair value of an investment carried at fair value is determined to be other than temporary, the unrealized loss recorded net of tax in other comprehensive income is realized as a charge to net income and a new cost basis is established for financial reporting purposes.

Comprehensive Income

        Comprehensive income consists of net income, unrealized gains and losses on available-for-sale securities, and a minimum pension liability adjustment and is presented in a separate consolidated statement of comprehensive income.

Property and Equipment

        Property and equipment is carried at cost. Maintenance and repairs are expensed as incurred. Improvements are capitalized. Depreciation and amortization are calculated and recorded using the straight-line method over the estimated useful life of the related asset (or lease term if shorter), generally three to ten years for furniture, fixtures, and data processing equipment; three to twenty years for equipment and machinery; and up to fifteen years for leasehold improvements.

Software Developed for Internal Use

        Certain internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized in accordance with the American Institute of Certified Public Accountants' Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for

69

Internal Use." These capitalized costs are included in "Property and equipment, net" on the Consolidated Balance Sheets, and were $5.0 million, $2.8 million, and $1.7 million for years ended December 31, 2002, 2001, and 2000, respectively. Amortization begins when the software project is complete and ready for its intended use and continues over the estimated useful life, generally five to ten years.

Goodwill and Intangible Assets

        Goodwill and intangible assets primarily represent the excess of purchase price over the fair value of net underlying tangible assets acquired using purchase accounting. In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. It also specifies the types of acquired intangible assets that require recognition and reporting separately from that of goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions in the statement. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144 "Accounting for Impairment of Long-Lived Assets" ("SFAS 144"). We have adopted the provisions of SFAS 141 and SFAS 142 for acquisitions occurring on or after July 1, 2001. With respect to transactions occurring prior to July 1, 2001, we adopted SFAS 141 and SFAS 142 January 1, 2002.

        On the date we adopted SFAS 142, we performed an evaluation of our goodwill that was acquired in prior business combinations to identify intangible assets that require recognition and reporting apart from goodwill and concluded that we have no separately identifiable intangible assets requiring recognition apart from that of goodwill. Also, on the date we adopted SFAS 142, in accordance with that statement, we performed a goodwill transitional impairment assessment and concluded that no impairment of goodwill existed at the date of adoption. At least annually, or in the case of certain factors being present, SFAS 142 requires that we complete an ongoing review of the recoverability of goodwill and intangible assets using a fair-value based approach. The approach for the review of goodwill has two steps: the first being to identify a potential impairment, and the second to measure the amount of the impairment loss, if any. Intangible assets with indefinite lives are also tested for impairment annually using a one-step approach that compares the fair value to the carrying amount of the asset.

        We periodically review the recoverability of intangible assets by comparing the carrying value of the associated intangible assets to their fair value. The determination of possible impairment is primarily measured by reference to various valuation techniques commonly used in the investment management industry, including appraisals, quoted market values, and future cash flows.

        Prior to the adoption of SFAS 142, goodwill was amortized on a straight-line basis over the expected periods to be benefited, ranging from 25 to 40 years, and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of the acquired company. The amount of goodwill impairment, if any, was measured based on the excess of the unamortized balance of goodwill over projected discounted future operating cash flows.

70

        Had the provisions of SFAS 142 been applied for the years ended December 31, 2002, 2001, and 2000, our net income and net income per diluted share would have been as follows:

	2002		2001	2000
	(in thousands except per share data)
Net income as reported	$	87,425	107,167	139,005
Add back goodwill amortization		—	6,649	5,502
Adjusted net income	$	87,425	113,816	144,507
Basic earnings per share as reported	$	1.09	1.33	1.67
Add back goodwill amortization		—	0.08	0.07
Adjusted basic earnings per share	$	1.09	1.41	1.74
Diluted earnings per share as reported	$	1.07	1.28	1.60
Add back goodwill amortization		—	0.08	0.06
Adjusted diluted earnings per share	$	1.07	1.36	1.66

Deferred Sales Commissions

        We defer certain costs, principally sales commissions and related compensation, which are paid to financial advisors in connection with the sale of certain shares of mutual funds sold without a front-end load sales charge. These costs are recorded as an asset on the Consolidated Balance Sheets. The deferred costs associated with the sale of Class B shares are amortized on a straight-line basis over the life of the shareholders' investments not to exceed five years. The deferred costs associated with the sale of Class C shares are amortized on a straight-line basis not to exceed twelve months. We recover such costs through Rule 12b-1 distribution fees, which are paid by the Class B and Class C shares of the Advisors Funds, W&R Funds, Ivy Funds, and InvestEd Funds, along with contingent deferred sales charges paid by shareholders who redeem their shares prior to completion of the required holding periods.

        A portion of the deferred selling commissions related to the Class B shares of the Ivy Funds was sold to an unrelated third party. We do not receive Rule 12b-1 distribution fees or contingent deferred sales charges upon redemption of those assets.

Revenue Recognition

        We recognize investment management fees as they are earned, over the period in which services are rendered. We charge the Funds daily based upon average daily net assets under management in accordance with management advisory contracts between us and the Funds. In general, the majority of investment management fees earned from institutional and separate accounts are charged quarterly based upon an average of net assets under management at the end of the months within the quarter in accordance with management advisory contracts. In general, shareholder servicing fees are recognized monthly calculated based on the number of accounts. Other administrative service fee revenues are recognized as contractual obligations are fulfilled or as services are provided. Underwriting and distribution commission revenues resulting from the sale of investment products are recognized on the trade date.

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We also recognize distribution revenues monthly on certain types of investment products, generally calculated based upon average daily net assets under management.

Advertising and Promotion

        We expense all advertising and promotion costs as incurred. We have agreements with the Funds pursuant to Rule 12b-1 under the Investment Company Act of 1940 pursuant to which distribution fees are collected from the Funds for distribution of mutual fund shares for costs such as advertising and commissions paid to broker-dealers. Under these agreements, which are approved or renewed on an annual basis by each Fund's board of directors/trustees, including a majority of the disinterested members of each Fund's board, we must engage in activities that are intended to result in the sale of mutual fund shares. Any fees collected and not spent for these purposes must be returned to the Funds. Advertising expense was $2.1 million, $2.8 million, and $4.2 million for the years ended December 31, 2002, 2001, and 2000, respectively.

Stock-Based Compensation

        As allowed under the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended by Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation—Transition and Disclosure" ("FAS 148"), we have elected to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations, including Financial Accounting Standards Board Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation," in accounting for our stock-based compensation plans using the intrinsic value method. In most cases, no compensation costs have been recognized with respect to stock options granted.

        The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FAS 123.

		2002		2001	2000
		(in thousands, except per share data)
Net income
	As reported	$	87,425	107,167	139,005
	Pro forma	$	70,150	96,029	133,435
Basic earnings per share
	As reported	$	1.09	1.33	1.67
	Pro forma	$	0.87	1.19	1.60
Diluted earnings per share
	As reported	$	1.07	1.28	1.60
	Pro forma	$	0.86	1.15	1.54

Income Taxes

        Income tax expense is based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying

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amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

Derivatives and Hedging Activities

        We adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities"on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value, with changes in the fair value of the derivative instruments to be recorded in current earnings or deferred in equity. As a matter of policy, we only execute derivative transactions to manage exposure arising in the normal course of business and not for speculative or trading purposes. It is management's opinion that, due to our limited use of significant hedging or other activities involving derivative instruments, changes in the fair value of derivatives will not have a material impact on our results of operations or our financial position. As of December 31, 2002, we had one derivative instrument, an interest rate swap, which is accounted for as a fair value hedge. This interest rate swap is considered effective in hedging the changes in the fair value of our senior notes arising from changes in interest rates, and accordingly, there has been no impact on earnings resulting from any ineffectiveness associated with this transaction. Please refer to Note 7. "Indebtedness" of the Notes to the Consolidated Financial Statements for additional information.

3. Investment Securities (Available-for-sale and Trading)

        Investments at December 31, 2002 and 2001 are as follows:

2002	Amortized cost		Unrealized gains	Unrealized (losses)		Fair value
	(in thousands)
United States government-backed mortgage securities	$	883	82	—		965
Municipal bonds		20,393	352	(898	)	19,847
Corporate bonds		24,657	559	(454	)	24,762
Affiliated mutual funds		37,887	1,340	(895	)	38,332
Trading securities		212	—	—		212
	$	84,032	2,333	(2,247	)	84,118

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2001	Amortized cost		Unrealized gains	Unrealized (losses)		Fair value
	(in thousands)
United States government-backed mortgage securities	$	1,166	80	(10	)	1,236
Municipal bonds		22,047	462	(1,505	)	21,004
Corporate bonds		10,805	57	(622	)	10,240
Affiliated mutual funds		32,713	920	(3,785	)	29,848
Trading securities		365	—	—		365
	$	67,096	1,519	(5,922	)	62,693

        Municipal and corporate bonds held as of December 31, 2002 mature as follows:

	Amortized cost		Fair value
	(in thousands)
Within one year	$	1,845	1,854
After one year but within five years		27,705	28,607
After ten years		15,500	14,148
	$	45,050	44,609

        Investment securities with fair value of $167 thousand, $952 thousand and $45.3 million were sold during 2002, 2001 and 2000, respectively, resulting in a net realized loss for 2002 of $52 thousand and net realized gains for 2001 and 2000 of $31 thousand and $2.1 million, respectively.

        During the third quarter of 2002, we recorded a charge to earnings of $7.1 million, pre-tax, to reflect the other than temporary decline in value of certain holdings in affiliated mutual funds.

4. Goodwill and Identifiable Intangible Assets

        Goodwill represents the excess of purchase price over the tangible assets and identifiable intangible assets of an acquired business. As a result of the acquisition of MIMI on December 16, 2002, we recorded $22.9 million of indefinite lived intangible assets and an increase to goodwill of $20.1 million. Considering that identifiable intangible assets recognized in connection with the purchase of the business of MIMI are contracts related to the management of mutual funds which will be continually offered and which are not expected to be terminated in the foreseeable future, such intangible assets were determined to be non-amortizable under SFAS 141 and SFAS 142. Gross goodwill was $232.4 million and $212.3 million at December 31, 2002 and 2001, respectively. Accumulated amortization on goodwill was $38.6 million at December 31, 2002 and 2001. Our goodwill is not deductible for tax purposes.

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        Changes in the carrying amount of goodwill (in thousands) for the periods presented were as follows:

December 31, 2000 balance, net of accumulated amortization	$	180,173
Adjustment to goodwill for change in acquisition contingency payment		160
Deduct goodwill amortization		(6,649	)
December 31, 2001 balance, net of accumulated amortization		173,684
Addition to goodwill for the acquisition of WRIICO		11,346
Addition to goodwill—deferred income taxes (1)		8,719
December 31, 2002 balance, net of accumulated amortization	$	193,749

(1)

Amount represents goodwill associated with deferred income taxes recorded for WRIICO's identifiable intangible assets based on the difference between the book and tax bases.

        Identifiable intangible assets (all considered indefinite lived) at December 31 are summarized as follows:

		2002		2001
		(in thousands)
Unamortized intangible assets:
Mutual fund management advisory contracts		$	6,646	—
Subadvisory management contracts			16,300	—
	Total	$	22,946	—

5. Sale-Leaseback of Real Estate

        On March 7, 2001, we entered into a sale-leaseback arrangement, in which we sold our two home office buildings and the associated land to an unrelated third party and leased them back for a period of fifteen years. The leaseback has been accounted for as an operating lease. The net proceeds from this sale were $28.2 million and resulted in an unrealized gain of approximately $1.3 million, which was deferred and is being amortized over the term of the operating lease. For the years ended December 31, 2002 and 2001, we recognized $96 thousand and $61 thousand, respectively, of this deferred gain as a reduction of rent expense.

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6. Property and Equipment

        A summary of property and equipment at December 31, 2002 and 2001 is as follows:

	2002		2001	Estimated useful lives
	(in thousands)
Furniture and fixtures	$	25,953	24,609	3 - 15 years
Equipment and machinery		19,655	18,921	3 - 20 years
Data processing equipment and computer software		25,730	14,735	3 - 10 years
Property and equipment, at cost		71,338	58,265
Deduct accumulated depreciation		22,015	16,515
Property and equipment, net	$	49,323	41,750

        Depreciation and amortization of property and equipment aggregated $6.4 million, $5.6 million and $3.6 million during the years ended December 31, 2002, 2001 and 2000, respectively.

7. Indebtedness

        On August 15, 2000, we filed a $400.0 million shelf registration, whereby proceeds received could be used for general corporate purposes, including the repayment of short-term debt outstanding. On January 18, 2001, we issued $200.0 million in principal amount 7.5% senior notes due in 2006 (the "Notes"), resulting in net proceeds of approximately $197.6 million (net of discounts, commissions and expenses) to repay short-term debt outstanding and for general corporate purposes. The Notes represent senior unsecured obligations and are rated "Baa2" by Moody's and "BBB" by Standard & Poor's. Interest is payable semi-annually on January 18 and July 18 at a rate of 7.5% per annum.

        On March 12, 2002, the Notes were effectively converted to variable rate debt by entering into an interest rate swap agreement whereby we have agreed with another party to exchange, at specified intervals, the difference between the fixed-rate and various floating-rate interest amounts, calculated using a notional amount of $200.0 million. The difference in the floating-rate interest paid and the 7.5% fixed-rate interest received is recorded as an adjustment to interest expense during the period that the related debt is outstanding. As of December 31, 2002, the floating rate being paid was 3.9%. The average floating rate paid on the interest rate swap for the year ended December 31, 2002 was 4.2%. The change in the fair value of the interest rate swap is recorded on the consolidated balance sheet by adjusting the carrying amounts of the Notes by an offsetting amount for the swap.

        Under SFAS 133, we account for the interest rate swap as a fair value hedge of the Notes. This interest rate swap is considered 100% effective in hedging the changes in the fair value of the Notes arising from changes in interest rates, and accordingly, there has been no impact on earnings resulting from any ineffectiveness associated with this transaction. Interest expense savings realized as a result of the hedge was approximately $5.2 million for 2002. As of December 31, 2002, we have recorded a cumulative increase in "Other assets" of $14.4 million to reflect the fair value of the interest rate swap and a cumulative increase in "Long-term debt" of $14.4 million to reflect the fair value of the Notes.

        We renewed our 364-day revolving credit facility, effective October 11, 2002, with various lenders for a total of $200.0 million, whereby the lenders could, at their option upon our request, expand the facility to $300.0 million. The credit facility is a 364-day revolving facility with an interest rate of LIBOR plus 0.625%

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plus an additional 0.125% fee when utilization of the facility exceeds 25% and 0.25% fee when utilization exceeds 50%. The facility provides an additional source of capital to finance share repurchases, acquisitions and other general corporate needs. As of December 31, 2002 and 2001, there were no borrowings outstanding under the facility.

        The most restrictive provisions of our borrowing arrangements are included in our revolving credit facility, which requires a consolidated leverage ratio not to exceed 3.0 to 1.0 for four consecutive quarters and a consolidated interest coverage ratio of not less than 4.0 to 1.0 for four consecutive quarters. We were in compliance with these covenants at December 31, 2002 and 2001.

        Long-term debt at December 31 consisted of the following:

		2002			2001
		(in thousands)
Money market loans		$	58,000		28,000
	Principal amount unsecured 7.5% senior notes due in 2006		200,000		200,000
	Discount on unsecured 7.5% senior notes due in 2006		(1,300	)	(1,664	)
	Fair value of hedge on unsecured 7.5% senior notes due in 2006		14,357		—
Subtotal unsecured 7.5% senior notes due in 2006			213,057		198,336
Total indebtedness			271,057		226,336
Current maturities			(58,000	)	(28,000	)
Total long-term obligations		$	213,057		198,336

        At December 31, 2002 and 2001, there was $58.0 million and $28.0 million of short-term borrowings outstanding, respectively. The average balance on combined short-term debt and long-term debt was $243.2 million and $246.2 million for 2002 and 2001, respectively. The weighted average interest rate on the short-term borrowings was 2.1% and 4.9%, respectively. The average interest rate for all borrowings, excluding other costs, was 4.6% and 7.1% for the years 2002 and 2001, respectively.

8. Investment Income

        The components of investment and other income are as follows:

	2002			2001	2000
	(in thousands)
Interest and amortization of (premium) discount	$	3,948		4,505	7,276
Dividends		283		794	492
Realized gains (losses), net		(52	)	31	2,111
Other		85		74	734
Total investment and other income	$	4,264		5,404	10,613

        In 2000, investment and other income included $2.5 million of realized gains from the sale of investment securities to partially fund the Legend acquisition. Average invested cash and marketable securities were $155.4 million in 2002 compared with $142.9 million in 2001.

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9. Acquisitions

        On December 16, 2002, we acquired the business of Mackenzie Investment Management Inc. ("MIMI"), a Florida-based U.S. investment management subsidiary of Toronto-based Mackenzie Financial Corporation ("MFC") and adviser of the Ivy Funds sold in the United States. The transaction was approved by the boards of directors of Waddell & Reed Financial, Inc., MIMI, and MFC in August of 2002 and by the shareholders of MIMI and Ivy Fund in early December 2002. We continue to operate MIMI's business through our subsidiary, Waddell & Reed Ivy Investment Company ("WRIICO").

        Based on the terms of the purchase agreement, we paid approximately $28.2 million to purchase the business of MIMI, plus approximately $33.2 million for excess working capital. Of the total $61.4 million purchase price, $3.4 million was held in escrow at December 31, 2002 to be paid following final working capital adjustments. The final purchase price is subject to working capital adjustments. The acquisition was accounted for as a purchase business combination and accordingly, the results of WRIICO's operations have been included with ours since the acquisition date. The excess of the purchase price, including our acquisition costs, over the fair value of the net assets acquired resulted in recognition of identifiable intangible assets and goodwill of $43.0 million. We recorded goodwill of $20.1 million and indefinite lived intangible assets of $22.9 million in connection with this transaction. Considering that identifiable intangible assets recognized in connection with the purchase of the business of MIMI are contracts related to the management of mutual funds which will be continually offered and which are not expected to be terminated in the foreseeable future, such intangible assets were determined to be non-amortizable under SFAS 141 and SFAS 142. Goodwill recognized in connection with the purchase of the business of MIMI is not deductible for tax purposes.

        As part of this transaction, we have entered into new subadvisory and marketing agreements. These agreements extend MFC's subadvisory agreements with WRIICO and provide us with additional investment management opportunities in Canada. Pursuant to the subadvisory agreements, we will receive investment management fees covering multiple funds whose assets were approximately $948.5 million (USD) at December 31, 2002. Pursuant to the marketing agreement, MFC will provide us with opportunities to launch new funds and/or assume additional existing subadvisory mandates under the Universal brand name in Canada, and will facilitate our relationship with MFC's parent company, Investors Group Inc. and its affiliates.

        With respect to WRIICO's U.S. business, we will maintain the Ivy Fund brand name, expand its product offerings and use it for U.S. retail nonproprietary load fund distribution, while utilizing our investment management capabilities to strengthen the Ivy Fund product line. Select Ivy Funds are also available to Waddell & Reed Advisors, where a number of styles offered by WRIICO are not part of our current proprietary product line. At December 31, 2002, the Ivy Funds had $647.6 million in assets.

        Commitments from our purchase of MIMI's business include obligations under an office lease for 40,786 square feet of office space in Boca Raton, Florida. The lease commenced on March 1, 2001 and has a 12-year term. We plan to utilize a portion of this office space through June 30, 2003 prior to operations transitioning to our home office in Kansas. We plan to sublease this space for the remainder of the lease term. Since the leased space will not be used in ongoing operations to generate future revenues for the Company, a liability for the lease costs (net of estimated sublease revenue) has been established on the opening balance sheet of the acquired business. The net present value of this liability was estimated to be $5.9 million. After all company operations have ceased at the leased facility, lease payments made, net of sublease receipts, will be recorded as a reduction of this liability.

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        We are also obligated to pay to the employees of MIMI certain severance related payments under various change in control agreements and employee retention plans, which we assumed as part of the purchase of MIMI's business. Expected payments to employees upon their termination or constructive discharge total $9.2 million, which were recorded as a liability on the opening balance sheet of the acquired business. For the remainder of 2002, there have been no material payments made to reduce this liability.

        A summary of the preliminary purchase price allocation of the net assets of the business of MIMI on the date of acquisition is as follows (in thousands):

Assets acquired
	Cash	$	32,114
	Accounts receivable		2,090
	Investments		1,826
	Deferred sales commissions		2,716
	Other assets		991
	Identifiable intangible assets		22,946
	Goodwill		20,065
Total assets acquired			82,748
Liabilities assumed
	Accounts payable and accrued liabilities		3,153
	Accrued exit costs		15,408
	Deferred taxes		1,847
	Other liabilities		950
	Total liabilities assumed		21,358
Total purchase price		$	61,390

        Please refer to Note 4. "Goodwill and Intangible Assets" for additional information on intangible assets and goodwill. Shortly after the closing of the acquisition, the excess cash was distributed to Waddell & Reed Financial, Inc. in the form of a dividend.

        We have not presented pro forma combined results of operations for this acquisition because the results of operations as if this acquisition were made at the beginning of the earliest period presented would not have been materially different from the amounts reported in the accompanying consolidated statements of income.

10. Contingent Purchase Price Payments for Acquisitions

        On March 31, 2000, we acquired Legend in a business combination accounted for as a purchase. Legend was a privately-held mutual fund distribution and retirement planning company based in Palm Beach Gardens, Florida. Legend serves employees of school districts and other not-for-profit organizations nationwide and uses strategic asset allocation services based on proprietary systems. The purchase agreement provided for additional purchase price payments contingent upon the achievement by Legend of specified earnings levels for the years 2000, 2001 and 2002. For 2000, the specified earnings level was met and an additional purchase price payment in the amount of $4.0 million was made and recorded as an

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addition to goodwill. Because earnings levels were not met during 2001 or 2002, there were no purchase price payments required to be made under the agreement. As of December 31, 2002, we are no longer obligated to make additional contingent purchase price payments to the former owners of Legend.

        On August 9, 1999, we acquired ACF, a privately-held investment management firm based in San Antonio, Texas. ACF manages investments for trusts, high net worth families and individuals, and pension plans of corporations, hospitals, schools, labor unions, endowments and foundations. The purchase agreement provided for additional contingent purchase price payments in two situations. First, these payments could be made if ACF achieved specified earnings levels for the years 2000 through 2004, aggregating to as much as $8.7 million, plus interest. Second, payments could also be made if ACF earned a specified performance fee from Encino Investment Partners GP LLC ("Encino") for the management of Encino Partners LP, a private investment fund, for the years 2000 through 2004, aggregating to as much as $2.0 million, plus interest. In 2000, ACF met both payment requirements in the purchase agreement and a contingent purchase price payment was earned and recorded as an addition to goodwill in the aggregate amount of $9.3 million. As of December 31, 2001, we were no longer obligated to make any additional contingent purchase price payments to ACF based on their achievement of specified earnings levels as the maximum amount of $8.7 million was earned in 2000. For the year ended December 31, 2001, ACF did not meet the specified performance requirements necessary to earn a payment for their management of Encino Partners LP. Encino Partners LP was liquidated during 2002 and as a result, we are no longer obligated to make future contingent purchase price payments to the former owners of ACF.

        We are not obligated to make contingent purchase price payments in connection with the acquisition of the business of MIMI on December 16, 2002.

11. Income Taxes

        The components of total income tax expense are as follows:

		2002			2001		2000
		(in thousands)
Currently payable:
	Federal	$	38,181		57,623		71,698
	State		3,840		7,231		11,750
			42,021		64,854		83,448
Deferred taxes			3,152		(901	)	5,493
Income tax expense from operations			45,173		63,953		88,941
Stockholders' equity-unrealized gain (loss) on investment securities available-for-sale			1,698		(437	)	(862	)
Minimum pension liability			(2,107	)	—		—
Total income taxes		$	44,764		63,516		88,079

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        The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at December 31, 2002 and 2001 are as follows:

		2002			2001
		(in thousands)
Deferred tax liabilities:
	Deferred selling costs	$	(2,660	)	(2,956	)
	Fixed assets		(5,223	)	(4,021	)
	Benefit plans		(56	)	—
	Identifiable intangible assets		(8,719	)	—
	Other		(2,320	)	(215	)
Total gross deferred liabilities			(18,978	)	(7,192	)
Deferred tax assets:
	Benefit plans		—		2,399
	Minimum pension liability		2,107		—
	Accrued expenses		2,665		2,246
	Acquisition severance liability		3,493		—
	Acquisition lease liability		2,262		—
	Stock loans		3,307		3,215
	Unrealized loss on investment securities		2,949		1,741
	Other		476		—
Total gross deferred assets			17,259		9,601
Net deferred tax asset (liability)		$	(1,719	)	2,409

        A valuation allowance for deferred tax assets was not necessary at December 31, 2002, 2001, or 2000. The following table reconciles the statutory federal income tax rate with our effective income tax rate:

	2002		2001		2000
Statutory federal income tax rate	35.0	%	35.0		35.0
State income taxes, net of federal tax benefits	2.1		2.6		3.5
State incentives	(1.0	)	0.0		0.0
Favorable resolution of outstanding income tax matters	(1.9	)	0.0		0.0
Other items	(0.1	)	(0.2	)	0.5
Effective income tax rate	34.1	%	37.4		39.0

        Our effective income tax rate was 34.1%, 37.4%, and 39.0%, in 2002, 2001 and 2000, respectively. The effective tax rate in 2002 was lower than the statutory rate due to state credits earned from past construction of one of our home office buildings and favorable resolution of previous years tax liabilities with tax authorities. The 2002 rate was also affected by discontinuing the amortization of goodwill and the State of Kansas passing new state income tax legislation favorable to the mutual fund industry. The change relates to the methodology used to source company taxable income to the State of Kansas in a fashion

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similar to that used in 11 other states. The law phases in the effect, such that 50% of the benefit was applicable in the year 2002 and 100% is applicable in 2003 and thereafter.

12. Pension Plan and Postretirement Benefits Other Than Pensions

        We participate in a noncontributory retirement plan that covers substantially all employees and certain vested former employees of Torchmark Corporation (our former parent company). Benefits payable under the plan are based on employees' years of service and compensation during the final ten years of employment. This plan invests in equity securities of large capitalization companies, investment grade corporate and government bonds, and cash and cash equivalents. We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all employees. The plan is contributory with retiree contributions adjusted annually.

		Pension Benefits					Postretirement Benefits
		2002			2001		2002		2001
		(in thousands)
Change in benefit obligation
	Benefit obligation at beginning of year	$	52,368		40,206		1,791		2,193
	Service cost		4,194		3,343		133		177
	Interest cost		3,786		3,295		146		186
	Plan change		—		1,990		623		(61	)
	Actuarial (gain) loss		4,962		5,084		2,200		(647	)
	Benefits and expenses paid		(3,044	)	(1,550	)	(244	)	(132	)
	Retiree contributions		—		—		89		75
	Benefit obligation at end of year	$	62,266		52,368		4,738		1,791
Change in plan assets:
	Fair value of plan assets at beginning of year	$	41,433		39,468		—		—
	Actual return on plan assets		(3,299	)	(1,885	)	—		—
	Company contribution		9,000		5,400		155		57
	Benefits and expenses paid		(3,044	)	(1,550	)	(244	)	(132	)
	Retiree contributions		—		—		89		75
	Fair value of plan assets at end of year	$	44,090		41,433		—		—
Funded status of plan		$	(18,176	)	(10,935	)	(4,738	)	(1,791	)
Unrecognized actuarial loss			18,138		6,314		2,599		414
Unrecognized prior service cost			2,347		2,531		328		(323	)
Unrecognized net transition obligation			83		88		—		—
Minimum pension liability adjustment			(7,975	)	—		—		—
Accrued benefit cost		$	(5,583	)	(2,002	)	(1,811	)	(1,700	)
Minimum pension liability adjustment		$	7,975		—		—		—
Intangible asset—included in "Other assets"			(2,430	)	—		—		—
Deferred tax benefits			(2,107	)	—		—		—
Pension liability adjustment to stockholders' equity		$	3,438		—		—		—

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Weighted average assumptions as of December 31:
	Discount rate		6.75	%	7.25		6.75		7.75
	Expected return on plan assets		9.25	%	9.25		N/A		N/A
	Rate of compensation increase		3.75	%	3.75		N/A		N/A
Components of net periodic benefit cost:
	Service cost	$	4,194		3,343		133		177
	Interest cost		3,786		3,295		146		186
	Expected return on plan assets		(3,711	)	(3,640	)	—		—
	Actuarial loss amortization		148		—		14		53
	Prior service cost amortization		184		44		(28	)	(24	)
	Transition obligation amortization		5		5		—		—
	Net periodic benefit cost	$	4,606		3,047		265		392

        Postretirement benefits plan amendments were due to the addition of advisors (both Legend retirement advisors and Waddell & Reed Advisors which were previously not eligible to participate in the plan) and due to decreases in prescription drug coverage for 2002 and 2001, respectively. The plan amendment to the pension plan was due to an increase in the pay cap from $170,000 to $200,000 in 2001.

        For measurement purposes, the health care cost trend rate was 11.0% and 6.5% in 2002 and 2001, respectively. The health care cost trend rate scale decreases from 11% to 5% over the next 7 years to reflect anticipated increases in health care costs. The effect of a 1% annual increase in assumed cost trend rates would increase the December 31, 2002 accumulated post-retirement benefit obligation by approximately $535 thousand, and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the year ended December 31, 2002 by approximately $91 thousand. The effect of a 1% annual decrease in assumed cost trend rates would decrease the December 31, 2002 accumulated post-retirement benefit obligation by approximately $462 thousand, and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the year ended December 31, 2002 by approximately $78 thousand.

13. Employee Savings Plan

        We sponsor a defined contribution plan that qualifies under Section 401(k) of the Internal Revenue Code to provide retirement benefits to substantially all of our employees following the completion of an eligibility period. As allowed under Section 401(k), the plan provides tax-deferred salary deductions for eligible employees. For 2002, employees could contribute from 1% to 50% of their annual pre-tax salary to the plan, limited to a maximum amount set by the Internal Revenue Service, to invest in our mutual fund shares and/or our common stock. We match employee contributions to the plan dollar for dollar up to the first 3% of the employee's salary and we provide a 50% matching contribution on the next 2% of the employee's salary. Our matching contributions may not exceed 4% of the employee's eligible salary. All matching contributions vest immediately. Our matching contributions to the plan for the years ended December 31, 2002, 2001, and 2000 were $2.9 million, $2.3 million, and $2.2 million, respectively.

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14. Stockholders' Equity

Stock Split

        On February 23, 2000, we declared a three-for-two stock split effected in the form of a dividend on our Class A and Class B common stock payable April 7, 2000 to stockholders of record as of March 17, 2000. All per share and share outstanding data in the consolidated financial statements and related notes retroactively reflect the stock split for all periods presented.

Class A and Class B Common Stock Merger

        On April 25, 2001, our stockholders approved an Agreement and Plan of Merger by and between the Company and WDR Sub, Inc., a wholly-owned subsidiary of the Company, with the Company to remain as the surviving corporation. The merger effected a combination of our Class A and Class B common stock on a one-for-one basis. Prior to the merger, our Class A and Class B common stock had the same rights, powers and preferences, except that the Class A common stock was entitled to one vote per share and the Class B common stock was entitled to five votes per share. Effective as of the end of business on April 30, 2001, each share of our Class B common stock was converted into one share of Class A common stock and the number of Class A authorized shares increased from 150,000,000 to 250,000,000 to account for the termination of the 100,000,000 authorized Class B shares. We terminated the Class B common stock registration under the Exchange Act and it is no longer listed or traded on the NYSE. During the first quarter of 2001, the high and low closing prices of our Class B common stock were $35.70 and $26.77, respectively. During the second quarter of 2001, the high and low closing prices of our Class B common stock were $31.33 and $24.73, respectively, through the date of April 30, 2001, at which time the combination discussed above was effected. On April 30, 2001, our Class B common stock closed at a price of $30.43. Dividends paid on Class B common stock (which was converted into Class A common stock) were $0.884 per share for the first and second quarters of 2001. Our Class A common stock continues to be registered under the Exchange Act and continues to be listed and traded on the NYSE under the symbol "WDR." All per-share and share outstanding data in the consolidated financial statements and notes thereto have been restated to reflect this combination.

Earnings per Share

        The weighted average number of shares used to compute basic earnings per share was 80,382,000, 80,592,000, and 83,362,000, for the years ended 2002, 2001, and 2000, respectively. The weighted average number of shares used in computing diluted earnings per share, which reflects the potential additional effect of stock option exercises and restricted stock awards was 81,874,000, 83,423,000, and 86,895,000, for the years ended 2002, 2001, and 2000, respectively.

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        For the years ended December 31, earnings per share were computed as follows:

		2002		2001	2000
		(in thousands, except per share amounts)
Net income		$	87,425	107,167	139,005
Weighted average shares outstanding—basic			80,382	80,592	83,362
Dilutive potential shares from stock options and certain restricted stock awards			1,492	2,831	3,533
Weighted average shares outstanding—diluted			81,874	83,423	86,895
Earnings per share:
	Basic	$	1.09	1.33	1.67
	Diluted	$	1.07	1.28	1.60

15. Stock Compensation Plans

        We have a Company Stock Incentive Plan (the "SIP Plan") that allows us to grant equity compensation, including non-qualified stock options and restricted stock, among other awards, as part of our overall compensation program to attract and retain key personnel and encourage a greater personal financial investment in the Company. A maximum of 30,000,000 shares of common stock are authorized for issuance under the SIP Plan. We also have a Company Executive Deferred Compensation Stock Award Plan (the "EDC Plan") and a Company Non-Employee Director Stock Award Plan (the "NED Plan") (collectively, the "Plans") that allow us to grant non-qualified stock options and/or restricted stock to promote the long-term growth of the Company. A maximum of 3,750,000 and 1,200,000 shares of common stock are authorized for issuance under the EDC Plan and NED Plan, respectively. In addition, we make incentive payments under the Company Executive Incentive Plan (the "EIP") in the form of cash, stock options or restricted stock. Incentive awards paid under the EIP in the form of stock options or restricted stock are issued out of shares reserved for issuance under the EDC Plan. Generally, shares of common stock covered by terminated, surrendered or canceled options, by forfeited restricted stock, or by the forfeiture of other awards that do not result in issuance of shares of common stock, are again available for awards under the plan from which they were terminated, surrendered, canceled, or forfeited.

        Under all of our stock incentive plans, the exercise price of each option is equal to the market price of the stock on the date of grant. The maximum term of non-qualified options granted under the SIP Plan is ten years and two days and the options generally vest in 33¹/3% increments beginning on the second, third and fourth anniversaries of the grant date. The maximum term of non-qualified options granted under the EDC Plan and NED Plan is eleven years and the options generally vest 10% each year, beginning on the first anniversary of the grant date.

        On December 31, 2002, we granted 315,598 shares of restricted stock with a fair market value of $19.67 per share under the SIP Plan and EDC Plan. These shares have no purchase price and vest over four years in 33¹/3% increments beginning on the second anniversary of the grant date. Under the Plans, unvested shares of restricted stock may be forfeited upon the termination of employment with the Company or service on the board of directors, dependent upon the circumstances of termination. Except for restrictions placed on the transferability of the restricted stock, holders of restricted stock have full

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stockholders' rights during the term of restriction, including voting rights and the right to receive cash dividends. Based upon the fair market value of these restricted shares on the grant date, we recorded deferred compensation totaling $6.2 million for the year ended December 31, 2002. Deferred compensation is included as a component of stockholders' equity and will be recognized as expense over the four year vesting period.

        All of the Plans have been approved by our stockholders and all equity compensation provided by the Company has been issued in accordance with the Plans.

        In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which was effective beginning January 1, 1996. SFAS No. 123 defines the "fair value method" of accounting for employee stock options. It also allows accounting for such options under the "intrinsic value method" in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations, which is the method we use. If a company elects to use the intrinsic value method, pro forma disclosures of earnings and earnings per share are required as if the fair value method of accounting was applied.

        Pursuant to SFAS No. 123, the fair value of each option has been estimated using a Black-Scholes option-pricing model with the following assumptions:

	2002		2001		2000
Dividend yield	2.90	%	1.30	%	1.10	%
Risk-free interest rate	3.57	%	4.77	%	5.43	%
Expected volatility	40.81	%	41.00	%	35.80	%
Expected life (in years)	4.96		4.85		4.71

        For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the vesting period of the options. Pro forma effects on net income and earnings per share follow:

		2002		2001	2000
		(in thousands except per share data)
Net income
	As reported	$	87,425	107,167	139,005
	Pro forma	$	70,150	96,029	133,435
Basic earnings per share
	As reported	$	1.09	1.33	1.67
	Pro forma	$	0.87	1.19	1.60
Diluted earnings per share
	As reported	$	1.07	1.28	1.60
	Pro forma	$	0.86	1.15	1.54

        After the spin-off from Torchmark in 1998, holders of Torchmark stock options, including our employees and directors, granted prior to 1998 were given a choice to retain their Torchmark options or convert their options into Waddell & Reed Financial, Inc. options ("Conversion Options"). A total of 5,541,215 Conversion Options were converted from Torchmark options. The Conversion Options retained

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the same terms as the previous Torchmark options except that the exercise price and the number of shares were adjusted so that the aggregate intrinsic value of the options remained the same.

        Our stock incentive plans include a Stock Option Restoration Program ("SORP") feature that allows, on a specific date set by the Company, an employee to pay the exercise price on vested options by surrendering common stock of the Company that has been owned for at least six months. The plans also permit an employee exercising an option to be granted new options in an amount equal to the number of common shares used to satisfy both the exercise price and withholding taxes due upon exercise. New options are granted with a term to expiration equal to the remaining term of the related original option and vest after six months. The SORP, which facilitates ownership of the Company's common stock by management and key employees, results in a net issuance of shares of common stock and fewer stock options outstanding. The Company receives a current income tax benefit for exercises of stock options.

        A summary of stock option activity and related information for the years ended December 31, 2002, 2001, and 2000 follows:

	2002				2001			2000
	Options		Weighted average exercise price		Options		Weighted average exercise price	Options		Weighted average exercise price
Outstanding, beginning of year	17,830,298		$	24.10	15,969,515		21.76	14,506,774		14.65
Granted	83,262			29.52	3,506,343		27.07	3,821,966		31.70
Exercised	(660,737	)		15.44	(1,003,951	)	15.69	(621,201	)	13.41
Granted in restoration	1,377,581			18.00	700,360		32.81	2,241,614		34.19
Exercised in restoration	(1,541,403	)		15.20	(1,280,442	)	14.86	(3,725,838	)	13.57
Terminated	(124,250	)		25.88	(61,527	)	13.88	(253,800	)	15.51
Outstanding, end of year	16,964,751		$	24.77	17,830,298		24.10	15,969,515		21.76
Exercisable, end of year	8,488,731		$	24.95	6,551,027		23.13	2,530,619		14.57

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        The weighted average fair value of options granted during the years ended December 31, 2002, 2001, and 2000 were $5.87, $9.37, and $10.36, respectively.

        Following is a summary of options outstanding at December 31, 2002:

	Outstanding Options
					Exercisable Options
		Weighted Average Remaining Contractual Life (in years)
Exercise Price Range	Number		Weighted Average Exercise Price		Number	Weighted Average Exercise Price
$5.44 to $9.99	505,426	4.17	$	7.86	249,821	$	7.43
$10.00 to $14.99	1,280,573	5.97		14.33	1,060,247		14.29
$15.00 to $19.99	5,082,263	6.35		16.79	2,513,721		16.22
$20.00 to $29.99	3,363,897	8.91		26.70	240,224		26.09
$30.00 to $34.19	6,732,592	7.96		33.08	4,424,718		33.39
	16,964,751	7.40	$	24.77	8,488,731	$	24.95

Stock Loan Program

        In March 1998, promissory notes were executed by a select group of 266 financial advisors and sales managers to facilitate their ownership of our stock at the IPO and drive future advisor productivity and retention growth. The promissory notes were issued for amounts ranging from $11 thousand to $58 thousand, bearing interest at 5.59% and maturing in March 2003. In the third quarter of 2001, we recorded a special charge of $8.2 million pre-tax, or $5.1 million after-tax, for the write-off of the full balance of these stock loans. This charge is reflected in underwriting and distribution expense in 2001. This action results from financial advisors and sales managers having collectively met the productivity requirements of the stock loan program, such that the notes were expected to be forgiven. In fact, these notes have been subsequently forgiven.

16. Uniform Net Capital Rule Requirements

        Three of our subsidiaries, Waddell & Reed, Inc. ("W&R"), Legend Equities Corporation ("LEC"), and Ivy Mackenzie Distributors, Inc. ("IMDI") are registered broker-dealers and members of the NASD. Broker-dealers are subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15.0 to 1.0. At December 31, 2002 and 2001, W&R had net capital of $10.4 million and $21.1 million, respectively, which was $5.0 million and $15.2 million, respectively, in excess of its required net capital of $5.4 million and $5.9 million, respectively. W&R's ratio of aggregate indebtedness to net capital was 7.73 to 1.0 at December 31, 2002 and 4.21 to 1.0 at December 31, 2001. At December 31, 2002 and 2001, LEC had net capital of $1.7 million and $1.8 million, respectively, which was $1.6 million and $1.7 million, respectively, in excess of its required net capital of $97 thousand and $88 thousand, respectively. LEC's ratio of aggregate indebtedness to net capital was 0.85 to 1.0 at December 31, 2002 and 0.74 to 1.0 at December 31, 2001. At December 31, 2002, IMDI (acquired December 16, 2002) had net capital of $761 thousand, which was $730 thousand in excess of its required net capital of $31 thousand. IMDI's ratio of aggregate indebtedness to net capital was 0.61 to 1.0 at

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December 31, 2002. The difference between net capital and stockholders' equity is the non-allowable assets which are excluded from net capital.

17. Rental Expense and Lease Commitments

        We lease our home office buildings and certain sales and other office space under long-term operating leases. Rent expense was $16.7 million, $14.5 million, and $9.5 million, for the years ended December 31, 2002, 2001, and 2000, respectively. Future minimum rental commitments under non-cancelable operating leases for the years ended December 31 are as follows (in thousands):

2003	$	16,126
2004		12,697
2005		9,620
2006		7,078
2007		5,163
Thereafter		30,872
	$	81,556

        New leases are expected to be executed as existing leases expire. Thus, future minimum lease commitments are not expected to be less than those in 2002.

        Total minimum future rental commitments have not been reduced by aggregate minimum sublease rentals of $0.6 million under operating leases due in the future under non-cancelable subleases.

18. Related Party Transactions

        We earn investment management fees from the Funds for which we also act as an investment adviser pursuant to an investment management agreement with each Fund. In addition, we have agreements with the Funds pursuant to Rule 12b-1 under the Investment Company Act of 1940 pursuant to which distribution and service fees are collected from the Funds for distribution of mutual fund shares for costs such as advertising and commissions paid to broker-dealers and for providing ongoing services to shareholders of the Funds and/or maintaining shareholder accounts. We also earn service fee revenues by providing various services to the Funds and their shareholders pursuant to a shareholder servicing agreement with each Fund (except the Target Funds) and an accounting service agreement with each Fund. Certain of our officers and directors are also officers, directors and/or trustees for our various Funds for which we act as an investment adviser. These agreements are approved or renewed on an annual basis by each Fund's board of directors/trustees, including a majority of the disinterested members. Accounts receivable include amounts due from the Funds for aforementioned services.

19. Contingencies

        The Company and/or certain of its subsidiaries are involved from time to time in various legal proceedings and claims incident to the normal conduct of their businesses. On the basis of information presently available and advice received from counsel, other than the items listed below, it is the opinion of

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management that such legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on our financial condition or results of operations.

United Investors Life Insurance Company

        We have been in litigation with United Investors Life Insurance Company ("UILIC") in the Circuit Court of Jefferson County, Alabama (CV-002720) over the terms of a disputed compensation agreement executed in July 1999 by UILIC and our broker-dealer subsidiary, Waddell & Reed, Inc. ("W&R") (the "Letter Agreement") and our customers' replacement of UILIC variable annuity policies with Nationwide variable annuity policies. More specifically, UILIC sought the return of all compensation pursuant to the Letter Agreement on all UILIC variable annuity policy assets under management sold by our financial advisors and also sought damages against us for various causes of action including, among others, conversion, breach of fiduciary duty, fraud, and tortious interference regarding the exchange of the variable annuity policies.

        On March 19, 2002, after the conclusion of a five-week trial, the jury in this case found for UILIC, awarding compensatory damages of $50 million. Jurors rejected UILIC's demand for punitive damages and our demands for counterclaim damages. The jury did not allocate the compensatory damages between the two major causes of action—tortious interference and validity of the contract. The amount collected pursuant to the Letter Agreement before the jury verdict was approximately $11.0 million.

        On June 25, 2002, the Court entered an order denying our post-trial motions regarding the jury verdict, including our motions to disregard it and for a new trial. In addition, the Court found that there was not a binding agreement between the companies regarding variable annuity basis point compensation pursuant to the Letter Agreement. Finally, the Court ruled in favor of the Company in denying a request by UILIC for an injunction preventing the replacement of UILIC variable annuity policies with Nationwide variable annuity policies by our customers.

        Pursuant to a ruling received on April 30, 2001 and the Court's ruling on June 25, 2002, we are prohibited from collecting annual compensation of 0.20% on all UILIC variable annuity policy assets under management sold by our financial advisors before January 1, 2000 and annual compensation of 0.25% on all variable annuity policies' assets under management on UILIC variable annuity policies sold by our financial advisors after January 1, 2000.

        On July 24, 2002 the Company filed its Notice of Appeal with the Alabama Supreme Court. The Notice of Appeal requested an appellate review of the jury's verdict and the finding of the Court regarding the Letter Agreement, including its previous ruling on basis point compensation that became effective on April 30, 2001. The Appeal has been fully briefed by the parties. Oral arguments were heard before the Alabama Supreme Court on February 19, 2003. It is anticipated that the Supreme Court will render a ruling by the end of 2003.

        The $50 million jury verdict accrues interest at 12% per annum from June 25, 2002. The judgment has been stayed with the posting of an appeal bond in the amount of $62.5 million in cash with the Court on July 24, 2002. This deposit is recorded in "Prepaid expenses and other current assets" on the consolidated balance sheet and we earned interest on it at 2.01% per annum during 2002. We are currently earning interest based on the daily federal funds rate.

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        Management believes that the jury verdict is not supported by the evidence or case law in Alabama. In the opinion of management, the size and nature of the judgment, if any, is unknown and not reasonably determinable; therefore, no liability has been recorded in the consolidated financial statements of Waddell & Reed Financial, Inc.

        On or about October 10, 2001, UILIC sued the Company and its California financial advisors (collectively, the "W&R Defendants") in the California Superior Court in and for the County of Los Angeles (hereafter "State Court") (BC25943). UILIC's complaint was based upon California Business and Professions Code, Section 17200 et seq., and sought restitution of amounts received, an accounting and the imposition of a constructive trust. In addition, as in the Alabama suit, UILIC also requested an injunction essentially preventing the replacement of UILIC variable annuity policies with Nationwide variable annuity policies by our customers. In its pleadings, UILIC claimed that it is not seeking damages, restitution or any remedy on its own behalf, but that the claim was brought on behalf of the general public and those persons who either currently own or previously owned variable annuity policies sold by the W&R Defendants. Specifically, UILIC claimed that the W&R Defendants violated California's Unfair Business Practices Act by replacing existing UILIC variable annuity contracts with variable annuity contracts issued by Nationwide, by purportedly failing to conduct proper suitability analyses, making material misrepresentations, withholding material information about the Nationwide variable annuity contracts, and refusing to service existing UILIC variable annuity contracts.

        On November 9, 2001, the W&R Defendants removed the action to the United States District Court for the Central District of California (hereafter "Federal Court") (CV 01-09684 TJH). Thereafter, the W&R Defendants filed a motion to dismiss UILIC's complaint on the grounds that it is preempted by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). SLUSA requires the dismissal of a covered state law class action that alleges an untrue, manipulative, or deceptive statement or omission in connection with the purchase or sale of a covered security. On or about July 19, 2002, the Federal Court issued a one page minute order, without opinion, denying the motion to dismiss and, on its own motion, remanding the case back to State Court. On or about July 24, 2002, the W&R Defendants filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit (the "Ninth Circuit") from the Federal Court's Order. On January 24, 2003, the Ninth Circuit ordered the parties to further brief the issues. It is anticipated that the issue will be fully briefed by June of 2003 with a decision regarding dismissal to be rendered by the Ninth Circuit before the end of the third quarter of 2003.

NASD Arbitration

        An NASD Dispute Resolution Arbitration Panel (the "Panel") entered an award of $27.6 million against W&R on August 7, 2001 (97-03642). The award was made upon the conclusion of an arbitration proceeding conducted in New York arising from a complaint by Stephen Sawtelle, a former W&R financial advisor. In the arbitration, this advisor claimed that following his termination on February 10, 1997, W&R engaged in conduct that tortiously interfered with his prospective business relations and violated provisions of the Connecticut Unfair Trade Practices Act ("CUTPA"). The Panel found W&R liable and directed payment of approximately $1.8 million in compensatory damages, plus attorneys fees of $747,000. It also held that W&R had violated CUTPA and ordered the payment of punitive damages in the amount of $25.0 million. On August 8, 2001, the former advisor filed a petition with the Supreme Court of the State

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of New York, County of New York, seeking to confirm the award (115056/01). Shortly thereafter, W&R filed a motion to have the award vacated or modified.

        On or about June 3, 2002, the New York Supreme Court reduced the compensatory damage and attorneys fee award from $2.5 million to $1.8 million and confirmed the original punitive damage award of $25.0 million. The judgment was stayed with the posting of an appeal bond with the Court in the amount of $28.7 million backed by a letter of credit in the amount of $36 million, which in turn is collateralized by investment securities.

        In September of 2002, the Company made a strategic legal decision to no longer appeal the compensatory damage and attorneys fees portion of the award after it was reduced from $2.5 million to $1.8 million. This decision was made at the time our appeal briefs were filed with the Appellate Division of the New York Supreme Court and reflected our strategy to focus on contesting the related punitive damage award of $25.0 million. During this year's third quarter, we recorded a $2.0 million charge to general and administrative expense for the estimated cost of the payment of the compensatory damage and attorneys fees portion of the award. The inclusion of pre- and post-judgment interest on the award increased the total charge to $2.0 million.

        On February 11, 2003, the Appellate Division of the New York Supreme Court vacated the Panel's punitive damage award of $25.0 million and remanded the matter back to the Panel for reconsideration of the issue of punitive damages. The Court upheld the lower court's previous rulings on compensatory damages and attorneys' fees. We satisfied the outstanding judgment on these awards on February 25, 2003. The outcome of any appeal which may be sought, if any, by Mr. Sawtelle or the determination of damages by the Panel cannot be predicted at this time.

        No charge has been recorded in the consolidated financial statements of Waddell & Reed Financial, Inc. for the punitive damage award or interest thereon since, in the opinion of management, the size and probability of the punitive damage award, if any, is unknown and not reasonably determinable.

20. Subsequent Event

        In an effort to enhance long-term value for our stockholders, reduce the total number of options outstanding and improve our ability to retain and provide incentives to our talented and valuable employees, on February 12, 2003, we offered to exchange all of the outstanding stock options (whether vested or unvested) held by our employees, consultants, financial advisors and directors, except Keith A. Tucker, Chairman and CEO, with a strike price of $25.4375 or greater for shares of restricted stock.

        Option holders participating in the tender offer received a number of shares of restricted stock for each option tendered dependent on the strike price of the options tendered. The shares of restricted stock received for options ranged from .1707 shares for each option tendered (for options with a strike price of $34.1875) to .2591 shares for each option tendered (for options with a strike price of $25.87).

        All shares of restricted stock issued pursuant to the tender offer were issued under the SIP Plan and are fully vested (i.e., they cannot be forfeited), but are subject to transfer restrictions. The transfer restrictions will expire in 33¹/3% increments beginning on the second anniversary of the grant date. As part of the terms of the tender offer, participating division and district managers entered into a non-solicitation

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agreement with the Company and all participants agreed to waive any and all future participation in the Company's Stock Option Restoration Program.

21. Selected Quarterly Information (Unaudited)

			Quarter
			First		Second	Third		Fourth
			(in thousands)
2002
	Total revenues		$	115,502	115,109	103,961		104,553
	Operating revenues			114,848	114,045	102,741		103,227
	Net income			24,779	25,262	16,004	*	21,380
	Earnings per share:
		Basic	$	0.31	0.31	0.20	*	0.27
		Diluted	$	0.30	0.31	0.20	*	0.26

*

Inclusive of third quarter 2002 special charges of $7.1 million pre-tax ($4.4 million net of tax) for a write-down of other than temporary impairment on investment securities and a $2.0 charge pre-tax ($1.3 million net of tax) for estimated cost of the payment of compensatory damage portion of an NASD arbitration award.

			Quarter
			First		Second	Third		Fourth
			(in thousands)
2001
	Total revenues		$	121,150	129,374	115,817		116,221
	Operating revenues			119,442	127,911	114,924		114,880
	Net income			30,596	31,098	20,428	**	25,042
	Earnings per share:
		Basic	$	0.37	0.39	0.25	**	0.31
		Diluted	$	0.36	0.38	0.25	**	0.30

**

Inclusive of third quarter 2001 special charge of $8.2 million pre-tax ($5.1 million net of tax) for a write-off relating to the expected forgiveness of stock loans.

        Quarterly amounts will not necessarily add up to annual amounts due to rounding.

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WADDELL & REED FINANCIAL, INC.

Index to Exhibits

Exhibit No.	Exhibit Description
2.1	Purchase Agreement, dated as of February 28, 2000, by and among Waddell & Reed Financial, Inc., Freemark Investment Management, Inc., Legend Financial Corporation, Advisory Services Corporation, The Legend Group, Inc., Philip C. Restino, Restino Family Trust, 01/02/94 Trust FBO John J. Restino, 01/02/94 Trust FBO Robert R. Restino, Mark J. Spinello, Glenn T. Ferris and David L. Phillips. Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated April 14, 2000 and incorporated herein by reference.
2.2	Agreement and Plan of Merger, dated as of February 14, 2001, by and between Waddell & Reed Financial, Inc. and WDR Sub, Inc. Filed as Exhibit 2.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
2.3	Stock Purchase Agreement, dated as of August 29, 2002, by and among Waddell & Reed Financial, Inc., Mackenzie Financial Corporation, Mackenzie Investment Management Inc. and Ivy Acquisition Corporation (excluding the Schedule of Exceptions and Exhibit F) and related Voting, Support, and Indemnification Agreement.* Filed as Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference.
3.1	Amended and Restated Certificate of Incorporation of the Company. Filed as Exhibit A to the Agreement and Plan of Merger, dated as of February 14, 2002, by and between the Company and WDR Sub, Inc. Filed as Exhibit 2.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
3.2	Amended and Restated Bylaws of the Company.
4.1	Specimen of Class A Common Stock Certificate. Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 and incorporated herein by reference.
4.2	Rights Agreement, dated as of April 28, 1999, by and between Waddell & Reed Financial, Inc. and First Chicago Trust Company of New York, which includes the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company, as filed on May 13, 1999 with the Secretary of State of Delaware, as Exhibit A and the form of Rights Certificate as Exhibit B. Filed as Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference.
4.3	First Amendment to Rights Agreement, dated as of February 14, 2001, by and between Waddell & Reed Financial, Inc. and First Chicago Trust Company of New York. Filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
4.4	Indenture, dated as of January 18, 2001, by and between Waddell & Reed Financial, Inc. and Chase Manhattan Trust Company, National Association. Filed as Exhibit 4.1(a) to the Company's Current Report on Form 8-K dated February 5, 2001 and incorporated herein by reference.
4.5	First Supplemental Indenture, dated as of January 18, 2001 by and between Waddell & Reed Financial, Inc. and Chase Manhattan Trust Company, National Association, including the form of the 7.50% notes due January 2006 as Exhibit A. Filed as Exhibits 4.1(b) and 4.2 to the Company's Current Report on Form 8-K dated February 5, 2001 and incorporated herein by reference.

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10.1	General Agent Contract, dated as of October 20, 2000, by and among Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company and Waddell & Reed, Inc. and its affiliated insurance companies. Filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.2	Fund Participation Agreement, dated as of December 1, 2000, by and among Nationwide Life Insurance Company and/or Nationwide Life and Annuity Insurance Company, Waddell & Reed Services Company and Waddell & Reed, Inc. Filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.3	The Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, As Amended and Restated. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference.
10.4	First Amendment to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, As Amended and Restated.
10.5	The Waddell & Reed Financial, Inc. 1998 Non-Employee Director Stock Option Plan. Filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference.
10.6	First Amendment to 1998 Non-Employee Director Stock Option Plan. Filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.
10.7	Second Amendment to 1998 Non-Employee Director Stock Option Plan.
10.8	The Waddell & Reed Financial, Inc. 1998 Executive Deferred Compensation Stock Option Plan, as Amended and Restated. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference.
10.9	First Amendment to the Waddell & Reed Financial, Inc. 1998 Executive Deferred Compensation Stock Option Plan, As Amended and Restated.
10.10	Credit Agreement, as amended, dated as of October 12, 2001 by and among Waddell & Reed Financial, Inc., Lenders and The Chase Manhattan Bank. Filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
10.11	Termination and Replacement Agreement, dated as of October 11, 2002, by and among Waddell & Reed Financial, Inc., the Lenders and JPMorgan Chase Bank.
10.12	Fixed Rate Promissory Note for Multiple Loans dated as of August 15, 2000, by and between Waddell & Reed Financial, Inc. and Chase Manhattan Bank. Filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.13	Master Note Agreement, dated as of July 7, 2000, by and between Waddell & Reed Financial, Inc. and UMB Bank, n.a. Filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
10.14	The Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan. Filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference.
10.15	The Waddell & Reed Financial, Inc. 1999 Management Incentive Plan, as amended. Filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.

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10.16	Form of Accounting Services Agreement by and between the Funds (except the Ivy Funds) and Waddell & Reed Services Company. Filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.17	Form of Investment Management Agreement by and between each of the Advisors Funds and Waddell & Reed Investment Management Company. Filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.18	Investment Management Agreement by and between the W&R Funds and Waddell & Reed Investment Management Company. Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.19	Investment Management Agreement by and between the Target Funds and Waddell & Reed Investment Management Company. Filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.20	Investment Management Agreement by and between InvestEd and Waddell & Reed Investment Management Company. Filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
10.21	Form of Shareholder Servicing Agreement by and between each of the Advisors Funds or the W&R Funds and Waddell & Reed Services Company. Filed as Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.22	Form of Administrative and Shareholder Servicing Agreement by and between InvestEd and Waddell & Reed Services Company. Filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
10.23	Form of Underwriting Agreement by and between each of the Advisors Funds and Waddell & Reed, Inc. Filed as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference.
10.24	Form of Underwriting Agreement by and between the W&R Funds and Waddell & Reed, Inc. Filed as Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference.
10.25	Form of Underwriting Agreement by and between InvestEd and Waddell & Reed, Inc. Filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
10.26	Form of Distribution and Service Plan for Class A Shares by and between each of the Advisors Funds and Waddell & Reed, Inc. Filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.27	Form of Distribution and Service Plan for Class A Shares by and between the W&R Funds or InvestEd and Waddell & Reed, Inc. Filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.28	Form of Distribution and Service Plan for Class B Shares by and between each of the Advisors, the W&R Funds, or InvestEd and Waddell & Reed, Inc. Filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.29	Form of Distribution and Service Plan for Class C Shares by and between each of the Advisors, the W&R Funds, or InvestEd and Waddell & Reed, Inc. Filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.

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10.30	Distribution and Service Plan for Class Y Shares, adopted December 27, 1995 by and between the W&R Funds and Waddell & Reed, Inc. Filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.31	Service Plan, adopted August 21, 1998 by and between W&R Target Funds, Inc. and Waddell & Reed, Inc. Filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.32	Administrative Agreement, dated as of March 9, 2001, by and among W&R Insurance Agency, Inc., Waddell & Reed, Inc., BISYS Insurance Services, Inc. and Underwriters Equity Corp. Filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
10.33	Consulting Agreement, dated January 1, 2002, by and between Robert L. Hechler and Waddell & Reed, Inc. Filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
10.34	Form of Change of Control Employment Agreement, dated December 14, 2001, by and between Keith A. Tucker and Henry J. Herrmann and Waddell & Reed Financial, Inc. Filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
10.35	Letter Agreement Amending Principal Underwriting Agreement, dated as of July 8, 1999, by and between United Investors Life Insurance Company and Waddell & Reed, Inc., effective January 1, 2000. Filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
10.36	ISDA Master Agreement, dated as of March 12, 2002, by and between Waddell & Reed Financial, Inc. and JP Morgan Chase Bank. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference.
11	Statement regarding computation of per share earnings.
21	Subsidiaries of the Company.
23	Consent of KPMG LLP.
24	Powers of Attorney.
99.1	Additional Stockholder Information as posted on the Waddell & Reed Financial, Inc. website.
99.2	Certificate of the Chief Executive Officer.
99.3	Certificate of the Chief Financial Officer.

*

The registrant agrees to furnish a copy of any omitted schedule to the Commission upon request.

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QuickLinks

WADDELL & REED FINANCIAL, INC. INDEX TO ANNUAL REPORT ON FORM 10-K For the fiscal year ended December 31, 2002
PART I

ITEM 1. Business

ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

PART III

ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13. Certain Relationships and Related Transactions
ITEM 14. Controls and Procedures

PART IV

ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

SIGNATURES
CERTIFICATIONS
WADDELL & REED FINANCIAL, INC. Index to Consolidated Financial Statements
Independent Auditors' Report
WADDELL & REED FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS December 31, 2002 and 2001
WADDELL & REED FINANCIAL, INC. CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2002, 2001 and 2000
WADDELL & REED FINANCIAL, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 2002, 2001 and 2000 (in thousands)
WADDELL & REED FINANCIAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2002, 2001 and 2000
WADDELL & REED FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2002, 2001 and 2000
WADDELL & REED FINANCIAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001, and 2000
WADDELL & REED FINANCIAL, INC. Index to Exhibits

EX-3.2

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Exhibit 3.2

AMENDED AND RESTATED BYLAWS
OF
WADDELL & REED FINANCIAL, INC.

Effective as of March 11, 2003

ARTICLE I. OFFICES

        Section 1.    Registered Office:

        The registered office shall be established and maintained at the office of the Corporation Trust Company, in the City of Wilmington, in the County of New Castle, in the State of Delaware, and said corporation shall be the registered agent of this corporation in charge thereof.

        Section 2.    Other Offices:

        The Corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require. The principal place of business of the Corporation shall be in Overland Park, Kansas.

ARTICLE II. MEETINGS OF STOCKHOLDERS

        Section 1.    Stockholder Action:

        Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. Subject to rights of holders of Preferred Stock to elect additional directors under specified circumstances, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors or the Chairman of the Board, upon not less than ten nor more than sixty days' written notice.

        Section 2.    Annual Meetings:

        Annual meetings of stockholders shall be held at such place, either within or without the State of Delaware, and at such time and date as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. In the event the Board of Directors fails to so determine the time, date and place of meeting, the annual meeting of stockholders shall be held at the principal executive offices of the Corporation in Kansas on the last Wednesday of April. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect members of a class of the Board of Directors, and they may transact such other corporate business as may properly come before the meeting. If the presiding officer at an annual meeting determines that business was not properly brought before the annual meeting, the presiding officer shall declare to the meeting that such business was not properly brought before the meeting and such business shall not be transacted.

        Section 3.    Voting and Proxies:

        In accordance with the terms of the Certificate of Incorporation and in accordance with the provisions of these Bylaws each holder of Class A Common Stock shall be entitled to one vote, in person or by proxy, per share. No proxy shall be voted after eleven months from its date unless such proxy provides for a longer period. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. Voting at meetings of stockholders need not be by written ballot

unless such is demanded at the meeting before voting begins by any stockholder. If a vote is taken by written ballot, then each such ballot shall state the name of the stockholder or proxy voting and such other information as the chairperson of the meeting deems appropriate, and if authorized by the Board of Directors, the ballot may be submitted by electronic transmission in the manner provided by law. All elections for directors shall be decided by a plurality of votes cast; all other questions shall be decided by a majority of votes cast, except as otherwise provided by these Bylaws, the Certificate of Incorporation or the laws of the State of Delaware.

        A complete list of the stockholders entitled to vote at the ensuing election, arranged in alphabetical order, with the address of each, and the number of shares held by each, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting on a reasonably accessible electronic network as permitted by law (provided that the information required to gain access to the list is provided with the notice of the meeting) or during the ordinary business hours at the principal place of business of the Corporation. If the meeting is held at a place, the list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is held solely by means of remote communication, then the list shall be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access the list shall be provided with the notice of the meeting.

        Section 4.    Quorum:

        A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at meetings of stockholders. In determining whether a quorum is present treasury shares shall not be counted. If less than a majority of the outstanding shares are represented, a majority of the shares so represented may adjourn the meeting from time to time without further notice, but until a quorum is secured no other business may be transacted. The stockholders present at a duly organized meeting may continue to transact business until an adjournment notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

        Section 5.    Notice of Meetings:

        Notice, stating the place, if any, date and time of the special or annual meeting, and the general nature of the business to be considered, shall be given in writing or by electronic transmission in the manner provided by law (including, without limitation, as set forth in Article VI, Section 11 of these Bylaws) to each stockholder entitled to vote thereat at such stockholder's address as it appears on the records of the Corporation, not less than ten nor more than sixty days before the date of the meeting. No business shall be transacted at any special meeting other than that stated in the notice of such special meeting. No business shall be transacted at any annual meeting other than that stated in the notice of such annual meeting or brought before the annual meeting by or at the direction of the Board. A stockholder proposal of business to be considered at an annual meeting will be included in the notice of such annual meeting and considered by the stockholders thereat if: (a) such proposal is delivered, in writing, to the Secretary of the Corporation at the principal executive offices of the Corporation not less than 120 days in advance of the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting has been changed by more than 30 days from the date of the previous year's annual meeting, delivery of such proposal by the stockholder, to be timely, must be so delivered not earlier than the close of business on the later of: (i) the 120th day prior to such meeting, or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made, (b) such proposal is a proper matter for stockholder action and (c) the stockholder complies with all requirements of applicable law, including without limitation, the Securities and Exchange Act of 1934, as amended.

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ARTICLE III. DIRECTORS

        Section 1.    Number, Election and Terms:

        The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than seven nor more than 15 persons. Subject to any rights of holders of Preferred Stock to elect directors under specified circumstances, the exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The initial Board of Directors elected following the filing of this Certificate of Incorporation shall consist of four Class I directors, four Class II directors and two Class III directors. Class I directors shall be elected initially for a one-year term, Class II directors initially for a two-year term and Class III directors initially for a three-year term. At each succeeding annual meeting of stockholders beginning in 1999, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. Directors need not be stockholders.

        Section 2.    Resignations:

        Any director, member of a committee or other officer may resign at any time upon notice given in writing or by electronic transmission, and such resignation shall take effect at the time of its receipt by the Chief Executive Officer or Secretary or at such other time as may be specified therein. The acceptance of a resignation shall not be necessary to make it effective.

        Section 3.    Newly Created Directorships and Vacancies:

        Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall, unless the Board of Directors otherwise determine, be filled by a majority vote of the directors then in office even if less than a quorum remain on the Board of Directors, or if all of the directors shall have been removed, by stockholders with a majority of the outstanding shares of stock, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which they have been elected expires. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

        If the office of any member of a committee or other officer becomes vacant, the directors in office, by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen.

        Subject to the rights of holders of Preferred Stock to elect directors under specified circumstances, directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the then outstanding shares of stock entitled to vote generally in the election of directors.

        If the holders of any series of Preferred Stock then outstanding are entitled to elect one or more directors, these provisions shall not apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that series and the rights of the holders

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of such shares shall be as set out in the Certificate of Designations, Preferences and Rights for such shares.

        Section 4.    Powers:

        The Board of Directors shall exercise all the powers of the Corporation except such as are by law, or by the Certificate of Incorporation of the Corporation or by these Bylaws conferred upon or reserved to the stockholders.

        Section 5.    Election of Committee Members:

        At each annual meeting or at any regular meeting of the Board of Directors, the directors may, by resolution or resolutions passed by a majority of the whole Board, designate directors to serve as members of the executive committee, the compensation committee, the finance committee, the nominating and corporate governance committee, and the audit committee until the next annual meeting of the Board of Directors or until their successors shall be duly elected and qualified or their earlier resignation or removal. At any regular or special meeting of the Board of Directors, the directors may elect additional advisors for these committees. Such advisors may or may not be members of the Board of Directors and shall serve until the next annual meeting of the Board of Directors or for the period of time designated by the Board. The Board of Directors may from time to time provide for such other committees as may be deemed necessary and assign to such committees such authority and duties as are appropriate and allowed by Delaware law.

        Section 6.    Meetings:

        The directors may hold their annual meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the annual meeting of the stockholders; or the time and place of such meeting may be fixed by resolution of the directors.

        Annual meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors.

        Special meetings of the Board of Directors may be called by the Chief Executive Officer at any time or by the Secretary on the written request of any two directors upon at least twelve hours personal notice to each director. Notice of the time, date and place of such meeting shall be given, orally, in writing or by electronic transmission (including electronic mail), by the person or persons calling the meeting. Such special meetings shall be held at such place or places as may be determined by the Chief Executive Officer or the directors calling the meeting, and shall be stated in the notice of the call of the meeting.

        Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

        Section 7.    Quorum:

        A majority of the directors shall constitute a quorum for the transaction of business. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned.

        Section 8.    Compensation:

        Directors shall not receive any stated salary for their services as directors or as members of committees, except that by resolution of the Board of Directors, retainer fees, meeting fees, expenses of

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attendance at meetings and other benefits and payments may be authorized. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefore.

        Section 9.    Action Without Meeting:

        Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee, respectively. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

        Section 10.    Amendment, Repeal and Adoption:

        Notwithstanding anything contained in these Bylaws to the contrary the shareholders may only amend or repeal, or adopt any provision inconsistent with this Article III, with the affirmative vote of the holders of at least 80% of the shares of the Corporation entitled to vote generally in the election of directors.

ARTICLE IV. STANDING COMMITTEES

        Section 1.    Executive Committee:

        The executive committee of the Board of Directors shall consist of the Chairman of the Board, the president, and not less than three nor more than eight members elected by the directors from their own number. The chairman of this committee shall be appointed by the Chairman of the Board. The executive committee in the interim between meetings of the Board of Directors shall exercise all of the powers of the Board of Directors.

        Section 2.    Compensation Committee:

        The compensation committee shall consist of not less than two nor more than eight members elected by the directors from among their own number. The chairman of this committee shall be appointed by the Chairman of the Board. The compensation committee shall prescribe the compensation of all senior executive officers of the Company, the five next most highly compensated officers and the senior portfolio managers and administer all of the Corporations benefit and stock option plans. The compensation of all other officers shall be determined by the Chief Executive Officer.

        Section 3.    Audit Committee:

        The audit committee shall consist of not less than three nor more than eight members elected by the directors from among their own number. The chairman of this committee shall be elected by the full Board of Directors, or if the chairman is not so elected by the full Board of Directors or if the chairman elected by the full Board of Directors is not present at a particular meeting, the members of the audit committee may designate a chairman by majority vote of the committee membership in attendance. The audit committee shall recommend to the Board the firm to be employed by the Corporation as its external auditor; shall consult with the persons chosen to be the external auditors with regard to the plan of audit; shall review the fees of the external auditors for audit and non-audit services; shall review, in consultation with the external auditors, their report of audit, or proposed report of audit, and the accompanying management letter, if any; shall review with management and the external auditor before publication or issuance, the annual financial statements, and any annual reports to be filed with the Securities and Exchange Commission; shall consult with the external auditors (periodically, as appropriate, out of the presence of management) with regard to the adequacy of the internal auditing and general accounting functions of the Corporation; shall consult with the

5

internal auditors (periodically, as appropriate, out of the presence of management) with regard to cooperation of corporate divisions with the internal auditing and accounting departments and the adequacy of corporate systems of accounting and controls; shall serve as a communications liaison between the Board of Directors, the external auditors, and the internal auditors; and shall perform such other duties not inconsistent with the spirit and purpose of the committee as are delegated to it by the Board of Directors.

        Section 4.    Finance Committee:

        The Board of Directors may elect from its membership a finance committee of not less than three nor more than eight members elected by the directors from among their own number. The chairman of this committee shall be appointed by the Chairman of the Board. The finance committee shall have special charge and control of all financial affairs of the Company. The principal functions and responsibilities of the finance committee are to: review and approve investment and loan policies; review and approve asset-liability management policies; monitor corporate financial results; recommend corporate financial actions, including dividends and capital financing. The finance committee shall make recommendations to the Board of Directors with respect to the terms and provisions of any issue of securities of the Company, including equity and debt securities, and shall serve as the pricing committee in connection with any such financing and shall authorize the execution of such underwriting agreements as may be necessary or desirable to effectuate such issue.

        Section 5.    Nominating and Corporate Governance Committee:

        The nominating and corporate governance committee shall consist of all non-employee (outside) directors of the Company. The chairman of this committee shall be appointed by the Chairman of the Board.    The nominating and corporate governance committee shall meet periodically to review the qualifications of potential Board candidates from whatever source received; shall report its findings to the Board and propose nominations for Board membership for approval by the Board and for submission to stockholders for approval; and shall review and make recommendations to the Board, where appropriate, concerning the size of the Board and the frequency of meetings. The nominating and corporate governance committee shall have and exercise all such power as it shall deem necessary for the performance of its duties.

        Section 6.    Meetings:

        Meetings of the executive committee, the finance committee, the nominating and corporate governance committee, the compensation committee, and the audit committee shall be held on call of the Chairman of the Board or any committee member. Meetings may be held informally, by telephone, or by mail, and it is not necessary that members of the committee be physically present together in order for a meeting to be held. The greater of two or one-third of the members of a committee shall constitute a quorum.

ARTICLE V. OFFICERS

        Section 1.    Officers:

        The officers of the Corporation shall be a President, such Vice-Presidents as shall from time to time be deemed necessary, a Secretary, a Treasurer, and such other officers as may be deemed appropriate. A Chairman of the Board and a Vice Chairman of the Board may also be elected. All such officers shall be elected by the Board of Directors and shall hold office until their successors are elected and qualified. None of the officers of the Corporation need be directors. More than one office may be held by the same person.

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        Section 2.    Chairman of the Board:

        In the event that there is a Chairman of the Board, he shall preside at all meetings of the Board of Directors and stockholders. He shall have and perform such duties as usually devolve upon his office and such other duties as are prescribed by the Bylaws and by the Board of Directors.

        Section 3.    Vice Chairman of the Board:

        The Vice Chairman of the Board shall in the absence or inability to act of the Chairman of the Board preside at all meetings of the Board of Directors and stockholders, and exercise and discharge the responsibilities and duties of the Chairman of the Board. He shall have and perform such other duties as may be prescribed or assigned by the Board of Directors or the Chairman of the Board.

        Section 4.    President:

        The President shall perform such duties as usually devolve upon his office and such other duties as are prescribed by these Bylaws, by the Board of Directors, and by the Chairman. In the absence or inability to act of the Chairman of the Board and the Vice Chairman of the Board or if the offices of Chairman of the Board and Vice Chairman of the Board shall be vacant, the President shall have and exercise all the powers and duties of such office. If the Chairman of the Board, Vice Chairman of the Board or the President is absent from any meeting of the Board of Directors or stockholders where either was to have presided, the other directors shall elect one of their number to preside at the meeting.

        Section 5.    Executive Vice President:

        The Executive Vice President shall be the chief operating officer of the Corporation, unless the Board elects a separate Chief Operating Officer, and shall perform such duties as may be assigned to him from time to time by these Bylaws, by the Board of Directors, and by the President.

        Section 6.    Vice Presidents:

        The Vice Presidents shall perform such duties as may be assigned to them from time to time by these Bylaws, the Board of Directors, the Chairman of the Board, or the President.

        Section 7.    Treasurer:

        The Treasurer shall have custody of all funds of the Corporation. The Treasurer shall have and perform such duties as are incident to the office of Treasurer and such other duties as may from time to time be assigned to him by the Board of Directors, the Chairman, or the President.

        Section 8.    Secretary:

        The Secretary shall keep minutes of all meetings of the stockholders and the Board of Directors unless otherwise directed by those bodies. The Secretary shall have custody of the corporate seal, and the Secretary or any Assistant Secretary shall affix the same to all instruments or papers requiring the seal of the Corporation. The Secretary, or in his absence, any Assistant Secretary, shall attend to the giving and serving of all notices of the Corporation. The Secretary shall perform all the duties incident to the office of Secretary, subject to the control of the Board of Directors, and shall do and perform such other duties as may from time to time be assigned by the Board of Directors, the Chairman, or the President.

        Section 9.    Other Officers and Agents:

        The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.

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        Section 10.    Chief Executive Officer:

        The Chairman of the Board shall serve as the chief executive officer of the Corporation. Subject to the control of the Board of Directors, the Chairman of the Board shall be vested with authority to act for the Corporation, and shall have general and active management of the business of the Corporation and such other general powers and duties of supervision and management as usually devolve upon such office and as may be prescribed from time to time by the Board of Directors.

        Section 11.    Election and Term:

        The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting held after each annual meeting of stockholders. Each officer shall hold office at the pleasure of the Board of Directors until his death, resignation, retirement, or removal. Any officer may be elected by the Board of Directors at other than annual meetings to serve until the first meeting of the Board of Directors held after the annual meeting of stockholders next following his election.

ARTICLE VI. MISCELLANEOUS

        Section 1.    Certificates of Stock:

        A certificate of stock or certificates of stock, signed by the Chairman or Vice Chairman of the Board, the President or Vice-President, the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, shall be adopted by the Board of Directors and shall be issued to each stockholder certifying the number of shares owned by such stockholder in the Corporation. Any or all of the signatures may be facsimiles.

        Section 2.    Lost Certificates:

        The Board of Directors may order a new certificate or certificates of stock to be issued in the place of any certificate or certificates of the Corporation alleged to have been lost or destroyed, but in every such case the owner of the lost certificate or certificates shall first cause to be given to the Corporation or its authorized agent a bond in such sum as said Board may direct, as indemnity against any loss that the Corporation may incur by reason of such replacement of the lost certificate or certificates; but the Board of Directors may, at their discretion refuse to replace any lost certificate of stock save upon the order of some court having jurisdiction in such matter and may cause such legend to be inscribed on the new certificate or certificates as in the Board's discretion may be necessary to prevent loss to the Corporation.

        Section 3.    Transfer of Shares:

        The shares of stock of the Corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Corporation by the delivery thereof to the person in charge of the stock and transfer books, and ledgers, or to the authorized agent of the Corporation, by whom they shall be canceled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the stock and transfer books.

        The Corporation may decline to register on its stock books transfers of stock standing in the name of infants, unless (a) the law of the state of which the infant is a resident relieves the Corporation of all liability therefore in case the infant or anyone acting for him thereafter elects to rescind such transfer, or (b) a court having jurisdiction of the infant and the subject matter enters a valid decree authorizing such transfer.

        Section 4.    Fractional Shares:

        No fractional part of a share of stock shall ever be issued by this Corporation.

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        Section 5.    Stockholders Record Date:

        In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

        Section 6.    Dividends:

        Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefore at any regular or special meeting, declare dividends upon the capital stock of the Corporation as and when they deem expedient. Before declaring any dividend there may be set apart out of any fund of the Corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper for working capital or to serve as a fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conducive to the interests of the Corporation. The Corporation may decline to pay cash dividends to infant stockholders except where full and valid release may be granted by the infant or under a decree of court of competent jurisdiction.

        Section 7.    Seal:

        The corporate seal shall consist of two concentric circles between which shall be "WADDELL & REED FINANCIAL, INC." with a representation of the Corporate Logogram in the center.

        Section 8.    Fiscal Year:

        The fiscal year of the corporation shall be the calendar year or such other period as shall be determined by resolution of the Board of Directors.

        Section 9.    Checks:

        All checks, drafts or other orders for the payment off money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agent or agents of the Corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors.

        Section 10.    Form of Records: Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on or by means of, or be in the form of, diskettes or any other information storage device or method, provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records pursuant to any provision of the Delaware General Corporation Law.

        Section 11.    Notice: (a) Except as otherwise specifically provided in these Bylaws (including, without limitation, the provisions of Article VI, Section 11(b) below) or required by law, all notices required to be given pursuant to these Bylaws shall be in writing and may in every instance be effectively given by hand delivery (including use of a delivery service), by depositing such notice in the United States mail, postage prepaid, or by sending such notice by prepaid telegram, telex, overnight express courier, mailgram or facsimile. Any such notice shall be addressed to the person to whom notice is to be given at such person's address as it appears on the records of the Corporation. The notice shall be deemed given (i) in the case of hand delivery, when received by the person to whom

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notice is to be given or by any person accepting such notice on behalf of such person, (ii) in the case of delivery by mail, upon deposit in the mail, (iii) in the case of delivery by overnight express courier, when dispatched, and (iv) in the case of delivery via telegram, telex, mailgram or facsimile, when dispatched.

        (b)    Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the Delaware General Corporation Law, the Certificate of Incorporation, or these Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (i) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given pursuant to this Article VI, Section 11(b) shall be deemed given: (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder.

        (c)    An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other agent of the Corporation that the notice has been given in writing or by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

        Section 12.    Waiver of Notice: Whenever notice is required to be given under any provision of these Bylaws, a written waiver of notice, signed by the person entitled to notice, or waiver by electronic transmission by such person, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any waiver of notice.

ARTICLE VII. AMENDMENTS

        Except as otherwise provided in Article III of these Bylaws, these Bylaws may be altered or repealed and Bylaws may be adopted at any annual meeting of the stockholders, or at any special meeting thereof if notice of the proposed alteration or repeal, or Bylaw or Bylaws to be adopted, is contained in the notice of such special meeting, by the affirmative vote of a majority of the stock issued and outstanding and entitled to vote thereat, or without any stockholder action by the affirmative vote of a majority of the Board of Directors, at any annual meeting of the Board of Directors, or at a special meeting of the Board of Directors, if notice of the proposed alteration or repeal, or Bylaw or Bylaws to be adopted, is contained in the notice of such special meeting.

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Exhibit 3.2

ARTICLE I. OFFICES
ARTICLE II. MEETINGS OF STOCKHOLDERS
ARTICLE III. DIRECTORS
ARTICLE IV. STANDING COMMITTEES
ARTICLE V. OFFICERS
ARTICLE VI. MISCELLANEOUS
ARTICLE VII. AMENDMENTS

EX-10.4

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Exhibit 10.4

FIRST AMENDMENT TO THE
WADDELL & REED FINANCIAL, INC.
1998 STOCK INCENTIVE PLAN

        Waddell & Reed Financial, Inc., a Delaware corporation (the "Company") previously established the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan (the "Plan"). Pursuant to Section 11 of the Plan, the board of directors (the "Board") of the Company reserves the right to amend the Plan. Pursuant to the powers reserved in the Plan, the Plan is hereby amended by action of the Board, effective December 12, 2002 (the "Effective Date").

1.

Section 1(i) of the Plan is amended in its entirety to read as follows:

i.    "Director Stock Option" means any option to purchase shares of Stock granted to an Outside Director.

2.

The following definitions are hereby added to Section 1 of the Plan to read as follows:

"Director Restricted Stock" means any shares of Restricted Stock granted to an Outside Director.

"Outside Director" means any director of the Company who is not an officer or employee of the Company, any Subsidiary or any Affiliate.

3.

Section 2 of the Plan is amended by (a) adding the following parenthetical at the end of each of clauses (ii) and (iii) of the third paragraph of Section 2: "(other than with respect to Director Stock Options and Director Restricted Stock)"; and (b) adding "and Director Restricted Stock" immediately after "other than Director Stock Options" in clause (iv) of the third paragraph of Section 2.

4.

Section 4(b) of the Plan is amended in its entirety to read as follows:

        (b)  Each Outside Director is eligible to receive awards of Director Stock Options and/or Director Restricted Stock pursuant to Section 6 of the Plan.

5.

Section 6 of the Plan is amended in its entirety to read as follows:

SECTION 6.    Director Stock Options and Director Restricted Stock.

        (a)  Awards.    Except to the extent otherwise provided in Section 6, all terms and conditions of Director Stock Options or Director Restricted Stock shall be established by the Board in its sole discretion (including, without limitation, the nontransferability and the time or times within which such Restricted Stock may be subject to forfeiture (subject to Section 13 and paragraph (e) of this section)). Director Stock Options awarded under the Plan shall be Non-Qualified Stock Options. Director Restricted Stock shall be subject to the provisions of Sections 8(b) and 8(c). Director Stock Options and Director Restricted Stock under the Plan shall be evidenced by a written agreement in such form as the Committee shall from time to time approve, in conformity with the terms and conditions the Board has specified with respect to such awards and the terms of Section 6 and the Plan.

        (1)  Formula-based Director Stock Options or Director Restricted Stock.    For each calendar year, either (i) 4,500 Director Stock Options or (ii) an award of 1,500 shares of Restricted Stock shall be automatically granted to each Outside Director on the first day of each calendar year on which Stock is publicly traded on the New York Stock Exchange. The determination as to whether an award is made pursuant to clause (i) or (ii) of this Section 6(a)(1) shall be made in the sole discretion of the Board.

        The option price per share of Stock purchasable under a Director Stock Option granted hereunder shall be 100% of the Fair Market Value of the Stock on the date of the grant of the Director Stock Option. Except as provided in Section 13, (a) said Director Stock Options shall become exercisable in full six months from the date of the grant of the option and shall remain exercisable for a term of ten years and two days from the date such Director Stock

Option is granted, and (b) the restrictions upon said Director Restricted Stock shall lapse in one-third increments on each of the second, third and fourth anniversaries of the Grant Date.

        (2)  Non-Formula Based Director Stock Options or Director Restricted Stock.    In its sole discretion, the Board may, from time to time, award Director Stock Options and/or Director Restricted Stock hereunder on a non-formula basis to all or such individual Outside Directors as it shall select. Such Director Stock Options or Director Restricted Stock may be awarded at such times and for such number of shares as the Board in its sole discretion determines. The price of such Director Stock Options may be fixed by the Board at a discount not to exceed 25% of the Fair Market Value of the Stock on the date of grant or may be the Fair Market Value of the Stock on the grant date. Such Director Stock Options shall become first exercisable and have an option term as determined by the Board in its sole discretion; provided, however, that except as described in Section 13 and in paragraph (e) of this section, no such Director Stock Option shall be first exercisable until six months from the date of grant. Except as described in Section 13 and in paragraph (e) of this section, the restrictions upon such Director Restricted Stock shall lapse in one-third increments on each of the second, third and fourth anniversaries of the Grant Date.

        (b)  Method of Exercise.    Any Director Stock Option granted pursuant to the Plan may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee). An optionee shall have rights to dividends or other stockholder rights with respect to shares subject to the option when the optionee has given written notice of exercise and has paid in full for such shares.

        (c)  Transferability.    No Director Stock Option shall be transferable by the optionee other than by will or by the laws of descent and distribution, and all Director Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes, in its sole discretion, that such transferability (i) does not result in accelerated taxation, and (ii) is otherwise appropriate and desirable, taking into account any factors considered relevant by the Committee, including, without limitation, any state or federal securities laws applicable to transferable options.

        (e)  Termination of Service.    Upon an optionee's termination of status as an Outside Director for any reason, any Director Stock Options held by such optionee shall become immediately exercisable and may thereafter be exercised during the period ending on the expiration of the stated term of such Director Stock Options or the first anniversary of the optionee's death, whichever is later. Notwithstanding the foregoing sentence, if the optionee's status as an Outside Director terminates by reason of or within three months after a merger or other business combination resulting in a "Change in Control" as defined in Section 13, each Director Stock Option held by such optionee shall terminate upon the latest of (i) six months and one day after the merger or business combination, (ii) ten business days following the expiration of the period during which publication of financial results covering at least thirty days of post-merger combined operations has occurred, or (iii) the expiration of the stated term of such Director Stock Option. Upon the termination of a participant's status as an Outside Director for any reason, all restrictions, including restrictions regarding forfeiture and nontransferability, placed upon any Director Restricted Stock held by such participant shall lapse; provided, however, that the Board may, in its sole discretion, provide for the lapse of such restrictions in installments and may

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accelerate or waive such restrictions in whole or in part, before or after the participant's termination of employment, based on such factors as the Board may determine, in its sole discretion.

6.

Section 8 of the Plan is amended in its entirety to read as follows:

SECTION 8.    Restricted Stock.

        (a)  Administration.    The Committee shall determine the officers, key employees and consultants of the Company and its Subsidiaries and Affiliates to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price, if any, to be paid by the recipient of Restricted Stock, the time or times within which such awards may be subject to forfeiture and nontransferability, and all other terms and conditions of the awards (subject to Sections 8(b), (c), (d), and 13). The Committee may also condition the grant and/or vesting of Restricted Stock upon the attainment of specified performance goals, or such other criteria as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan.

        (b)  Awards.    The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award (a "Restricted Stock Award Agreement"), has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify) after the award date by executing a Restricted Stock Award Agreement and paying the price, if any, specified in the Restricted Stock Award Agreement. An account for each participant who is awarded Restricted Stock shall be opened with the Company's transfer agent or such other administrator designated by the Committee for the deposit of the shares of Restricted Stock subject to the Award, or, in the sole discretion of the Committee, each participant may be issued a stock certificate registered in the name of the participant with respect to such shares of Restricted Stock. The Committee shall specify that the certificate, if any, shall bear a legend, as provided in clause (i) below, and/or be held in custody by the Company, as provided in clause (ii) below.

          (i)  The certificate shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form:

"The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan and a Restricted Stock Award Agreement entered into between the registered owner and Waddell & Reed Financial, Inc. Copies of such plan and agreement are on file in the offices of Waddell & Reed Financial, Inc., 6300 Lamar Avenue, Overland Park, Kansas 66202."

        (ii)  The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company or the transfer agent or such other administrator designated by the Committee until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award.

        (c)  Restrictions and Conditions.    Shares of Restricted Stock awarded shall be subject to the following restrictions and conditions:

          (i)  Subject to the provisions of this Plan and the relevant Restricted Stock Award Agreement, during such period as may be set by the Committee commencing on the grant date (the "Restriction Period"), the participant shall not be permitted to sell, transfer,

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pledge or assign shares of Restricted Stock awarded under the Plan. The Committee may, in its sole discretion, provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, before or after the participant's termination of employment, based on performance and/or such other factors as the Committee may determine, in its sole discretion.

        (ii)  Except as provided in paragraph (c)(i) of this Section 8, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company, including the right to receive any dividends. Dividends paid in stock of the Company or stock received in connection with a stock split with respect to Restricted Stock shall be subject to the same restrictions as on such Restricted Stock. Certificates, if issued pursuant to Section (b) hereof, for shares of unrestricted Stock shall be delivered to the participant promptly after, and only after, the period of forfeiture shall expire without forfeiture in respect of such shares of Restricted Stock.

        (d)  Termination.    Subject to the provisions of the Restricted Stock Award Agreement and this Section 8, upon termination of employment by reason of death, Normal Retirement or Disability, the restrictions upon any Restricted Stock granted pursuant to Section 8(a) held by the participant shall immediately lapse. Upon termination of employment for any reason other than death, Normal Retirement or Disability during the Restriction Period, all shares of Restricted Stock granted pursuant to Section 8(a) still subject to restriction shall be forfeited by the participant, and the participant shall only receive the amount, if any, paid by the participant for such forfeited Restricted Stock.

7.

Except as hereby amended, the Plan shall remain in full force and effect.

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Exhibit 10.4

FIRST AMENDMENT TO THE WADDELL & REED FINANCIAL, INC. 1998 STOCK INCENTIVE PLAN

EX-10.7

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Exhibit 10.7

SECOND AMENDMENT TO THE
WADDELL & REED FINANCIAL, INC.
1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

        Waddell & Reed Financial, Inc., a Delaware corporation (the "Company") previously established the Waddell & Reed Financial, Inc. 1998 Non-Employee Director Stock Option Plan (the "Plan"). Pursuant to Section 8 of the Plan, the Board of Directors of the Company reserves the right to amend the Plan. Pursuant to the powers reserved in the Plan, the Plan is hereby amended effective December 12, 2002 (the "Effective Date").

1.    The Plan shall be renamed the "Waddell & Reed Financial, Inc. 1998 Non-Employee Director Stock Award Plan" and all references in the Plan to the "Waddell & Reed Financial, Inc. 1998 Non-Employee Director Stock Option Plan" are hereby amended to read the "Waddell & Reed Financial, Inc. Non-Employee Director Stock Award Plan."

2.    The following definitions are hereby added to Section 2.1 of the Plan to read as follows:

        "Award" means the grant of an Option or Restricted Stock to an Awardee pursuant to the terms, conditions and limitations that the Committee may establish in order to fulfill the objectives of the Plan.

        "Awardee" means a Non-Employee Director to whom an outstanding Award has been granted or, in the event of such Non-Employee Director's death prior to the expiration of an Option or the lapse of restrictions encumbering Restricted Stock, such Non-Employee Director's Beneficiary.

        "Award Notice" means a written award notice to a Non-Employee Director from the Company evidencing an Option or a Restricted Stock Award, as applicable.

        "Restricted Stock" means Shares granted to a Participant under Article 6 hereof, that is subject to certain restrictions and/or to a risk of forfeiture.

3.    Except as provided in this Second Amendment, the occurrences within the Plan of the defined term "Option" or "Options" shall be replaced with the defined term "Award" or "Awards," the occurrences within the Plan of the defined term "Stock Option Award Notice" shall be replaced with the defined term "Award Notice," and the occurrences within the Plan of the defined term "Optionee" shall be replaced with the defined term "Awardee;" provided, however, that the definitions of "Option" and "Optionee" in Section 2.1 of the Plan shall remain unchanged.

4.    Article 6 of the Plan is amended in its entirety to read as follows:

ARTICLE 6
Elective Awards

        Each Non-Employee Director shall be granted Awards subject to the following terms and conditions:

                Section 6.1    Election to Receive An Award.    At any time, but only one time, during the calendar year immediately following the filing of a Primary Election Form under Article 5, a Participant shall have the right to convert into an Award pursuant to this Article 6 the then-current balance (as of the date of such election to receive an Award) in his or her Interest Account for the calendar year to which the Primary Election Form relates. For example, if a Primary Election Form is filed in December 1998 to defer Annual Compensation to be earned in 1999, the director may elect at any time in 1999 to convert such deferred amount to an Award. To make such election, the Participant must file with the Plan Administrator a written irrevocable Secondary Election Form to receive an Award as of the date of the election (the "Award Grant Date").

        Effective January 1, 2003, a Participant shall have the right to convert the then-current balance (as of the date of such election to receive an Award) in his or her Interest Account for the 2003 calendar year into either Options or Restricted Stock. Notwithstanding the foregoing provisions of this Section 6.1, effective January 1, 2004, a Participant will only be entitled to convert the then-current balance (as of the date of such election to receive an Award) in his or her Interest Account for the calendar year to which the Primary Election Form relates into Restricted Stock and/or Options as determined by the Committee.

        The exercise price per Share, if any, under each Award granted pursuant to this Article 6 shall be indicated in the Award Notice. The exercise price per Share under any Option granted pursuant to this Article 6 shall, at the election of the Optionee as indicated on the Secondary Election Form, be either 100% of the Fair Market Value per Share on the Award Grant Date or a lesser percentage (but not less than 75%) of the Fair Market Value per Share on the Award Grant Date, such lesser percentage to be determined by the Committee from time to time. Such Secondary Election Form shall indicate the percentage of such Options to be granted at each Exercise Price, which choice may affect the number of Options to be received pursuant to Section 6.2.

        Section 6.2    Number of Shares Subject to Awards.

        (a)  Number of Options.    The number of Shares subject to an Option granted pursuant to this Article 6 shall be the number of whole Shares equal to A divided by B, where:

A=

the dollar amount which the Non-Employee Director has elected to convert to Options pursuant to Section 6.1; and



B=

the per share value of an Option on the Award Grant Date, as determined by the Committee using an option valuation model selected by the Committee in its discretion (such value to be expressed as a percentage of the Fair Market Value per Share on the Award Grant Date).

        In determining the number of Shares subject to an Option, (i) the Committee may designate the assumptions to be used in the selected option valuation model, and (ii) any fraction of a Share will be rounded down to the next whole number of Shares.

        (b)  Number of Shares of Restricted Stock.    The number of Shares subject to an Award of Restricted Stock granted pursuant to this Article 6 shall be the number of whole Shares equal to A divided by B, where:

A=

the dollar amount which the Non-Employee Director has elected to convert to Restricted Stock pursuant to Section 6.1; and



B=

the Fair Market Value of a Share on the Award Grant Date.

        In determining the number of Shares subject to an Award of Restricted Stock, any fraction of a Share will be rounded down to the next whole number of Shares.

        Section 6.3    Term of Awards.

        (a)  Exercise of Options.    All Options shall be fully nonforfeitable, but shall be exercisable only at the time provided in this Section 6.3 and Section 6.4 below. Each Option shall be first exercisable, cumulatively, as to 10% commencing on each of the first through tenth anniversaries of the Award Grant Date. An Optionee's death, Disability, retirement or other termination of directorship or failure to be reelected as a director shall not shorten the term of any outstanding Option. In no event shall the period of time over which the Option may be exercised exceed eleven years from the Award Grant Date. An Option, or portion thereof, may be exercised in

2

whole or in part only with respect to whole Shares. Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). Payment in full or in part may also be made in the form of unrestricted Shares already owned by the Optionee (based, in each case, on the Fair Market Value of the Shares on the date the Option is exercised, as determined by the Committee). If payment of the exercise price of an Option is made in whole or in part in the form of Shares that are restricted, the Shares received upon the exercise of such Option shall be restricted in accordance with the original term of the restricted stock award in question, except that such restrictions shall apply to only the number of Shares equal to the number of restricted stock surrendered upon the exercise of such Option. No Shares shall be issued until full payment therefor has been made. An Optionee shall have rights to dividends or other rights of a stockholder with respect to Shares subject to the Option when the Optionee has given written notice of exercise and has paid in full for such Shares.

        (b)  Terms of Restricted Stock Awards.

          (i)  Grant and Restrictions.    Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee may determine at the Award Grant Date or thereafter. Except to the extent restricted under the terms of the Plan and any Award Notice relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a stockholder, including the right to vote the Restricted Stock and the right to receive cash dividends thereon. During the restricted period applicable to the Restricted Stock, subject to Section 6.6 below, the Restricted Stock may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the Participant.

        (ii)  Forfeiture.    Except as otherwise determined by the Committee, upon termination of service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company.

        (iii)  Book-Entry Accounts; Certificates for Stock.    An account for each Participant who is awarded Restricted Stock shall be opened with the Company's transfer agent or such other administrator designated by the Committee for the deposit of the shares of Restricted Stock subject to the Award, or, in the sole discretion of the Committee, each Participant may be issued a stock certificate registered in the name of the Participant with respect to such shares of Restricted Stock. The Committee shall specify that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company or a transfer agent retain physical possession of the certificates, and that the Participant deliver a stock power to the Company or transfer agent, as applicable, endorsed in blank, relating to the Restricted Stock. Such legend shall be substantially in the following form:

"The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Waddell & Reed Financial, Inc. 1998 Non-Employee Director Stock Award Plan and a Restricted Stock Award Agreement entered into between the registered owner and Waddell & Reed Financial, Inc. Copies of the Plan and Agreement are on file in the offices of Waddell & Reed Financial, Inc., 6300 Lamar Avenue, Overland Park, Kansas 66202."

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        (iv)  Dividends and Splits.    Unless otherwise determined by the Committee, Shares distributed in connection with a stock split or stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Shares or other property has been distributed.

                Section 6.4    Accelerated Exercisability and Lapse of Restrictions.    Notwithstanding the normal exercisability schedule and forfeiture provisions set forth in Sections 6.3(a) and 6.3(b)(ii) hereof, any and all outstanding Options shall become immediately exercisable and restrictions on any Award of Restricted Stock shall lapse and the shares subject to such Award shall become nonforfeitable upon the first to occur of (a) the death of the Awardee, (b) the Disability of the Awardee, (c) the occurrence of a Change in Control, (d) the unanimous determination by the Committee that a particular Option, Options, or Restricted Stock Award, in whole or in part, shall become fully exercisable and nonforfeitable, or (e) as otherwise provided by the Committee by rule or regulation or in any Award agreement, or as determined in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock shall be waived in whole or in part in the event of terminations resulting from specified causes. Upon acceleration, an Option will remain exercisable for the remainder of its original term.

                Section 6.5    Award Notice.    Each Award granted under the Plan shall be evidenced by an Award Notice which shall be executed by an authorized officer of the Company. Such Award Notice shall contain provisions regarding (a) the number of Shares subject to the Award, (b) the exercise price per Share, if any, of the Award and the means of payment therefor, (c) the term of the Award, and (d) such other terms and conditions not inconsistent with the Plan as may be determined from time to time by the Committee. The Committee, in its discretion, may include in the grant of any Option under the Plan, a "stock option restoration program" ("SORP") provision. Such provision shall provide, without limitation, that, if payment on exercise of an Option is made in the form of Shares, and the exercise occurs on the Annual SORP Exercise Date, an additional Option ("SORP Option") will automatically be granted to the Optionee as of the date of exercise, having an exercise price equal to 100% of the Fair Market Value of the Shares on the date of exercise of the prior Option, having a term equal to that of the original option period for the exercised Option giving rise to the grant of the SORP option, not to exceed a maximum term of 10 years and two days from such date of exercise (subject to any forfeiture provision or shorter limitation on exercise required under the Plan), having an initial exercise date no earlier than six months after the date of such exercise, and covering a number of shares equal to the number of Shares used to pay the exercise price of the Stock Option, plus the number of shares (if any) withheld to cover income taxes and employment taxes (plus any selling commissions) on the exercise. "Annual SORP Exercise Date" shall mean August 1, or if August 1 is not a trading day on the New York Stock Exchange, "Annual SORP Exercise Date" shall mean the next succeeding trading date. Notwithstanding the foregoing, the Committee may delay the Annual SORP Exercise Date to the extent it determines necessary to comply with regulatory or administrative requirements.

                Section 6.6    Transferability of Awards.    No Award shall be assignable or transferable by the Awardee; provided, however, that an Award Notice may provide that Options are transferable by will or the laws of descent and distribution; and provided, further, that the Committee may (but need not) permit other transfers of an Award where the Committee concludes that such transferability (a) does not result in accelerated taxation, and (b) is otherwise appropriate and desirable, taking into account any state or federal securities laws applicable to transferable Awards and the purposes of the Plan.

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5.

Article 7 of the Plan is amended in its entirety to read as follows:

ARTICLE 7
Shares Subject to the Plan

                Section 7.1    Shares Subject to the Plan.    Subject to adjustment as provided in Article 9, the total number of Shares reserved and available for delivery in connection with Awards under the Plan shall not exceed 1,200,000 Shares. Shares delivered under the Plan may be newly issued Shares or previously issued and reacquired Shares, and there are hereby reserved for issuance under the Plan 1,200,000 Shares. To the extent that Shares subject to an outstanding Award are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such Award or by reason of the delivery of Shares to pay all or a portion of the exercise price of an Award, then such Shares shall again be available under the Plan.

        In the case of Options exercised with payment in Shares under the "stock option restoration program", the number of Shares transferred by the Optionee in payment of the exercise price plus the number of shares withheld to cover income and employment taxes (plus any selling commissions) on such exercise will be netted against the number of Shares issued to the Optionee in the exercise, and only the net number shall be charged against the 1,200,000 limitation set forth above.

6.

Article 9 of the Plan is amended in its entirety to read as follows:

ARTICLE 9
Adjustment Provisions

                Section 9.1    Change in Corporate Structure Affecting Shares.    If the Company shall at any time change the number of issued Shares without new consideration to the Company (such as by stock dividend, stock split, recapitalization, reorganization, exchange of shares, liquidation, combination or other change in corporate structure affecting the Shares) or make a distribution of cash or property which has a substantial impact on the value of issued Shares, the total number of shares reserved for issuance under the Plan shall be appropriately adjusted and the number of Shares covered by each outstanding Award and the exercise price per Share under each outstanding Award and the number of shares underlying Awards shall be adjusted so that the aggregate consideration payable to the Company and the value of each such Award shall not be changed. Adjustments pursuant to this Section 9.1 shall not be made to the extent the Plan as been amended to reflect any adjustment contemplated in this Section 9.1.

                Section 9.2    Certain Reorganizations.    Notwithstanding any other provision of the Plan, and without affecting the number of Shares reserved or available hereunder, the Committee shall authorize the issuance, continuation or assumption of outstanding Awards or provide for other equitable adjustments after changes in the Shares resulting from any merger, consolidation, sale of assets, acquisition of property or stock, recapitalization, reorganization or similar occurrence in which the Company is the continuing or surviving corporation, upon such terms and conditions as it may deem necessary to preserve Awardees' rights under the Plan.

                Section 9.3    Acquisitions.    In the case of any sale of assets, merger, consolidation or combination of the Company with or into another corporation other than a transaction in which the Company is the continuing or surviving corporation and which does not result in the outstanding Shares being converted into or exchanged for different securities, cash or other property, or any combination thereof (an "Acquisition"), any Awardee who holds an outstanding Award shall have the right (subject to the provisions of the Plan and any limitation applicable to

5

the Award) thereafter and during the term of the Award, to receive upon exercise or vesting, in the case of Restricted Stock, thereof the Acquisition Consideration (as defined below) receivable upon the Acquisition by an Awardee of the number of Shares which would have been obtained upon exercise of the Option or portion thereof or vesting of all or a portion of the Restricted Stock Award in question, as the case may be, immediately prior to the Acquisition. The term "Acquisition Consideration" shall mean the kind and amount of shares of the surviving or new corporation, cash, securities, evidence of indebtedness, other property or any combination thereof receivable in respect of one Share of the Company upon consummation of an Acquisition.

7.

Except as hereby amended, the Plan shall remain in full force and effect.

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Exhibit 10.7

EX-10.9

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Exhibit 10.9

FIRST AMENDMENT TO THE
WADDELL & REED FINANCIAL, INC.
1998 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN

        Waddell & Reed Financial, Inc., a Delaware corporation (the "Company") previously established the Waddell & Reed Financial, Inc. 1998 Executive Deferred Compensation Stock Option Plan (the "Plan"). Pursuant to Article 8 of the Plan, the Board of Directors of the Company reserves the right to amend the Plan. Pursuant to the powers reserved in the Plan, the Plan is hereby amended effective December 12, 2002 (the "Effective Date").

1.    The Plan shall be renamed the "Waddell & Reed Financial, Inc. 1998 Executive Deferred Compensation Stock Award Plan" and all references in the Plan to the "Waddell & Reed Financial, Inc. 1998 Executive Deferred Compensation Stock Option Plan" should be amended to read the "Waddell & Reed Financial, Inc. 1998 Executive Deferred Compensation Stock Award Plan."

2.    The following definitions are hereby added to Section 2.1 of the Plan to read as follows:

        "Award" means the grant of an Option or Restricted Stock to an Awardee pursuant to the terms, conditions and limitations that the Committee may establish in order to fulfill the objectives of the Plan.

        "Awardee" means an Eligible Executive to whom an outstanding Award has been granted or, in the event of such Eligible Executive's death prior to the expiration of an Option or the lapse of restrictions encumbering Restricted Stock, such Eligible Executive's Beneficiary.

        "Award Notice" means a written award notice to an Eligible Executive from the Company evidencing an Option or a Restricted Stock Award, as applicable.

        "Restricted Stock" means Shares granted to a Participant under Article 6 hereof, that are subject to certain restrictions and/or to a risk of forfeiture.

3.    Except as provided in this First Amendment, the occurrences within the Plan of the defined term "Option" or "Options" shall be replaced with the defined term "Award" or "Awards," the occurrences within the Plan of the defined term "Stock Option Award Notice" shall be replaced with the defined term "Award Notice," and the occurrences within the Plan of the defined term "Optionee" shall be replaced with the defined term "Awardee;" provided, however, that the definitions of "Option" and "Optionee" in Section 2.1 of the Plan shall remain unchanged; and further provided that Section 4.3 of the Plan shall remain unchanged.

4.    Article 6 of the Plan is amended in its entirety to read as follows:

        ARTICLE 6.    Awards.    Each Eligible Executive shall be granted Awards subject to the following terms and conditions:

Section 6.1    Election to Receive Awards.

                (a)    Awards Converted from Deferred Salary.    During the same calendar quarter with respect to which a Participant deferred Salary into the Plan, the Participant shall have the right to convert some or all of his or her Interest Account for Salary for such quarter or the previous quarter(s) of that same calendar year into Awards pursuant to this Article 6. To make such election, the Participant must file with the Plan Administrator a written irrevocable Secondary Election Form for Salary to receive Awards as of the date of the filing of such Secondary Election Form (the "Award Grant Date").

        Effective January 1, 2003, a Participant shall have the right to convert some or all of his or her Interest Account for Salary for the first quarter of calendar year 2003 into either Options or Restricted Stock. Notwithstanding the foregoing provisions of this Section 6.1(a), effective April 1,

2003, a Participant will only be entitled to convert some or all of his or her Interest Account for Salary for such quarter or the previous quarter(s) of that same calendar year into Restricted Stock.

        (b)  Awards Converted from Deferred Bonus. At any time, but only one time, during the twelve-month period following the end of a calendar year with respect to which a Participant deferred the Annual Bonus into the Plan, the Participant shall have the right to convert some or all of his or her Interest Account for Bonus for such previous year into Awards pursuant to this Article 6. To make such election, the Participant must file with the Plan Administrator a written irrevocable Secondary Election Form for Bonus to receive Awards as of the date of the filing of such Secondary Election Form (the "Award Grant Date").

        Effective January 1, 2003, a Participant shall have the right to convert some or all of his or her Interest Account for Bonus for the previous year into either Options or Restricted Stock. Notwithstanding the foregoing provisions of this Section 6.1(b), effective January 1, 2004, a Participant will only be entitled to convert some or all of his or her Interest Account for Bonus for the previous year into Restricted Stock.

        (c)  Award Converted from Bonus at Committee Direction. The Committee, in its sole discretion, may direct that all or any portion of the Annual Bonus that would otherwise be payable in cash to a Participant, be converted to Awards pursuant to this Article 6.

        (d)  Exercise Price of Awards. The exercise price per Share, if any, under each Award granted pursuant to this Article 6 shall be indicated in the Award Notice. The exercise price per Share under each Option granted pursuant to this Article 6 shall, at the election of the Optionee as indicated on the Secondary Election Form, be either 100% of the Fair Market Value per Share on the Award Grant Date, or a lesser percentage (but not less than 75%) of the Fair Market Value per Share on the Award Grant Date, such lesser percentage to be determined by the Committee from time to time. Such Secondary Election Form shall indicate the percentage of such Options to be granted at each Exercise Price, which choice may affect the number of Options to be received pursuant to Section 6.2. Notwithstanding the foregoing, the exercise price under any Option granted to a Covered Employee shall be 100% of the Fair Market Value per share on the Award Grant Date.

Section 6.2    Number of Shares Subject to Awards.

        (a)    Number of Options.    The number of Shares subject to an Option granted pursuant to this Article 6 shall be the number of whole Shares equal to A divided by B, where:

A=	the dollar amount which the Eligible Executive has elected to convert to Options pursuant to Section 6.1; and
B=	the per share value of an Option on the Award Grant Date, as determined by the Committee using an option valuation model selected by the Committee in its discretion (such value to be expressed as a percentage of the Fair Market Value per Share on the Award Grant Date).

2

                In determining the number of Shares subject to an Option, (i) the Committee may designate the assumptions to be used in the selected option valuation model, and (ii) any fraction of a Share will be rounded down to the next whole number of Shares. The maximum number of shares with respect to which Options may be granted to a Covered Employee in any calendar year is 750,000.

        (b)  Number of Shares of Restricted Stock.    The number of Shares subject to an Award of Restricted Stock granted pursuant to this Article 6 shall be the number of whole Shares equal to A divided by B, where:

A=	the dollar amount which the Eligible Executive has elected to convert to Restricted Stock pursuant to Section 6.1; and
B=	the Fair Market Value of a Share on the Award Grant Date.

                In determining the number of Shares subject to an Award of Restricted Stock, any fraction of a Share will be rounded down to the next whole number of Shares.

Section 6.3 Term of Awards.

        (a)  Exercise of Options.    Each Option shall be first exercisable, cumulatively, as to 10% commencing on each of the first through tenth anniversaries of the Award Grant Date. Notwithstanding the foregoing, the exercisability of any Option held by a Covered Employee shall be deferred to the extent that the Committee, in its discretion, determines that current exercise of the Option would cause loss of the Company's tax deduction pursuant to Section 162(m) of the Internal Revenue Code. In no event shall such deferral continue beyond the first day of the calendar year after the Optionee ceases to be a Covered Employee. An Optionee's death, Disability, retirement or other termination of employment shall not shorten the term of any outstanding Option. In no event shall the period of time over which the Option may be exercised exceed the longer of (i) eleven years from the Award Grant Date, or (ii) the thirtieth (30th) day of the calendar year immediately following the year in which an Optionee ceased to be a Covered Employee. An Option, or portion thereof, may be exercised in whole or in part only with respect to whole Shares. Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). Payment in full or in part may also be made in the form of unrestricted Shares already owned by the Optionee or restricted stock or deferred stock subject to an award under the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan (based, in each case, on the Fair Market Value of the Shares on the date the Option is exercised, as determined by the Committee). If payment of the option exercise price of an Option is made in whole or in part in the form of restricted stock or deferred stock, the Shares received upon the exercise of such Option shall be restricted or deferred, as the case may be, in accordance with the original term of the restricted stock award or deferred stock award in question, except that such restrictions or deferral provisions shall apply to only the number of such Shares equal to the number of shares of restricted stock or deferred stock surrendered upon the exercise of such Option. No Shares shall be issued until full payment therefor has been made. An Optionee shall have rights to dividends or other rights of a stockholder with respect to Shares subject to the Option when the Optionee has given written notice of exercise and has paid in full for such Shares.

        (b)  Terms of Restricted Stock Awards.

                (i)    Grant and Restrictions.    Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances

3

(including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee may determine at the Award Grant Date or thereafter. Except to the extent restricted under the terms of the Plan and any Award Notice relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a stockholder, including the right to vote the Restricted Stock and the right to receive dividends thereon. During the restricted period applicable to the Restricted Stock, subject to Section 6.6 below, the Restricted Stock may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the Participant.

                (ii)    Forfeiture.    Except as otherwise determined by the Committee, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company.

                (iii)    Book-Entry Accounts; Certificates for Stock.    An account for each Participant who is awarded Restricted Stock shall be opened with the Company's transfer agent or such other administrator designated by the Committee for the deposit of the shares of Restricted Stock subject to the Award, or, in the sole discretion of the Committee, each Participant may be issued a stock certificate registered in the name of the Participant with respect to such shares of Restricted Stock. The Committee shall specify that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company or a transfer agent retain physical possession of the certificates, and that the Participant deliver a stock power to the Company or transfer agent, as applicable, endorsed in blank, relating to the Restricted Stock. Such legend shall be substantially in the following form:

"The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Waddell & Reed Financial, Inc. 1998 Executive Deferred Compensation Stock Award Plan and a Restricted Stock Award Agreement entered into between the registered owner and Waddell & Reed Financial, Inc. Copies of the Plan and Agreement are on file in the offices of Waddell & Reed Financial, Inc., 6300 Lamar Avenue, Overland Park, Kansas 66202."

                (iv)    Dividends and Splits.    Unless otherwise determined by the Committee, Shares distributed in connection with a stock split or stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Shares or other property has been distributed.

        Section 6.4    Accelerated Exercisability and Lapse of Restrictions.    Notwithstanding the normal exercisability schedule and forfeiture provisions set forth in Sections 6.3(a) and 6.3(b)(ii) hereof, any and all outstanding Options shall become immediately exercisable and restrictions on any Award of Restricted Stock shall lapse and the shares subject to such Award shall become nonforfeitable upon the first to occur of (a) the death of the Awardee, (b) the Disability of the Awardee, (c) the occurrence of a Change in Control, (d) the unanimous determination by the Committee that a particular Option, Options, or Restricted Stock Award, in whole or in part, shall become fully exercisable and nonforfeitable, or (e) as otherwise provided by the Committee by rule or regulation or in any Award agreement, or as determined in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Stock. Upon acceleration, an Option will remain exercisable for the remainder of its original term.

        Section 6.5    Award Notice.    Each Award granted under the Plan shall be evidenced by an Award Notice which shall be executed by an authorized officer of the Company. Such Award Notice shall contain provisions regarding (a) the number of Shares subject to the Award, (b) the exercise price per Share, if any, of the Award and the means of payment therefor, (c) the term of

4

the Award, and (d) such other terms and conditions not inconsistent with the Plan as may be determined from time to time by the Committee. The Committee, in its discretion, may include in the grant of any Option under the Plan, a "stock option restoration program" ("SORP") provision. Such provision shall provide, without limitation, that, if payment on exercise of an Option is made in the form of Shares, and the exercise occurs on the Annual SORP Exercise Date, an additional Option ("SORP Option") will automatically be granted to the Optionee as of the date of exercise, having an exercise price equal to 100% of the Fair Market Value of the Shares on the date of exercise of the prior Option, having a term of no more than the later of either (i) the original option period for the exercised Option giving rise to the grant of the SORP option, not to exceed a maximum term of 10 years and two days from such date of exercise (subject to any forfeiture provision or shorter limitation on exercise required under the Plan) or (ii) the thirtieth 30th day of the calendar year immediately following the year in which the Optionee ceases to be a Covered Employee, having an initial exercise date no earlier than six months after the date of such exercise, and covering a number of shares equal to the number of Shares used to pay the exercise price of the Stock Option, plus the number of shares (if any) withheld to cover income taxes and employment taxes (plus any selling commissions) on the exercise. "Annual SORP Exercise Date" shall mean August 1, or if August 1 is not a trading day on the New York Stock Exchange, "Annual SORP Exercise Date" shall mean the next succeeding trading date. Notwithstanding the foregoing, the Committee may delay the Annual SORP Exercise Date to the extent it determines necessary to comply with regulatory or administrative requirements.

        Section 6.6    Transferability of Awards.    No Award shall be assignable or transferable by the Awardee; provided, however, that an Award Notice may provide that Options are transferable by will or the laws of descent and distribution; and provided, further, that the Committee may (but need not) permit other transfers of Awards where the Committee concludes that such transferability (a) does not result in accelerated taxation, and (b) is otherwise appropriate and desirable, taking into account any state or federal securities laws applicable to transferable Awards and the purposes of the Plan.

5.

Article 7 of the Plan is amended in its entirety to read as follows:

        ARTICLE 7.    Shares Subject to the Plan.

        Section 7.1    Shares Subject to the Plan.    Subject to adjustment as provided in Article 9, the total number of Shares reserved and available for delivery in connection with Awards under the Plan shall not exceed 3,750,000 Shares. Shares delivered under the Plan may be newly issued Shares or previously issued and reacquired Shares, and there are hereby reserved for issuance under the Plan 3,750,000 Shares. To the extent that Shares subject to an outstanding Award are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such Award or by reason of the delivery of Shares to pay all or a portion of the exercise price of an Award, then such Shares shall again be available under the Plan, except that if such Shares could not again be available for Awards to a particular Participant under any applicable law or regulation, such shares shall be available exclusively for Awards to Participants who are not subject to such limitation.

        In the case of Options exercised with payment in Shares under the "stock option restoration program" the number of Shares transferred by the Optionee in payment of the exercise price plus the number of Shares withheld to cover income and employment taxes (plus any selling commissions) on such exercise will be netted against the number of Shares issued to the Optionee in the exercise, and only the net number shall be charged against the 3,750,000 limitation set forth above.

6.

Article 9 of the Plan is amended in its entirety to read as follows:

5

        ARTICLE 9.    Adjustment Provisions

        Section 9.1    Change in Corporate Structure Affecting Shares.    If the Company shall at any time change the number of issued Shares without new consideration to the Company (such as by stock dividend, stock split, recapitalization, reorganization, exchange of shares, liquidation, combination or other change in corporate structure affecting the Shares) or make a distribution of cash or property which has a substantial impact on the value of issued Shares, the total number of Shares reserved for issuance under the Plan shall be appropriately adjusted and the number of Shares covered by each outstanding Award and the exercise price per Share under each outstanding Award and the number of Shares underlying Awards shall be adjusted so that the aggregate consideration payable to the Company and the value of each such Award shall not be changed. In addition, the aggregate number of Shares available for issuance to any employee pursuant to Section 6.2 shall be adjusted to take into account any change in corporate structure affecting shares. Adjustments pursuant to this Section 9.1 shall not be made to the extent the Plan has been amended to reflect any adjustment contemplated by this Section 9.1.

        Section 9.2    Certain Reorganizations.    Notwithstanding any other provision of the Plan, and without affecting the number of Shares reserved or available hereunder, the Committee shall authorize the issuance, continuation or assumption of outstanding Awards or provide for other equitable adjustments after changes in the Shares resulting from any merger, consolidation, sale of assets, acquisition of property or stock, recapitalization, reorganization or similar occurrence in which the Company is the continuing or surviving corporation, upon such terms and conditions as it may deem necessary to preserve Awardees' rights under the Plan.

        Section 9.3    Acquisitions.    In the case of any sale of assets, merger, consolidation or combination of the Company with or into another corporation other than a transaction in which the Company is the continuing or surviving corporation and which does not result in the outstanding Shares being converted into or exchanged for different securities, cash or other property, or any combination thereof (an "Acquisition"), any Awardee who holds an outstanding Award shall have the right (subject to the provisions of the Plan and any limitation applicable to the Award) thereafter and during the term of the Award, to receive upon exercise or vesting, in the case of Restricted Stock, thereof the Acquisition Consideration (as defined below) receivable upon the Acquisition by a holder of the number of Shares which would have been obtained upon exercise of the Option or portion thereof or vesting of all or a portion of the Restricted Stock Award in question, as the case may be, immediately prior to the Acquisition. The term "Acquisition Consideration" shall mean the kind and amount of shares of the surviving or new corporation, cash, securities, evidence of indebtedness, other property or any combination thereof receivable in respect of one Share of the Company upon consummation of an Acquisition.

7.

Except as hereby amended, the Plan shall remain in full force and effect.

6

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Exhibit 10.9

EX-10.11

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Exhibit 10.11
EXECUTION COPY

TERMINATION AND REPLACEMENT
AGREEMENT

        TERMINATION AND REPLACEMENT AGREEMENT (this "TR Agreement") dated as of October 11, 2002, among Waddell & Reed Financial, Inc. (the "Borrower"), the financial institutions listed in Annex I hereto under the captions "Continuing Lenders" (the "Continuing Lenders") and "Additional Lenders "(the "Additional Lenders", and together with the Continuing Lenders, the "Lenders"), and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Administrative Agent (the "Administrative Agent"). Capitalized terms used and not defined herein shall have the meanings assigned to such terms in the New Credit Agreement (as defined below).

W I T N E S S E T H:

        WHEREAS, the Borrowers, the Continuing Lenders, certain other lenders (the "Exiting Lenders"), and the Administrative Agent are parties to Credit Agreement, dated as of October 12, 2001 (as amended on February 28, 2002 and as otherwise amended, supplemented or otherwise modified from time to time, the "Original Credit Agreement");

        WHEREAS, the Original Credit Agreement is to be terminated as provided herein; and

        WHEREAS, the Continuing Lenders and the Additional Lenders are willing, subject to the terms and conditions of this TR Agreement, to replace the Original Credit Agreement with a new credit agreement as provided herein.

        NOW THEREFORE, in consideration of the mutual agreements contained in this TR Agreement and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto hereby agree as follows:

        SECTION 1.    Termination and Replacement.    Subject to the conditions set forth in Section 2 hereof:

        (i)    the Original Credit Agreement, including all schedules and exhibits thereto, is hereby terminated, subject to the applicable provisions set forth therein as to the survival of certain rights and obligations, and simultaneously replaced by a new credit agreement (the "New Credit Agreement") identical in form and substance to the Original Credit Agreement, except as expressly set forth below.

        (ii)  the heading of the New Credit Agreement shall read as follows:

        "THIS CREDIT AGREEMENT is entered into as of October 11, 2002, among Waddell & Reed Financial, Inc. (the "Borrower"), the several financial institutions from time to time party to this Agreement (collectively, the "Lenders" and each individually, a "Lender"), and JPMORGAN CHASE BANK ("JPMorgan"), as administrative agent for the Lenders (herein in such capacity, together with any successors thereto in such capacity, the "Administrative Agent")."

        (iii)  Deleting all references to the term "The Chase Manhattan Bank" and by substituting in lieu thereof the term "JPMorgan Chase Bank".

        (iv)  Deleting all references to the date "October 12, 2001" and by substituting in lieu thereof the date "October 11, 2002".

        (v)  Section 1.01 of the New Credit Agreement is hereby amended by deleting therefrom the definitions of the following defined terms in their entirety and substituting in lieu thereof the following definitions:

        "Applicable Rate" means, for any day, with respect to any ABR Loan or Eurodollar Loan, or with respect to the facility fees payable hereunder, as the case may be, the applicable rate per

annum determined pursuant to the Pricing Grid attached hereto as Annex A; provided that, in the case of the Term Loans, each of such rates payable shall be increased by the rate of 0.25% per annum.

        "Commitment" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans and Term Loans hereunder, expressed as an amount representing the maximum aggregate outstanding principal amount of such Lender's Revolving Loans and Term Loans hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.09, (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04 and (c) increased from time to time pursuant to Section 2.20. The initial amount of each Lender's Commitment is set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable, and the initial aggregate amount of the Commitments of the Lenders (as set forth on Schedule 2.01) is $200,000,000.

        "Revolving Credit Termination Date" means October 10, 2003 or such earlier date as the Commitments shall terminate pursuant to the terms hereof (or, if such day is not a Business Day, the next preceding Business Day).

        (vi)  Section 2.12(b) of the New Credit Agreement is hereby amended by deleting such section in its entirety and substituting in lieu thereof the following language:

        (b)  Prior to conversion of Revolving Loans into Term Loans pursuant to Section 2.04, the Borrower agrees to pay to the Administrative Agent for the account of each Lender a utilization fee equal to (i) 0.125% per annum for each day on which the Commitment Utilization Percentage exceeds 25%, which fee shall accrue on the daily amount of such Lender's outstanding Loans for each Excess Utilization Day during the period from and including the day on which the Commitment Utilization Percentage exceeds 25% to but excluding the day on which the Commitment Utilization Percentage no longer exceeds 25% and (ii) 0.250% per annum for each day on which the Commitment Utilization Percentage exceeds 50%, which fee shall accrue on the daily amount of such Lender's outstanding Loans for each Excess Utilization Day during the period from and including the day on which the Commitment Utilization Percentage exceeds 50% to but excluding the day on which the Commitment Utilization Percentage no longer exceeds 50%. Accrued utilization fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof; provided that any utilization fees accruing after the date on which the Commitments terminate shall be payable on demand. All utilization fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).

      (vii)  Section 3.04 of the New Credit Agreement is hereby amended by deleting such section in its entirety and substituting in lieu thereof the following language:

        SECTION 3.04.    Financial Condition; No Material Adverse Effect.    (a) The Borrower has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholders equity and cash flows (i) as of and for the fiscal years ended 2000 and 2001, reported on by KPMG LLP, independent public accountants, and (ii) as of and for the fiscal quarters and the portion of the fiscal year ended March 31, 2002 and June 30, 2002, certified by its principal financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. The Borrower and its Subsidiaries do not have any material Guarantees, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other

obligation in respect of derivatives, that are not reflected or disclosed in the most recent financial statements referred to in this paragraph.

        (b)  Since December 31, 2001, there has been no event, development or circumstance that has had or could reasonably be expected to have a Material Adverse Effect.

      (viii)  Annex A of the New Credit Agreement is hereby amended by replacing such annex in its entirety with Annex I-A attached hereto.

        (ix)  Schedule 2.01 of the New Credit Agreement is hereby amended by replacing such schedule in its entirety with Schedule 2.01 attached hereto.

        (x)  Schedule 3.06 of the New Credit Agreement is hereby amended by replacing such schedule in its entirety with Schedule 3.06 attached hereto.

        (xi)  Schedule 3.13 of the New Credit Agreement is hereby amended by replacing such schedule in its entirety with Schedule 3.13 attached hereto.

        SECTION 2.    Conditions to Effectiveness.    This Amendment shall be effective on the date on which all of the following conditions precedent have been satisfied (or waived in accordance with Section 9.02) (the "Effective Date"):

          (i)  The Administrative Agent (or its counsel) shall have received from each party hereto either (a) a counterpart of this TR Agreement signed on behalf of such party or (b) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement.

        (ii)  The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of the General Counsel of the Borrower, substantially in the form of Exhibit B, and covering such other matters relating to the Borrower, this Agreement or the Transactions as the Required Lenders shall reasonably request. The Borrower hereby requests such counsel to deliver such opinion.

        (iii)  The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel.

        (iv)  The Administrative Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02 without giving effect to the parenthetical set forth in paragraph (a) of Section 4.02.

        (v)  The Administrative Agent shall have received evidence satisfactory to it that simultaneously with the making of the initial Loans on the Closing Date, the Borrower will have repaid in full all amounts outstanding under the Original Credit Agreement and the commitments of the lenders under the Original Credit Agreement will have been terminated, and the Administrative Agent shall have received the promissory notes issued under the Original Credit Agreement marked "cancelled".

        (vi)  The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all reasonable out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder.

      (vii)  All governmental and third party approvals necessary in connection with the continuing operations of the Borrower and its Subsidiaries and the transactions contemplated hereby shall have been obtained and be in full force and effect, and all applicable waiting periods shall have

expired without any action being taken or threatened by any competent authority that would restrain, prevent or otherwise impose adverse conditions on the financing contemplated hereby.

      (viii)  The Lenders shall have received (a) audited consolidated financial statements of the Borrower for the 2000 and 2001 fiscal years and (b) unaudited interim consolidated financial statements of the Borrower for each quarterly period ended subsequent to the date of the latest applicable financial statements delivered pursuant to clause (a) of this paragraph as to which such financial statements are available, and such financial statements shall not, in the reasonable judgment of the Lenders, reflect any material adverse change in the consolidated financial condition of the Borrower, as reflected in the financial statements or projections contained in the Confidential Information Memorandum.

The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 5:00 p.m., New York City time, on October 11, 2002 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time).

        SECTION 3.    GOVERNING LAW.    THIS TR AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

        SECTION 4.    Execution in Counterparts.    This TR Agreement may be executed by one or more of the parties to this TR Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this TR Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent.

        IN WITNESS WHEREOF, the parties hereto have caused this TR Agreement to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written.

WADDELL & REED FINANCIAL, INC.
By:	/s/  KEITH A. TUCKER Name: Keith A. Tucker Title: Chairman of the Board and Chief Executive Officer
JPMORGAN CHASE BANK (formerly known as The Chase Manhattan Bank), individually and as Administrative Agent
By:	/s/  ELISABETH H. SCHWABE Name: Title:
BANK OF AMERICA, N.A.
By:	/s/  ELIZABETH W. F. BISHOP Name: Elizabeth W. F. Bishop Title: Managing Director
FLEET NATIONAL BANK
By:	/s/  DAVID A. BOSSELAIT Name: David A. Bosselait Title: Director
THE BANK OF NEW YORK
By:	/s/  TIMOTHY J. SOMERS Name: Timothy J. Somers Title: Vice President
UMB BANK, N.A.
By:	/s/  DAVID A. PROFFITT Name: David A. Proffitt Title: Senior Vice President
ROYAL BANK OF SCOTLAND
By:	/s/  DIANE FERGUSON Name: Diane Ferguson Title: Senior Vice President

U.S. BANK, NATIONAL ASSOCIATION
By:	/s/  WOODY JOHNSON Name: Woody Johnson Title: Vice President
STATE STREET BANK AND TRUST COMPANY
By:	/s/  CHARLES A. GARRITY Name: Charles A. Garrity Title: Vice President

Annex I

Continuing Lenders

J.P. Morgan Chase & Co.
Bank of America, N.A.
Fleet National Bank
The Bank of New York
UMB Bank, N.A.
Royal Bank of Scotland
State Street Bank and Trust Company

New Lenders

U.S. Bank, National Association

Annex I-A

PRICING GRID

	Level 1	Level 2	Level 3	Level 4	Level 5
S&P Rating:	A- or better	BBB+	BBB	BBB-	Less than BBB-
Moody's Rating:	A3 or better	Baa1	Baa2	Baa3	Less than Baa3
ABR Loans' Applicable Margin	0%	0%	0%	0%	0%
Eurodollar Loans' Applicable Margin	0.295%	0.400%	0.625%	0.850%	1.325%
Facility Fee Rate	0.080%	0.100%	0.125%	0.150%	0.175%

        For purposes of determining the Applicable Margins or the Facility Fee Rates, (i) in the event of a "split rating" (i.e., if the Moody's Rating applicable to the Borrower at any time appears in the chart above in a different column from that in which the S&P Rating then applicable to the Borrower appears), the Applicable Margins and the Facility Fee Rates will be based on the column which includes the higher rating (unless the higher rating is more than one rating level higher than the lower rating, in which case the pricing shall be that applicable to the rating level which is one rating level lower than the higher rating level), (ii) if Moody's or S&P shall not have in effect a rating (other than because such rating agency shall no longer be in the business of rating corporate debt obligations), then such rating agency will be deemed to have established a rating one rating level lower than the rating of either Moody's or S&P, as the case may be, that remains in effect and (iii) the Applicable Margins and the Facility Fee Rates shall be subject to adjustment (upwards or downwards, as appropriate), effective as of the date on which S&P or Moody's announces a rating change which results in a change in the Applicable Margins and the Facility Fee Rates.

SCHEDULE 2.01

COMMITMENTS

Lender		Commitment
J.P. Morgan Chase & Co.		$	32,000,000.00
Bank of America, N.A.		$	32,000,000.00
Fleet National Bank		$	32,000,000.00
The Bank of New York		$	24,500,000.00
UMB Bank, N.A.		$	24,500,000.00
Royal Bank of Scotland		$	20,000,000.00
U.S. Bank, National Association		$	20,000,000.00
State Street Bank and Trust Company		$	15,000,000.00
	Total	$	200,000,000.00

SCHEDULE 3.06

DISCLOSED MATTERS

        In conjunction with previous public disclosure, management does not believe that any proceeding listed below, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.

1.

United Investors Life Insurance Company v. Waddell & Reed Financial, Inc., et al., Circuit Court of Jefferson County, Alabama (CV 00-2720)



2.

NASD Arbitration Number 97-03642, S. Sawtelle v. Waddell & Reed, Inc., et al. (MASTER, Consol. With 99-5327)



3.

United Investors Life Insurance Company v. Waddell & Reed Financial, Inc. et. al., California Superior Court, Los Angeles County (BC25943), removed to United States District Court of the Central District of California (CV 01-09684 TJH).

SCHEDULE 3.13

SUBSIDIARIES

Name	Jurisdiction of Incorporation or Formation	% of Capital Stock Owned by Borrower(1)
Waddell & Reed Financial Services, Inc.	Missouri	100%
Waddell & Reed, Inc.	Delaware	100%
Waddell & Reed Investment Management Company	Kansas	100%
Waddell & Reed Services Company	Missouri	100%
Waddell & Reed Development, Inc.	Delaware	100%
Waddell & Reed Distributors, Inc.	Missouri	100%
Waddell & Reed Leasing, Inc.	Missouri	100%
W & R Insurance Agency, Inc.	Missouri	100%
W & R Insurance Agency of Alabama, Inc.	Alabama	100%
W & R Insurance Agency of Arkansas, Inc.	Arkansas	100%
W & R Insurance Agency of Montana, Inc.	Montana	100%
W & R Insurance Agency of Nevada, Inc.	Nevada	100%
W & R Insurance Agency of Texas, Inc.	Texas	100%
W & R Insurance Agency of Utah, Inc.	Utah	100%
W & R Insurance Agency of Wyoming, Inc.	Wyoming	100%
Unicon Agency, Inc.	New York	100%
Unicon Insurance Agency of Massachusetts, Inc.	Massachusetts	100%
Fiduciary Trust Company of New Hampshire	New Hampshire	100%
Austin, Calvert & Flavin, Inc.	Texas	100%
Encino GP Investment Partners LLC	Texas	100%
Encino Partners L.P.	Texas	General Partner/4.10%
Legend Group Holdings, LLC	Delaware	100%
Legend Advisory Corporation	New York	100%
Legend Equities Corporation	Delaware	100%
Advisory Services Corporation	Nevada	100%
The Legend Group, Inc.	Delaware	100%
LEC Insurance Agency, Inc.	Texas	100%

1

Owned directly or indirectly through one or more wholly-owned subsidiaries

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Exhibit 10.11 EXECUTION COPY

W I T N E S S E T H

Annex I
Annex I-A

EX-11

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Exhibit 11

WADDELL & REED FINANCIAL, INC.
COMPUTATION OF EARNINGS PER SHARE

	2002		2001		2000
	(in thousands except for per share data)
Net income	$	87,425	$	107,167	$	139,005
Basic weighted average shares outstanding		80,382		80,592		83,362
Diluted weighted average shares outstanding		81,874		83,423		86,895
Basic net income per share	$	1.09	$	1.33	$	1.67
Diluted net income per share	$	1.07	$	1.28	$	1.67

Note: Data for all periods presented is stated or has been restated to reflect the three-for-two stock split declared on February 23, 2000, payable on April 7, 2000 to shareholders of record as of March 17, 2000.

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Exhibit 11

EX-21

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Exhibit 21

Subsidiaries

Name	Jurisdiction of Incorporation or Formation
Waddell & Reed Financial Services, Inc.	Missouri
Waddell & Reed Development, Inc.	Delaware
Waddell & Reed, Inc.	Delaware
Waddell & Reed Investment Management Company	Kansas
Waddell & Reed Services Company	Missouri
Waddell & Reed Leasing, Inc.	Missouri
Waddell & Reed Distributors, Inc.	Missouri
Waddell & Reed Ivy Investment Company	Delaware
Ivy Mackenzie Distributors, Inc.	Florida
Ivy Services, Inc.	Florida
W & R Insurance Agency, Inc.	Missouri
W & R Insurance Agency of Alabama, Inc.	Alabama
W & R Insurance Agency of Arkansas, Inc.	Arkansas
W & R Insurance Agency of Montana, Inc.	Montana
W & R Insurance Agency of Nevada, Inc.	Nevada
W & R Insurance Agency of Texas, Inc.	Texas
W & R Insurance Agency of Utah, Inc.	Utah
W & R Insurance Agency of Wyoming, Inc.	Wyoming
Unicon Agency, Inc.	New York
Unicon Insurance Agency of Massachusetts, Inc.	Massachusetts
Fiduciary Trust Company of New Hampshire	New Hampshire
Austin, Calvert & Flavin, Inc.	Texas
Encino GP Investment Partners, LLC	Delaware
Legend Group Holdings, LLC	Delaware
Legend Advisory Corporation	New York
Legend Equities Corporation	Delaware
Advisory Services Corporation	Nevada
The Legend Group, Inc.	Delaware
LEC Insurance Agency, Inc.	Texas

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Exhibit 21

EX-23

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Exhibit 23

Consent of Independent Certified Pubic Accountants

The Board of Directors
Waddell & Reed Financial, Inc.

We consent to the incorporation by reference in the Registration Statements No. 333-65827 and 333-44528 on Forms S-8 and No. 333-43862 on Form S-3 of our report dated February 21, 2003, relating to the consolidated balance sheets of Waddell & Reed Financial, Inc. and subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows and the related schedules for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 Annual Report on Form 10-K of Waddell & Reed Financial, Inc. Our report refers to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Asets" on January 1, 2002.

/s/ KPMG LLP

Kansas City, Missouri
March 21, 2003

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Exhibit 23

EX-24

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Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:

        That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Daniel C. Schulte, John E. Sundeen, Jr. and Wendy J. Hills, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

        IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name.

/s/ Robert L. Hechler
Robert L. Hechler
January 27, 2003

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:

        That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Daniel C. Schulte, John E. Sundeen, Jr. and Wendy J. Hills, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

        IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name.

/s/ Alan W. Kosloff
Alan W. Kosloff
January 28, 2003

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:

        That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Daniel C. Schulte, John E. Sundeen, Jr. and Wendy J. Hills, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

        IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name.

/s/ Dennis E. Logue
Dennis E. Logue
January 27, 2003

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:

        That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Daniel C. Schulte, John E. Sundeen, Jr. and Wendy J. Hills, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

        IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name.

/s/ James M. Raines
James M. Raines
January 30, 2003

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:

        That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Daniel C. Schulte, John E. Sundeen, Jr. and Wendy J. Hills, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

        IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name.

/s/ Ronald C. Reimer
Ronald C. Reimer
January 28, 2003

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:

        That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Daniel C. Schulte, John E. Sundeen, Jr. and Wendy J. Hills and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

        IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name.

/s/ William L. Rogers
William L. Rogers
January 30, 2003

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:

        That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Daniel C. Schulte, John E. Sundeen, Jr. and Wendy J. Hills, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

        IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name.

/s/ Jerry W. Walton
Jerry W. Walton
January 27, 2003

QuickLinks

Exhibit 24

EX-99.1

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 99.1

Financial Highlights

	2002			2001			% Change
	(Dollar amounts in thousands, except per share data)
Revenues from:
Investment management fees	$	186,038		$	214,242		-13
Underwriting and distribution fees		183,133			203,535		-10
Shareholder service fees		65,690			59,381		11
Revenues excluding investment and other income	$	434,861		$	477,158		-9
Total revenues	$	439,125		$	482,562		-9
Net income	$	87,425	(1)	$	107,167	(2)	-18
Diluted earnings per share	$	1.07	(1)	$	1.28	(2)	-16
Investment product sales—retail	$	2,008,600		$	2,782,900		-28
Financial advisors (excluding Legend)		3,466			3,165		10

1.

This includes special after-tax charges of $5.7 million, or $.07 per share. Net income excluding special charges was $93.1 million, or $1.14 per share.

2.

This includes a special after-tax charge of $5.1 million, or $.06 per share. Net income excluding special charge was $112.2 million, or $1.35 per share.

See accompanying Form 10-K.

			2002		2001		% change
			(millions)
Assets Under Management
	Mutual funds
		Equity funds	$	17,167	$	22,707	-24
		Fixed income funds		4,176		3,415	22
		Money market funds		1,143		1,194	-4
	Total mutual funds			22,486		27,316	-18
	Institutional and separate accounts			5,629		5,490	3
Total assets under management			$	28,115	$	32,806	-14
S&P 500 Stock Index (year-end)				879.8		1,148.1	-23

Primary Business And Fund Families

Waddell & Reed Advisors

        Financial advisors from Waddell & Reed, Inc. assist clients from all walks of life in realizing their personal and financial goals. Our advisors specialize in developing personalized financial planning strategies, including retirement planning, education funding, insurance and estate planning.

Wholesale Distribution

Austin, Calvert & Flavin

        Our San Antonio, Texas-based subsidiary manages investments for trusts, high net worth families and individuals; pension plans for private and public entities; and endowments and foundations.

Institutional investment management

        Through Waddell & Reed Investment Management Company, several of our portfolio managers oversee investments for defined benefit plans, endowments and high net worth individuals.

Nonproprietary fund distribution

        We distribute the Ivy Funds and the W&R Funds—which will be merged in 2003—through unaffiliated broker/dealers, 401(k) plans and registered investment advisers.

Subadvisory

        We serve as subadvisor for 6 U.S. mutual funds/variable annuity funds; 9 Canadian mutual funds through our relationship with Mackenzie Financial Corporation; and 5 offshore funds through relationships with various institutions.

The Legend Group

        Financial advisors at The Legend Group, our Florida-based retirement planning subsidiary, focus on serving employees of school districts and other nonprofit entities.

Mutual fund families

        Waddell & Reed offers one of the most robust and competitive fund lineups in the industry.

Waddell & Reed Advisors Funds	20 funds, sold primarily through proprietary advisors
Ivy Funds*	18 funds, sold through both intermediaries and proprietary advisors
Waddell & Reed InvestEd Portfolios	3 funds within our 529 college savings plan, sold through both proprietary advisors and intermediaries
W&R Target Funds, Inc.	12 portfolios, sold primarily through proprietary advisors as the underlying investments in annuity and life insurance policies

*

We have announced our intention to merge the Ivy Funds family with the W&R Funds family, creating one new family to be called the "Ivy Funds." The fund total noted reflects the pro forma effect of the merger.

Letter to Stockholders

The future holds great promise for Waddell & Reed. With exceptional investment products, a strong core proprietary business and expanding nonproprietary distribution, we are well positioned for future growth.

Keith A. Tucker
Chairman of the Board & Chief Executive Officer

Henry J. Herrmann
President & Chief Investment Officer

        Waddell & Reed and the investment management industry endured another difficult year in 2002. The continuing slide in the equity markets and declining investor appetite for investment products diminished our earnings and our share price. Net income for the year was $87.4 million, or $1.07 per diluted share, compared with $107.2 million, or $1.28 per diluted share in 2001 (which included goodwill amortization of $6.6 million).

        Despite the conditions and our financial results in 2002, we made very good progress in building our business and extending the span of our operations. Our investment performance remained highly competitive; we took a number of steps to expand the distribution of our products; and we were successful in retaining existing clients and assets in a turbulent environment. With investment results that have been consistently strong over many years and market cycles, and a growing distribution network, we are well positioned to strengthen our sales, especially as market conditions improve.

        At December 31, 2002, Morningstar, Inc., rated most of Waddell & Reed's equity funds highly: 76 percent of our equity funds and 91 percent of our overall equity assets received ratings of either four or five stars. As ranked by Lipper, Inc., Waddell & Reed's funds generally performed better than peer funds during 2002. For the year, 41 percent of our equity funds ranked in the top 10 percent of their peer groups, and 50 percent ranked in the top 25 percent. For the year, 65 percent of all of our funds were ranked in the top half of their peer group. On a longer-term basis, our performance is compelling: for the three-year and five-year periods ended December 31, 76 percent and 96 percent of our equity funds, respectively, ranked in the top half of their peer groups, according to Lipper. This reflects the ability of our investment management team to provide exceptional performance to our fund shareholders across a variety of market environments.

        A major focus in 2002 was the expansion of the distribution channels through which we market our highly competitive investment performance. Since 2000, we have been successful in this effort and, encouraged by our results, we took action in 2002 to further expand the breadth of our nonproprietary distribution. Central to this effort was our acquisition of Mackenzie Investment Management, Inc. (MIMI), the United States-based subsidiary of Toronto-based Mackenzie Financial Corporation (MFC). This transaction provides us benefits both in the United States and in Canada.

        MIMI's Ivy Funds family brings us new assets and distribution opportunities in U.S. retail nonproprietary sales channels, as well as additions to our product lineup. We already have taken steps to bring Waddell & Reed's investment management team to the Ivy Funds, and in March 2003 we announced our plans to merge the Ivy and W&R families under the Ivy brand. This would create a combined product line of considerably greater scale and breadth, which will utilize Waddell & Reed's historical performance for marketing purposes.

        As part of the MIMI acquisition, we also entered into a marketing agreement with MFC that brings us new investment management opportunities in Canada. Under the subadvisory agreement, we are managing nine funds within MFC's Universal Funds family, and will have opportunities to launch new funds and/or assume additional existing subadvisory mandates under the Universal Funds brand. We also will seek, over time, to pursue opportunities with Investors Group, Inc.—MFC's parent company and the largest Canadian mutual fund company—and its other affiliates.

        These efforts help to build breadth and diversity in our distribution, the core of which is our proprietary financial advisors. These advisors provide financial planning services throughout the United States and create durable relationships with their clients.

        During the difficult market environment that existed in 2002, much of our advisors' effort was necessarily focused on client retention and counseling, leaving less time for new sales development activity. As a result, sales per advisor declined during the year. At the same time, our retail mutual fund redemption rate, at 10.4 percent, remained among the industry's lowest, reflecting the strength of our advisors' client relationships. Moreover, the number of financial plans prepared by our advisors increased 14 percent in 2002 over 2001, reflecting growing investor and financial advisor focus on the need for financial planning. We believe our focus on financial planning, which has been in place for years, will continue to serve us well as investors' desire for comprehensive advice continues to grow.

        During the year, we supported our advisors and their efforts through ongoing training programs and additional financial planning tools. We enhanced the software used to produce our key financial planning analysis, called the FocusPlan, and introduced the next generation of our financial planning services. Included are several new modules that can be tailored to fit client needs, and an updated version of our most sophisticated financial planning service, called FocusPlan Premier, which offers detailed financial modeling and analysis for clients who have more complex financial situations. For 2003, we are planning to implement a sophisticated, convenient and comprehensive customer relationship management (CRM) system for our advisors that can be integrated to include all components of an advisor's day-to-day client management needs.

        The future holds great promise for Waddell & Reed. With exceptional investment products, a strong core proprietary business and expanding nonproprietary distribution, we are well positioned for future growth. All of this, of course, contributes to the ongoing creation of stockholder value. Thank you for your continued commitment to our company.

Sincerely,

Keith A. Tucker
Chairman of the Board & Chief Executive Officer

Henry J. Herrmann
President & Chief Investment Officer

A more comprehensive narrative regarding 2002 is available on our website. Please review more details of the year's activities at www.waddell.com, under the "Corporate" heading.

A broader look at 2002

        There hasn't been a more prolonged period of stock market decline in the United States for more than 60 years. Wall Street ended its third straight losing year when 2002 came to a close, marking the longest such streak of market downturns since Franklin Roosevelt was in the White House and Waddell & Reed was just a five-year-old organization.

        Certainly, much has changed since the last stretch of similar market declines, including the scope and breadth of our company. What has not changed is that financial markets can move sharply over short periods, and that experienced management, proper perspective and consistent discipline can help our clients weather whatever the market may put forth.

        The financial markets were pressured throughout the year by ongoing geopolitical unrest and terrorist threats, corporate misconduct and accounting scandals, and a sluggish U.S. economy. In this climate, Waddell & Reed's assets under management declined when compared with year-end 2001. Nonetheless, the company continued to evolve and made steady progress in the face of 2002's difficulties. In 2002, that included the following key steps:

•

the acquisition of the Ivy Funds family and new relationship with Mackenzie Financial Corporation, which bring new assets to manage, new subadvisory opportunities in Canada, broader distribution channels and extended intermediary sales efforts;

•

the introduction of several new products, and the growth of others;

•

the undertaking of key cost-cutting initiatives;

•

continued competitive performance in our investment management; and

•

ongoing activity to ensure the continued productivity of our proprietary financial advisors.

        We believe that each of these steps has contributed to the continued growth of our company and put Waddell & Reed in a stronger, more competitive position. We are aggressively capturing opportunities that improve our position and earnings prospects.

        Beginning in 2003, we will refine our reporting of assets under management and sales to reflect the way our business is evolving. Commencing with our results for the first quarter of this year, to be released in April, our reporting of assets under management and sales will divide into two discrete groupings: "Waddell & Reed Advisors," reflecting the activity and results of the Waddell & Reed proprietary sales force; and "Wholesale," reflecting all our other sales efforts, including institutional defined benefit, intermediary, subadvisory and Legend. We believe this will help to provide a clear and relevant picture of the contributions and growth characteristics of the key components of our distribution.

Wholesale

The Ivy Funds

        In December, we completed our acquisition of the Ivy Funds family and established subadvisory and marketing relationships with the funds' former parent, Toronto-based Mackenzie Financial Corporation (MFC). The transaction immediately provided us with multiple benefits and promises to bring significant opportunities in the years to come.

        The Ivy Funds bring us new assets and distribution opportunities in retail nonproprietary sales channels, as well as additional investment management resources. We already have taken steps to place Waddell & Reed's investment management team on the Ivy Funds, and we will continue to re-engineer and invigorate the fund family as we move through 2003. During the first quarter of 2003, we announced our intention to merge the Ivy Funds with our W&R Funds family, carrying the Ivy Funds brand forward. Once approved by shareholders, we anticipate that this merger will accomplish several objectives. Several of the Ivy Funds that have strategies similar to W&R Funds would be merged with those W&R Funds, carrying the more successful performance record forward. Selected larger, more successful Ivy Funds that fill gaps in our product line would be retained. Following approval of this merger, we would have a new fund family that is managed by our investment team, would include larger funds that offer greater scale and, in most cases, reduced expenses to shareholders.

        In addition, the Ivy Funds now allow us to more aggressively offer the benefits of our strong investment team and sound investment process to a broader segment of the investing public. The Ivy Funds significantly enhance our nonproprietary sales efforts through a team of wholesalers who provide a wider and more frequent means of customer contact throughout the country. We also are offering the Ivy Funds for sale through our proprietary financial advisors, bringing our advisors new fund styles that previously were not part of our fund lineup.

        The subadvisory and marketing agreements with MFC bring us new investment management opportunities in Canada. Under the subadvisory agreement, we immediately began to manage selected mutual funds within MFC's Universal Funds family. Under the marketing agreement, MFC will offer Waddell & Reed opportunities to launch new funds and/or assume additional existing subadvisory mandates under the Universal Funds brand. We also will have the opportunity to seek investment management assignments from Investors Group, Inc., MFC's parent and Canada's largest mutual fund firm.

Intermediary sales

        Since 2000, we have been distributing our highly competitive investment products through selected intermediary sales channels. We expect this effort to expand in coming years, as we anticipate offering the merged Ivy/W&R funds family through intermediary channels, including unaffiliated broker/dealers, 401(k) plans and registered investment advisers. Current W&R Funds are available on many major fund platforms. Following the anticipated merger of the Ivy Funds and W&R Funds, we anticipate making the new Ivy Funds family available for sale through these intermediary channels, strengthening our foothold and increasing our sales opportunities.

        Our overall sales were bolstered by the efforts of our subsidiary, The Legend Group, whose 248 financial advisors focus on retirement planning for employees of school districts and not-for-profit organizations. Legend grew significantly in 2002, adding 58 financial advisors to its team. During a year of declining equity markets, Legend's sales increased by nearly 6 percent over 2001.

Institutional asset management

        For many years, Waddell & Reed has offered its investment management capabilities to institutional clients, including corporations and public entities. This institutional business has, over time, been well-accepted by a range of institutional investors. Through Waddell & Reed Investment Management Company, several of our portfolio managers oversee investments for defined benefit plans, endowments and high net worth individuals. Our institutional investment business includes

Austin, Calvert & Flavin, Inc., our San Antonio, Texas-based subsidiary, which manages investments for trusts, high net worth families and individuals; for pension plans of private and public entities; and for endowments and foundations.

        Complementing these efforts is our subadvisory investment management, which expanded in 2002. We currently serve as subadvisor for six U.S. mutual funds/variable annuity funds, nine Canadian mutual funds through our relationship with MFC, and five offshore funds through relationships with various institutions.

Waddell & Reed Advisors

        Personalized financial planning and one-on-one interaction, complemented by our high-quality investment products, set Waddell & Reed advisors apart and help them to differentiate themselves in a competitive industry. Our financial planning approach is based on long-term investment discipline and founded on realistic market expectations. This is a primary reason why Waddell & Reed continues to report one of the lowest long-term retail asset redemption rates in the industry, as mentioned above. Although that rate increased slightly in 2002 to 10.4 percent, more than 75 percent of the increase was due to lower long-term retail average assets, which is the denominator in the calculation.

        While our advisors remained committed to their clients and the planning process, they found little relief from the challenging economic climate. Sales per advisor declined 33 percent in 2002, a figure that is attributable not only to decreased sales in a lackluster market, but also is influenced by the fact that the total number of our financial advisors increased 10 percent from the previous year. Gross production per advisor, which measures total distribution revenues (and is therefore a more complete measure of advisor productivity) declined 18 percent in 2002.

        Although overall retail investment product sales were down, the number of financial plans prepared increased 14 percent in 2002 over 2001, and financial planning revenues overall were up 26 percent over the previous year. This indicates to us that, although our clients may not be committing additional capital, they remain focused on the need for continued financial planning. Our principal sales focus, within the financial planning context, is on investment products, but our broad financial planning process incorporates the sale of insurance products, which helps our advisors serve the complete scope of client needs, regardless of economic conditions. Revenues generated from the sale of insurance products increased 33 percent over the previous year.

        During 2002, we further supported our advisors and their efforts through ongoing internal training programs and marketing campaigns. Significantly, we enhanced the software used to produce our key financial planning analysis, called the FocusPlan, and introduced the next generation of our financial planning services. Included are several new modules that can be tailored to fit client needs and an updated version of our most sophisticated financial planning service, called FocusPlan Premier, which offers detailed financial modeling and analysis for clients who have more complex financial situations. For 2003, we are planning to implement a sophisticated, convenient and comprehensive customer relationship management (CRM) system, called CORE, for our advisors that can be integrated to include all components of an advisor's day-to-day client management needs.

        Key internal support also was provided to all advisors during the year with the redesign of Waddell & Reed Advisors eSource, our internal informational Internet site, and through the introduction of prominent new products and services.

Investment management

        The hallmark of our investment approach has been our ability to outperform in rising markets while preserving capital in declining markets. That capability was borne out in 2002. While the equity investing environment remained difficult throughout the year, and performance on an absolute basis was challenged, the majority of our mutual funds performed well on a relative basis. Under the guidance of Waddell & Reed Financial, Inc.'s investment management subsidiary, Waddell & Reed Investment Management Company (WRIMCo), our funds turned in what we feel are solid performances in a climate where many funds suffered dramatic losses.

Mutual Fund Assets Under Management
by Management Style

	IN MILLIONS
Large Capitalization Growth	6,577
Mid Capitalization Growth	887
Small Capitalization Growth	1,214
Large Capitalization Core Equity	5,521
Large Capitalization Value	432
International Equity	1,286
Balanced and Asset Allocation	1,249
Tax Exempt Bonds	1,272
High Yield Bonds	964
Taxable Investment-grade Bonds	1,940
Money Markets	1,144

        For the year ended December 31, 2002, Morningstar, Inc., rated most of Waddell & Reed's equity funds highly: 76 percent of our equity funds and 91 percent of our overall equity assets received either four or five stars. Over the last five years, 78 percent of our equity funds and 85 percent of all equity assets received either four or five stars.

        As ranked by Lipper, Inc., Waddell & Reed's funds generally performed better than peer group funds during 2002. For the period, 41 percent of our equity funds ranked in the top 10 percent of their peer groups, and 50 percent ranked in the top 25 percent. Ranking all of our funds for the year, 65 percent were in the top half of their peer group.

        On a longer-term basis, our performance is quite compelling: According to Lipper, for periods ended December 31, 76 percent of our equity funds ranked in the top half of their peer groups over the last three years, and 96 percent ranked in the top half of their peer groups over the last five years. This, we feel, reflects the extraordinary ability of our investment management team to provide exceptional performance to our fund shareholders across a variety of market environments.

        Our funds are managed by an investment team with unusual depth and breadth of experience. Our team comprises 54 investment professionals, including 17 research analysts, three economists and eight traders. Our 24 portfolio managers have an average of more than 22 years of investment experience and an average tenure with Waddell & Reed of 13 years. And, although our funds cover a broad range of investment categories, they all adhere to an investment philosophy that emphasizes fundamental analysis and risk control. Thus, as short-term declines inevitably impact all financial markets, our portfolio managers stay committed to the discipline of analyzing the fundamentals of the companies and securities they evaluate for possible investment.

Products and services

        One of the components essential to Waddell & Reed remaining competitive is a comprehensive array of high-quality products. Several product enhancements and new services introduced throughout the year were notable.

        The Waddell & Reed InvestEd Plan, our 529 college savings plan available nationally that was launched in October 2001, grew considerably in 2002, reaching approximately 18,200 accounts by year-end. In 2002, we added a payroll deduction program to the InvestEd Plan, making it even easier for our clients to save for higher education through consistent contributions. We also entered into an agreement with BabyMint, an online savings program that facilitates 529 investing through rebates from selected retail merchants.

        In order to provide a stronger tax savings vehicle to a key demographic segment, we introduced the Waddell & Reed Government Final Pay Plan for public educational institution and government agency employees. This plan enables employers and employees to save on a tax-deferred basis, and because the assets are located within a qualified plan, they have the ability to be transferred to the shelter of an IRA through a rollover.

        To bring easier access to the 401(k) market for self-employed and owner-only clients, we became one of the first financial firms in the country to introduce a retirement savings plan specifically designed for individual business owners, under a plan we call Exclusive(k). We also established a relationship with Ameritrade Financial Services to offer our clients high-quality personal brokerage services at a discounted price and to enhance the diversity of services available to clients.

        We continued to increase the scope of insurance products that we make available through our partnership with Nationwide Financial Services, Inc. In 2002, we introduced the Waddell & Reed Advisors Select Income Annuity, a single premium, immediate variable annuity that offers a variety of flexible, control-driven features. We also began offering the Nationwide Quatro fixed annuity and Nationwide Platinum V, a single premium deferred annuity.

        2002 marked the first full year of operation for Strategic Portfolio Allocation (SPA), our dynamic asset allocation program that combines cutting-edge technical analysis—including the use of artificial intelligence—with oversight from our investment professionals and individual client attention from our advisors. SPA offers clients ongoing asset allocation by combining sophisticated computer-based planning capabilities, the guidance of a personal financial advisor and the underlying Waddell & Reed funds. By December 31, 2002, SPA assets had grown considerably, nearly doubling 2001's figures and reaching nearly $718 million, including both mutual fund and variable annuity accounts.

The coming years

        The coming years will be a time to deliver on the foundation we put in place in 2002. We have every confidence that the addition of the Ivy Funds family will significantly broaden our intermediary sales and distribution efforts. Our foothold in Canada will only grow stronger as we build our relationship with MFC and with new investors. We continue to look for relationships that will add breadth to our distribution channels and leverage our superior asset management capabilities. With exceptional investment products, a strong core proprietary business and expanding nonproprietary distribution, we are well positioned for growth. Thus, we stand poised to succeed to an even greater degree when the market and world events turn for the better.

Officers and Directors

Mr. Keith A. Tucker
Chairman and Chief Executive Officer
Director
    • 33 years industry experience
    • 11 years with Waddell & Reed

Mr. Henry J. Herrmann
President and Chief Investment Officer
Director
    • 40 years industry experience
    • 31 years with Waddell & Reed

Mr. Robert L. Hechler
Retired, Former Executive Vice President, Waddell & Reed Financial, Inc.
Director (since 1998)

Mr. Alan W. Kosloff
Chairman, Kosloff & Partners, LLC
Director (since 2003)

Mr. Dennis E. Logue
Dean, Michael B. Price College of Business, University of Oklahoma
Director (since 2002)

Mr. James M. Raines
President, James M. Raines and Co.
Director (since 1998)

Mr. Ronald C. Reimer
Director and Chairman, Network Trust
Director (since 2001)

Mr. William L. Rogers
Managing Director, The Halifax Group
Director (since 1998)

Mr. Jerry W. Walton
Chief Financial Officer, J.B. Hunt Transport Services, Inc.
Director (since 2000)

Mr. Thomas W. Butch
Senior Vice President and Chief Marketing Officer
    • 21 years industry experience
    • 3 years with Waddell & Reed

Mr. Michael D. Strohm
Senior Vice President and Chief Operations Officer
    • 30 years industry experience
    • 30 years with Waddell & Reed

Mr. John E. Sundeen, Jr.
Senior Vice President, Chief Financial Officer and Treasurer
    • 19 years industry experience
    • 19 years with Waddell & Reed

Mr. Robert J. Williams, Jr.
Senior Vice President and National Sales Manager

    • 29 years industry experience
    • 6 years with Waddell & Reed

Mr. Daniel C. Schulte
Vice President, General Counsel and Corporate Secretary
    • 5 years industry experience
    • 5 years with Waddell & Reed

Mr. Mark A. Schieber
Vice President and Controller
    • 22 years industry experience
    • 22 years with Waddell & Reed

Corporate Information

Annual Meeting of Stockholders
April 30, 2003 10:00 a.m.
Corporate Headquarters
6300 Lamar Avenue
Overland Park, KS 66202

Corporate Headquarters
Waddell & Reed Financial, Inc.
P.O. Box 29217
Overland Park, KS 66201

Stock Exchange Listing
Class A Common Stock
New York Stock Exchange
Symbol: WDR

Transfer Agent & Registrar
EquiServe Trust Company, N.A.
P.O. Box 2500
Jersey City, NJ 07303-2500
Toll Free Number: (800) 446-2617
Hearing Impaired: (201) 222-4955

Independent Auditors
KPMG LLP
1000 Walnut, Suite 1600
Kansas City, MO 64106

Stockholder Inquiries
For general information regarding your Waddell & Reed Financial, Inc. stock, call (800) 532-2757 or visit our website at www.waddell.com. For stock transfers, call (800) 446-2617.

Mutual Fund Information
(888) WADDELL

Dividend Reinvestment
Waddell & Reed Financial, Inc. maintains a dividend reinvestment plan for all holders of its common stock. Under the plan, stockholders may reinvest all or part of their dividends in additional shares of common stock. Participation is entirely voluntary. More information on the plan can be obtained from the Transfer Agent shown at left.

Stockholder & Analyst Resources
We invite you to visit our website at www.waddell.com under the "Corporate" heading to view a more comprehensive discussion regarding our 2002 results.

        We believe that in today's digital world, the Internet allows us to disseminate our corporate information much more quickly and efficiently. In addition to the standard information typically found on corporate web-sites, such as stock information, access to archived press releases and SEC filings, and answers to frequently asked questions, we supply our stockholders and analysts with timely supplemental data including quarterly corporate presentations, access to live and archived web-casts, data tables and more. If you elect to request information alerts, we will send you an email when something new is posted to our corporate website.

        Please direct questions to Nicole McIntosh, Investor Relations Manager, (913) 236-1880 or via email at investorrelations@waddell.com.

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Exhibit 99.1

Financial Highlights
Primary Business And Fund Families
Letter to Stockholders
A broader look at 2002
Wholesale
Waddell & Reed Advisors
Investment management
Mutual Fund Assets Under Management by Management Style
Products and services
The coming years
Officers and Directors
Corporate Information

EX-99.2

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Exhibit 99.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

        I, Keith A. Tucker, Chairman of the Board of Directors and Chief Executive Officer of Waddell & Reed Financial, Inc. (the "Company") hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (the "Act"), that:

        1.    The Company's Annual Report on Form 10-K for the year ended December 31, 2002 (the "Report") dated March 25, 2003 and filed with the United States Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

        2.    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 26, 2003

/s/  KEITH A. TUCKER Keith A. Tucker
Chairman and Chief Executive Officer

        The foregoing Certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise.

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Exhibit 99.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

EX-99.3

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Exhibit 99.3

CERTIFICATION OF CHIEF FINANCIAL OFFICER

        I, John E. Sundeen, Jr., Senior Vice President, Chief Financial Officer and Treasurer of Waddell & Reed Financial, Inc. (the "Company") hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (the "Act"), that:

        1.    The Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report") dated March 25, 2003 and filed with the United States Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

        2.    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 26, 2003

/s/  JOHN E. SUNDEEN, JR. John E. Sundeen, Jr.
Senior Vice President, Chief Financial Officer and Treasurer

        The foregoing Certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise.

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Exhibit 99.3

CERTIFICATION OF CHIEF FINANCIAL OFFICER