Registration Statement

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nqvb71TkSaPEezTgsAHB6Bksi/mDGkbEMrQ1Ty3SJJ5dVv2bztJkANpkLoUNS1Ik XENYounDAvp8VVuDY9IWVQ== 0000088525-03-000021.txt : 20030610 0000088525-03-000021.hdr.sgml : 20030610 20030610165955 ACCESSION NUMBER: 0000088525-03-000021 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20030610 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY EQUITY FUND CENTRAL INDEX KEY: 0000088525 IRS NUMBER: 486104426 STATE OF INCORPORATION: KS FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-19458 FILM NUMBER: 03739413 BUSINESS ADDRESS: STREET 1: SECURITY MANAGEMENT COMPANY, LLC STREET 2: ONE SECURITY BENEFIT PLACE CITY: TOPEKA STATE: KS ZIP: 66636-0001 BUSINESS PHONE: 7854383127 MAIL ADDRESS: STREET 1: SECURITY MANAGEMENT COMPANY, LLC STREET 2: ONE SECURITY BENEFIT PLACE CITY: TOPEKA STATE: KS ZIP: 66636-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY EQUITY FUND CENTRAL INDEX KEY: 0000088525 IRS NUMBER: 486104426 STATE OF INCORPORATION: KS FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-01136 FILM NUMBER: 03739414 BUSINESS ADDRESS: STREET 1: SECURITY MANAGEMENT COMPANY, LLC STREET 2: ONE SECURITY BENEFIT PLACE CITY: TOPEKA STATE: KS ZIP: 66636-0001 BUSINESS PHONE: 7854383127 MAIL ADDRESS: STREET 1: SECURITY MANAGEMENT COMPANY, LLC STREET 2: ONE SECURITY BENEFIT PLACE CITY: TOPEKA STATE: KS ZIP: 66636-0001 485APOS 1 ef-registrationstmt.htm PEA #97 - ADDING ALPHA OPPORTUNITY FUND Registration Statement

Registration No. 811-1136
Registration No. 2-19458
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Post-Effective Amendment No. 97 [X]
----
and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 97 [X]
----

(Check appropriate box or boxes)

SECURITY EQUITY FUND
(Exact Name of Registrant as Specified in Charter)

ONE SECURITY BENEFIT PLACE, TOPEKA, KANSAS 66636-0001
(Address of Principal Executive Offices/Zip Code)

Registrant's Telephone Number, including area code:
(785) 438-3000

Copies To:
James R. Schmank, President Amy J. Lee, Secretary
Security Equity Fund Security Equity Fund
One Security Benefit Place One Security Benefit Place
Topeka, KS 66636-0001 Topeka, KS 66636-0001
(Name and address of Agent for Service)

It is proposed that this filing will become effective (check appropriate box):

[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485

If appropriate, check the following box:

[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment

SECURITY EQUITY FUND

FORM N-1A

Explanatory Note: This Amendment to the Registration Statement of Security
Equity Fund, which consists of eleven series, relates only to the Alpha
Opportunity Series. The combined prospectuses and statement of additional
information for the Equity, Global, Large Cap Growth, Mid Cap Value, Technology,
International, Select 25, Small Cap Growth, Enhanced Index and Social Awareness
Series and the prospectus for Social Awareness Series are incorporated herein by
reference to the Registrant's most recent filing under Rule 497 under the
Securities Act of 1933.

PROSPECTUS

[____], 2003

|_| Security Alpha Opportunity Fund(SM)

---------------------------------------------------------------------
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
---------------------------------------------------------------------

[SDI LOGO]
Security Distributors, Inc.
A Member of The Security Benefit
Group of Companies

TABLE OF CONTENTS

FUND INVESTMENT OBJECTIVES AND STRATEGIES.................................. 3
PRINCIPAL RISKS............................................................ 4
Market Risk.............................................................. 4
Smaller Companies........................................................ 4
Value Stocks............................................................. 4
Growth Stocks............................................................ 5
Foreign Securities....................................................... 5
Options and Futures...................................................... 5
Fixed-Income Securities.................................................. 5
Investment in Investment Companies....................................... 5
Active Trading........................................................... 5
Additional Information................................................... 5
FEES AND EXPENSES OF THE FUND.............................................. 5
Related Performance...................................................... 6
INVESTMENT MANAGER......................................................... 7
Management Fees.......................................................... 7
SUB-ADVISER................................................................ 8
Portfolio Managers....................................................... 8
BUYING SHARES.............................................................. 9
Class A Shares........................................................... 9
Class A Distribution Plan................................................ 9
Class B Shares........................................................... 9
Class B Distribution Plan................................................ 10
Class C Shares........................................................... 10
Class C Distribution Plan................................................ 10
Brokerage Enhancement Plan............................................... 10
Waiver of Deferred Sales Charge.......................................... 11
Confirmations and Statements............................................. 11
SELLING SHARES............................................................. 11
By Mail.................................................................. 11
By Telephone............................................................. 12
By Broker................................................................ 12
Payment of Redemption Proceeds........................................... 12
DIVIDENDS AND TAXES........................................................ 12
Tax on Distributions..................................................... 12
Taxes on Sales or Exchanges.............................................. 12
Backup Withholding....................................................... 12
DETERMINATION OF NET ASSET VALUE........................................... 13
SHAREHOLDER SERVICES....................................................... 13
Accumulation Plan........................................................ 13
Systematic Withdrawal Program............................................ 13
Exchange Privilege....................................................... 14
Retirement Plans......................................................... 15
INVESTMENT POLICIES AND MANAGEMENT PRACTICES............................... 15
Foreign Securities....................................................... 15
Smaller Companies........................................................ 15
Convertible Securities and Warrants...................................... 15
Initial Public Offering.................................................. 16
High Yield Securities.................................................... 16
Cash Reserves............................................................ 16
Borrowing................................................................ 16
Futures and Options...................................................... 16
Swaps, Caps, Floors and Collars.......................................... 16
When-Issued Securities and Forward Commitment Contracts.................. 17
Securities Lending....................................................... 17
GENERAL INFORMATION........................................................ 17
Shareholder Inquiries.................................................... 17
APPENDIX A - REDUCED SALES CHARGES......................................... 18
Class A Shares........................................................... 18
Rights of Accumulation................................................... 18
Statement of Intention................................................... 18
Reinstatement Privilege.................................................. 18
Purchases at Net Asset Value............................................. 18

FUND INVESTMENT OBJECTIVES AND STRATEGIES

Listed below are the investment objective and principal investment strategies
for the Security Alpha Opportunity Fund (the "Alpha Opportunity Fund" or the
"Fund"). The Board of Directors may change the Fund's investment objective
without shareholder approval. As with any investment, there can be no guarantee
the Fund will achieve its investment objective.

FUND FACTS
- -------------------------------------------------
Objective: Long-term growth of capital
Benchmark: S&P 500 Index
Sub-Adviser: Mainstream Investment Advisers, LLC

- ----------------------------------------
INVESTMENT OBJECTIVE
- ----------------------------------------

The Alpha Opportunity Fund seeks long-term growth of capital.

- ----------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
- ----------------------------------------

The Fund pursues its objective by investing, under normal market conditions,
approximately 50% of its total assets according to an active value strategy
managed by the Fund's Sub-Adviser, Mainstream Investment Advisers, LLC
("Mainstream"), and 50% of its total assets accordving to a more passive index
strategy based on the S&P 500 Composite Stock Price Index (the "S&P 500 Index")
managed by Security Management Company, LLC (the "Investment Manager"). All
daily cash inflows and outflows will be allocated to the passive index portion
of the Fund in order to minimize the potential negative impact of daily cash
flows to Mainstream's investment strategy. Once a month, the Investment Manager
will rebalance the portfolio to an allocation of approximately 50% of total
assets to each strategy, although the allocation upon rebalancing may range
between 40% and 60% of total assets to each strategy.

The Fund pursues its active value strategy by investing primarily in
publicly-traded equity securities, principally common stocks, but to a lesser
degree in exchange traded funds, convertible bonds, convertible preferred
stocks, stock warrants, rights and other securities with equity characteristics.
If there is an insufficient number of available securities meeting the purchase
criteria of Mainstream, the Fund may also hold a portion of its assets in cash
and money market instruments, and such holdings may be substantial. Dividend and
interest income will be an incidental consideration. The Fund may engage in
short sales of securities believed to be overvalued.

Mainstream seeks to identify individual stocks with solid underlying financial
fundamentals, trading at levels representing value relative to the market
generally. Mainstream uses technical and fundamental methods of analysis to
choose stocks for the Fund's portfolio. The technical analyses used include a
relative strength index ("RSI"), price moving averages and price relative to
historical market averages.

Mainstream also uses bottom-up analysis by evaluating the 2,000 or so most
actively traded stocks in the marketplace. The bottom-up analysis reviews stock
prices in relationship to their stock price moving averages and ranks them by
their RSIs. A purchase candidate is identified as a stock that is at fair value
or undervalued to the marketplace. A sale candidate is identified as a stock
that is expensive or overbought. These action candidates are then grouped by
industry. Mainstream prefers that the candidates are concentrated in a
particular industry. Mainstream also considers the industry and underlying
financial fundamentals of the action candidates. Where the fundamentals are
positive relative to their valuations, the stocks may be purchased. Stocks with
high RSIs may be sold. Stocks with high RSIs and deteriorating fundamentals may
be sold short. Mainstream actively manages the active value portion of the
Fund's portfolio and will buy and sell securities frequently. This active
trading will increase the costs the Fund incurs and may increase the amount of
tax an investor pays on the Fund's returns.

A top-down evaluation of the stock and bond markets, primarily based on their
RSIs, is also used. A high RSI may indicate that the marketplace is expensive or
overbought; conversely, a low RSI indicates that the marketplace is inexpensive
or oversold. Mainstream uses the RSI in combination with an analysis of the
short-term outlook for corporate earnings, interest rates, currencies and
commodities to determine the overall stock to cash and long stock to short stock
allocations.

The Fund pursues its more passive index strategy by investing in equity
derivatives backed by a portfolio of fixed income securities. The Fund may
invest in futures contracts, options, options on futures contracts, swaps and
other derivative instruments. The value of equity derivatives closely tracks
changes in the value of the index. The equity derivatives may be purchased with
a fraction of the assets that would be needed to purchase equity securities
directly, so that the remainder of the Fund's assets which are allocated to this
strategy may be invested in fixed income securities. The Investment Manager
actively manages the fixed income securities backing the equity derivatives with
a view toward enhancing the Fund's total return. The Fund's overall portfolio
duration is normally not expected to exceed one year.

Although this portion of the Fund's portfolio does not normally invest directly
in S&P 500 securities, when equity derivatives appear to be overvalued relative
to the S&P 500 Index, the Fund may invest in a "basket" of S&P 500 stocks. The
S&P 500 Index is a well known stock market index composed of 500 selected common
stocks that represent approximately two-thirds of the total market value of all
U.S. common stocks. Individual stocks are selected based on an analysis of the
historical correlation between the return of every S&P 500 stock and the return
of the S&P 500 Index itself. The Investment Manager may employ fundamental
analysis of factors such as earnings and earnings growth, price to earnings
ratio, dividend growth, and cash flows to choose among stocks that satisfy the
correlation tests. Stocks chosen for the Fund are not limited to those with any
particular weighting in the S&P 500 Index. The Fund may also invest in exchange
traded funds based on the S&P 500 Index, such as Standard & Poor's Depositary
Receipts.

The fixed income securities in which the Fund may invest include securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
corporate debt securities of U.S. issuers, including convertible securities;
mortgage backed and other asset-backed securities; and bank certificates of
deposit, fixed time deposits and bankers' acceptances. The Fund may invest up to
10% of its total assets in high yield securities ("junk bonds") rated B or
higher by Moody's or S&P, or, if unrated, determined by the Investment Manager
to be of comparable quality.

Although the Fund invests principally in U.S. securities, it may, from time to
time, invest in securities of companies located outside the U.S., principally
through American Depositary Receipts traded on U.S. markets.

Under adverse or unstable market conditions, the Fund could invest some or all
of its assets in cash, repurchase agreements and money market instruments of
foreign or domestic issuers and the U.S. and foreign governments. Although the
Fund would do this only in seeking to avoid losses, the Fund may be unable to
pursue its investment objective during that time, and it could reduce the
benefit from any upswing in the market.

PRINCIPAL RISKS

The following chart summarizes the principal risks applicable to the Fund.
However, the fact that a particular risk is not indicated as a principal risk
for the Fund does not mean that the Fund is prohibited from investing its assets
in securities which give rise to that risk. It simply means that the risk is not
a principal risk for the Fund. The Portfolio Managers for the Fund have
considerable leeway in choosing investment strategies and selecting securities
that they believe will help the Fund achieve its investment objective. In
seeking to meet its investment objective, the Fund's assets may be invested in
any type of security or instrument whose investment characteristics are
consistent with the Fund's investment program.

========================================
Market Risk o
----------------------------------------
Smaller Companies o
----------------------------------------
Value Stocks o
----------------------------------------
Growth Stocks o
----------------------------------------
Foreign Securities o
----------------------------------------
Options and Futures o
----------------------------------------
Fixed-Income Securities o
----------------------------------------
Investment in Investment Companies o
----------------------------------------
Active Trading o
========================================

An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will go up and down, which means
investors could lose money.

MARKET RISK -- While equity securities have historically been a leading choice
of long-term investors, they do fluctuate in price. Their prices tend to
fluctuate more dramatically over the shorter term than do the prices of other
asset classes. These movements may result from factors affecting individual
companies, or from broader influences like changes in interest rates, market
conditions, investor confidence or changes in economic, political or financial
market conditions.

SMALLER COMPANIES -- While potentially offering greater opportunities for
capital growth than larger, more established companies, the equity securities of
smaller companies may be particularly volatile, especially during periods of
economic uncertainty. Securities of smaller companies may present additional
risks because their earnings are less predictable, their share prices tend to be
more volatile and their securities often are less liquid than larger, more
established companies.

VALUE STOCKS -- Investments in value stocks are subject to the risk that their
intrinsic values may never be realized by the market, or that their prices may
go down. While the Fund's investments in value stocks may limit downside risk
over time, the Fund may, as a trade-off, produce more modest gains to the extent
it invests in value stocks rather than growth stocks.

GROWTH STOCKS -- While potentially offering greater or more rapid capital
appreciation potential than value stocks, investments in growth stocks may lack
the dividend yield that can cushion stock prices in market downturns. Growth
companies often are expected to increase their earnings at a certain rate. If
expectations are not met, investors can punish the stocks, even if earnings do
increase.

FOREIGN SECURITIES -- Investing in foreign securities involves additional risks
such as currency fluctuations, differences in financial reporting standards, a
lack of adequate company information and political instability. These risks may
increase in underdeveloped capital markets.

OPTIONS AND FUTURES -- Options and futures may be used to hedge the Fund's
portfolio, to increase returns or to maintain exposure to a market without
buying individual securities. However, there is the risk that such practices
sometimes may reduce returns or increase volatility. These practices also entail
transactional expenses.

FIXED-INCOME SECURITIES -- Fixed-income investing may present risks because the
market value of fixed-income investments generally is affected by changes in
interest rates. When interest rates rise, the market value of a fixed-income
security declines. Generally, the longer a bond's maturity, the greater the
risk. A bond's value can also be affected by changes in the credit rating or
financial condition of its issuer. Investments in higher yielding, high risk
debt securities may present additional risk because these securities may be less
liquid than investment grade bonds, and because they are more susceptible to the
risk that the issuer will not be able to make the requisite principal and
interest payments. They also tend to be more susceptible to high interest rates
and to real or perceived adverse economic and competitive industry conditions.
Bond values fluctuate, and an investor may receive more or less money than
originally invested.

INVESTMENT IN INVESTMENT COMPANIES -- Investments in other investment companies
may include index-based investments such as SPDRs (based on the S&P 500 Index),
MidCap SPDRs (based on the S&P MidCap 400 Index), Select Sector SPDRs (based on
sectors or industries of the S&P 500 Index), Nasdaq-100 Index Tracking Stocks
(based on the Nasdaq-100 index) and DIAMONDS (based on the Dow Jones Industrial
Average). To the extent the Fund invests in other investment companies, it will
incur its pro rata share of the underlying investment companies' expenses. In
addition, the Fund will be subject to the effects of business and regulatory
developments that affect an underlying investment company or the investment
company industry generally.

ACTIVE TRADING -- Active trading will increase the costs the Fund incurs and as
a result, may lower the Fund's performance. It may also increase the amount of
tax an investor pays on the Fund's returns.

ADDITIONAL INFORMATION -- For more information about the Fund's investment
program, including additional information about the risks of certain types of
investments, please see the "Investment Policies and Management Practices"
section of this prospectus and the Statement of Additional Information.

FEES AND EXPENSES OF THE FUND

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE FUND.

- ----------------------------------------
SHAREHOLDER FEES (ALL FUNDS)
- ----------------------------------------

Fees are paid directly from your investment.

================================================================================
CLASS A CLASS B CLASS C
SHARES SHARES(1) SHARES
- --------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 5.75% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(as a percentage of original purchase price None(2) 5%(3) 1%(4)
or redemption proceeds, whichever is lower)
- --------------------------------------------------------------------------------
1 Class B shares convert tax-free to Class A shares automatically after eight
years.

2 Purchases of Class A shares in amounts of $1,000,000 or more are not subject
to an initial sales load; however, a deferred sales charge of 1% is imposed
in the event of redemption within one year of purchase.

3 5% during the first year, decreasing to 0% in the sixth and following years.

4 A deferred sales charge of 1% is imposed in the event of redemption within
one year of purchase.
================================================================================

- ----------------------------------------
ANNUAL FUND OPERATING EXPENSES
- ----------------------------------------

Expenses that are deducted from Fund assets.

================================================================================
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
Management fee(1)................................. 2.00% 2.00% 2.00%
Distribution (12b-1) fees(2)...................... 0.25% 1.00% 1.00%
Other expenses(3)................................. 0.50% 0.50% 0.50%
TOTAL ANNUAL FUND OPERATING EXPENSES.............. 2.75% 3.50% 3.50%
- --------------------------------------------------------------------------------
1 Alpha Opportunity Fund pays an advisory fee that will range from 1.25% to
2.75% of average daily net assets based upon the Fund's performance relative
to the S&P 500 Index. See the discussion of such fee under "Management Fees."

2 The Fund has adopted a Brokerage Enhancement Plan under Rule 12b-1, but has
not yet implemented the Plan. If the Brokerage Enhancement Plan is
implemented, it is not expected that any amounts received by the Fund's
distributor would exceed 0.05% of the Fund's average net assets. This
additional amount is not reflected in the "Distribution (12b-1) fees" set
forth in the table.

3 Other expenses for Alpha Opportunity Fund are based upon estimated expenses,
because the Fund commenced operations [ ], 2003.
================================================================================

EXAMPLE

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

Each Example assumes that you invest $10,000 in the Fund for the time periods
indicated. Each Example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be as follows:

You would pay the following expenses if you redeemed your shares at the end of
each period.

===============================================================
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------
Class A.......... $837 $1,379 N/A N/A
Class B.......... 853 1,374 N/A N/A
Class C.......... 453 1,074 N/A N/A
===============================================================

You would pay the following expenses if you did not redeem your shares.

===============================================================
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------
Class A.......... $837 $1,379 N/A N/A
Class B.......... 353 1,074 N/A N/A
Class C.......... 353 1,074 N/A N/A
===============================================================

RELATED PERFORMANCE --

================================================================================
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 2002)
- --------------------------------------------------------------------------------
PAST PAST FROM
1 YEAR 5 YEARS INCEPTION

Mainstream Composite Data(1) ............... -9.34% 11.16% 24.29%(2)
S&P 500 Index(4) ........................... -22.09% -0.58% 6.88%(3)
- --------------------------------------------------------------------------------
1 Reported performance returns include the reinvestment of dividends. Net
performance results are modeled to reflect the deduction of the highest
investment advisory fees charged by Mainstream and other applicable expenses.
Actual fees may vary depending on, among other things, the applicable fee
schedule and portfolio size. The Mainstream Composite Data includes short
positions; the S&P 500 Index does not include short positions. Assets under
management in the Mainstream Composite Data were $1.0 million on January 2,
1996; $8.6 million on January 2, 1997; $76.8 million on January 2, 1998;
$106.5 million on January 2, 1999; $104 million on January 3, 2000; $146.3
million on January 2, 2001; $129.9 million on January 2, 2002; and $128.5
million on January 2, 2003.

2 For the period beginning January 2, 1996 (date of inception) to December 31,
2002. Results prior to July 15, 1997, were obtained while the Mainstream
Portfolio Manager was employed by Providian Corporation and thereafter were
obtained while he was employed by Mainstream.

3 The performance of the S&P 500 Index is for the period January 2, 1996 to
December 31, 2002.

4 The S&P 500 Index is composed of 500 selected common stocks that represent
approximately two-thirds of the total market value of all U.S. common stocks.
The comparative S&P 500 returns do not reflect deduction of fees, taxes or
expenses and are provided solely as representative of the general market for
the same period of time. Index performance assumes reinvestment of dividends
and distributions.
================================================================================

The Alpha Opportunity Fund, which commenced operations on [ ], 2003, had no
performance record for the calendar year ended December 31, 2002. The above
table sets forth historical information for individual and institutional client
accounts with investment objectives and strategies substantially similar to
those of the active value portion of the Alpha Opportunity Fund, which accounts
are managed by the Alpha Opportunity Fund's Sub-Adviser, Mainstream.

This composite performance data is provided to illustrate the past performance
of Mainstream in managing accounts similar to the active value portion of the
Fund and does not represent the Fund's performance. In reviewing this data,
please keep in mind that Mainstream manages under normal circumstances only
approximately 50% of the Alpha Opportunity Fund's total assets in its active
value strategy, while the balance of the Fund's assets are managed by the
Investment Manager in a more passive index strategy. Mainstream's performance is
relevant only to that portion of the Fund's assets that is managed by
Mainstream. See the discussion of the Fund's principal investment strategies
above for more information.

The composite performance data is computed based upon Mainstream's asset
weighted "average" performance with regard to such accounts. The composite
performance information is based on a composite of all client accounts of
Mainstream having substantially similar investment objectives, policies and
strategies to those of the active value portion of the Alpha Opportunity Fund.
The composite performance results reflect a deduction of the maximum advisory
fee charged by Mainstream and other expenses incurred by the client accounts.

Mainstream has supplied the composite performance data, and the Investment
Manager believes it to be reliable; however, such information has not been
audited or verified by the Investment Manager.

The accounts included in the composite performance data are not mutual funds
registered under the Investment Company Act of 1940, nor are the accounts
subject to investment limitations, diversification requirements and other
restrictions imposed by the Act and the Internal Revenue Code. If such
requirements were applicable to the accounts, the performance shown may have
been lower.

THE PERFORMANCE DATA SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR THE FUND'S
PERFORMANCE, NOR SHOULD IT BE CONSIDERED AS AN INDICATION OF FUTURE PERFORMANCE
OF THE FUND OR MAINSTREAM.

INVESTMENT MANAGER

Security Management Company, LLC (the "Investment Manager"), One Security
Benefit Place, Topeka, Kansas 66636, is the Fund's investment manager. On
December 31, 2002, the aggregate assets of all of the mutual funds under the
investment management of the Investment Manager were approximately $4.3 billion.

MANAGEMENT FEES -- The following chart shows the aggregate investment management
fees paid by each Fund during the last fiscal year, except as otherwise
indicated. The Investment Manager, and not the Fund, is responsible for payment
of sub-advisory fees.

The Investment Manager may waive some or all of its management fee to limit the
total operating expenses of the Fund to a specified level. The Investment
Manager also may reimburse expenses of the Fund from time to time to help it
maintain competitive expense ratios. These arrangements are voluntary and may be
terminated at any time. The fees without waivers or reimbursements are shown in
the fee table on page 6.

=================================================
MANAGEMENT FEES
(expressed as a percentage of average net assets)
-------------------------------------------------
Alpha Opportunity Fund*.................. 2.00%
-------------------------------------------------
*The Fund was not offered for sale until [____],
2003. Alpha Opportunity Fund's management fee
will range from 1.25% to 2.75% of average daily
net assets as discussed below.
=================================================

The Investment Manager receives a management fee from Alpha Opportunity Fund
that is composed of two components. The first component is an annual base fee
equal to 2.00% of Alpha Opportunity Fund's average daily net assets. The second
component is a performance adjustment that either increases or decreases the
base fee, depending on how Alpha Opportunity Fund performed relative to the S&P
500 Index.

The illustration below demonstrates how the performance adjustment may affect
the Investment Manager's fee. The Investment Manager will receive the 2.00%
annual base fee for the first year of the Fund's investment operations, and
thereafter if the Fund's investment performance matches the investment record of
the S&P 500 Index over the prior 12 month period. If the investment performance
of the Fund's Class A shares exceeds the investment record of the S&P 500 Index,
the performance adjustment increases the fee paid to the Investment Manager
proportionately, reaching a maximum annual fee of 2.75% if the Fund outperforms
the investment record of the S&P 500 Index by 15 percentage points over the
measuring period. If the investment performance of the Fund's Class A shares
trails the investment record of the S&P 500 Index, the performance adjustment
decreases the fee paid to the Investment Manager proportionately, reaching a
minimum annual fee of 1.25% if the Fund underperforms the investment record of
the S&P 500 Index by 15 percentage points over the measuring period. The
performance adjustment is calculated on the basis of a "rolling" 12 month
measuring period, so that a fee rate calculated on the basis of investment
performance over a 12 month period will apply only for the next succeeding
month, and then will be subject to recalculation for the following month on the
basis of the Fund's investment performance over the prior 12 month period.

Performance adjustments will begin on [ ], 2004 based upon Alpha Opportunity
Fund's performance during the 12 months ended [ ], 2004.

The following table includes examples showing the fees that the Investment
Manager would earn at various levels of investment performance of the Alpha
Opportunity Fund and the S&P 500 Index:

========================================================
% POINT DIFFERENCE TOTAL
BETWEEN CLASS A PERFORMANCE MANAGEMENT
SHARES AND ADJUSTMENT FROM FEE PAID TO
S&P 500 INDEX BASE ADVISORY FEE MANAGER
--------------------------------------------------------
15% +0.75% 2.75%
--------------------------------------------------------
10% +0.50% 2.50%
--------------------------------------------------------
5% +0.25% 2.25%
--------------------------------------------------------
0% 0.00% 2.00%
--------------------------------------------------------
-5% -0.25% 1.75%
--------------------------------------------------------
-10% -0.50% 1.50%
--------------------------------------------------------
-15% -0.75% 1.25%
========================================================

Please note that the controlling factor is not whether the Alpha Opportunity
Fund's investment performance is positive or negative, but whether it exceeds or
lags the investment record of the S&P 500 Index. Further, the Fund's investment
performance is compared against the investment record of the S&P 500 Index only
on the basis of a rolling 12 month period, and not on the basis of relative
performance over a longer period. The base fee and maximum annual fee payable to
the Investment Manager are higher than investment advisory fees typically paid
by mutual funds.

SUB-ADVISER

The Investment Manager and the Fund have received from the U.S. Securities and
Exchange Commission an exemptive order for a multi-manager structure that allows
the Investment Manager to hire, replace or terminate sub-advisers without the
approval of shareholders. The order also allows the Investment Manager to revise
a sub-advisory agreement with the approval of the Fund's Board of Directors, but
without shareholder approval. If a new sub-adviser is hired, shareholders will
receive information about the new sub-adviser within 90 days of the change. The
order allows the Fund to operate more efficiently and with greater flexibility.
The Investment Manager provides the following oversight and evaluation services
to the Fund:

o performing initial due diligence on prospective sub-advisers for the Fund

o monitoring the performance of the sub-adviser

o communicating performance expectations to the sub-adviser

o ultimately recommending to the Board of Directors whether a sub-adviser's
contract should be renewed, modified or terminated.

The Investment Manager does not expect to recommend frequent changes of
sub-advisers. Although the Investment Manager will monitor the performance of
the sub-advisers, there is no certainty that any sub-adviser or the Fund will
obtain favorable results at any given time.

The Investment Manager has engaged Mainstream Investment Advisers, LLC
("Mainstream") to provide investment advisory services to Alpha Opportunity
Fund. Mainstream, 101 West Spring Street, Fourth Floor, New Albany, Indiana
47150, managed approximately $144 million in client assets as of December 31,
2002. For its services as sub-adviser, the Investment Manager, and not the Alpha
Opportunity Fund, pays Mainstream a sub-advisory fee. The sub-advisory fee is an
annual base fee equal to 2.50% of that portion of the Alpha Opportunity Fund's
assets managed by Mainstream. The sub-advisory fee will be adjusted upward or
downward, depending on how that portion of Alpha Opportunity Fund's assets
performed relative to the S&P 500 Index during the prior 12 months. During its
first 12 months of operations, the Investment Manager will pay Mainstream the
base fee of 2.50% without any adjustment for performance. Performance
adjustments will begin on [ ], 2004 based upon the investment performance during
the 12 months ended [ ], 2004 of that portion of Alpha Opportunity Fund's assets
managed by Mainstream. The maximum performance adjustment upward or downward is
1.50% annually. Depending on the investment performance of Alpha Opportunity
Fund's assets managed by Mainstream, the Investment Manager will pay Mainstream
a maximum of 4.00% or a minimum of 1.00% in annual sub-advisory fees. The nature
of the performance fee is such that the Investment Manager will pay Mainstream a
higher fee when the investment performance of the active value portion of the
Fund is better than the investment record of the S&P 500 Index during the prior
12 months and a lower fee when the investment performance of that portion of the
Fund is lower than the investment record of the S&P 500 Index during the prior
12 months. For more information about Mainstream's sub-advisory fee, please read
the "Sub-Adviser" section of the Statement of Additional Information.

PORTFOLIO MANAGERS -- The Portfolio Managers oversee the day-to-day operations
of the Fund:

STEVEN M. BOWSER, Vice President and Senior Portfolio Manager of the Investment
Manager, has been a co-manager of the Alpha Opportunity Fund since its inception
in [ ] 2003. Mr. Bowser joined the Investment Manager in 1992. From 1989 to
1992, Mr. Bowser was Assistant Vice President and Portfolio Manager with the
Federal Home Loan Bank of Topeka. He was employed at the Federal Reserve Bank of
Kansas City in 1988 and began his career with the Farm Credit System from 1982
to 1987, serving as a Senior Financial Analyst and Assistant Controller. He
graduated with a bachelor of science degree from Kansas State University in
1982. He is a Chartered Financial Analyst charterholder.

WILLIAM H. JENKINS, Manager of Mainstream, has been a co-manager of the Alpha
Opportunity Fund managing the active value portion of the Fund since its
inception in [ ] 2003. He has more than 34 years of investment experience. Mr.
Jenkins co-founded Mainstream Investment Advisers, LLC, an investment adviser
registered with the SEC, in July 1997. He spent the prior 15 years with
Providian Corporation as their sole equity portfolio manager. From 1988 to 1991,
he was head of new asset and liability strategies for Providian, in addition to
his equity portfolio management responsibilities. Prior to Providian, he worked
as a portfolio manager/analyst at McGlinn Capital, Delaware Investment Advisors
and Mellon Bank and Trust. Mr. Jenkins holds a bachelor's degree from Grove City
College and a M.B.A. from New York University. He is a Chartered Financial
Analyst charterholder.

MARK LAMB, Vice President of the Investment Manager, has been a co-manager of
Alpha Opportunity Fund since [ ] 2003. Mr. Lamb joined the Investment Manager in
February 2003. Prior to joining the Investment Manager, Mr. Lamb was employed by
ARM Financial Group as director of investment risk management and senior
derivatives portfolio manager. From 1997 to 1998, Mr. Lamb was director of
financial engineering for LG&E Energy Marketing and from 1989 to 1997, he was
project manager of corporate finance and director of derivative securities for
Providian Capital Holding. Mr. Lamb holds a bachelor of science degree in
engineering physics and a M.B.A. from Murray State University. He is a Chartered
Financial Analyst charterholder.

BUYING SHARES

Shares of the Fund are available through broker/dealers, banks, and other
financial intermediaries that have an agreement with the Fund's Distributor,
Security Distributors, Inc. A broker/dealer or other financial intermediary may
charge fees in connection with an investment in the Fund. Fund shares purchased
directly from the Fund are not assessed such additional charges but may be
subject to a front-end sales charge as noted under "Class A shares."

There are three different ways to buy shares of the Fund: Class A shares, Class
B shares or Class C shares. The different classes of a Fund differ primarily
with respect to the sales charges and Rule 12b-1 distribution fees for each
class. The minimum initial investment is $100. Subsequent investments must be
$100 (or $20 under an Accumulation Plan). The Fund reserves the right to reject
any order to purchase shares in whole or in part.

The Fund no longer issues certificates; all Fund shares are issued in
non-certificate form.

CLASS A SHARES -- Class A shares are subject to a sales charge at the time of
purchase. An order for Class A shares will be priced at the Fund's net asset
value per share (NAV), plus the sales charge set forth below. The NAV, plus the
sales charge, is the "offering price." The Fund's NAV is generally calculated as
of the close of trading on every day the New York Stock Exchange (NYSE) is open.
An order for Class A shares is priced at the NAV next calculated after the order
is accepted by the Fund, plus the sales charge.

================================================================================
SALES CHARGE
---------------------------------
AS A AS A PERCENTAGE
PERCENTAGE OF OF NET AMOUNT
AMOUNT OF ORDER OFFERING PRICE INVESTED
- --------------------------------------------------------------------------------
Less than $50,000........................... 5.75% 6.10%
$50,000 to $99,999.......................... 4.75% 4.99%
$100,000 to $249,999........................ 3.75% 3.90%
$250,000 to $499,999........................ 2.75% 2.83%
$500,000 to $999,999........................ 2.00% 2.04%
$1,000,000 or more*......................... None None
- --------------------------------------------------------------------------------
*Purchases of $1,000,000 or more are not subject to a sales charge at the time
of purchase, but are subject to a deferred sales charge of 1.00% if redeemed
within one year following purchase. The deferred sales charge is a percentage
of the lesser of the NAV of the shares redeemed or the net cost of such shares.
Shares that are not subject to a deferred sales charge are redeemed first.
================================================================================

Please see Appendix A for options that are available for reducing the sales
charge applicable to purchases of Class A shares.

CLASS A DISTRIBUTION PLAN -- The Fund has adopted a Class A Distribution Plan
that allows the Fund to pay distribution fees to the Fund's Distributor. The
Distributor uses the fees to pay for activities related to the sale of Class A
shares and services provided to shareholders. The distribution fee is equal to
0.25% of the average daily net assets of the Fund's Class A shares. Because the
distribution fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of a shareholder's investment and may
cost an investor more than paying other types of sales charges.

CLASS B SHARES -- Class B shares are not subject to a sales charge at the time
of purchase. An order for Class B shares will be priced at the Fund's NAV next
calculated after the order is accepted by the Fund. The Fund's NAV is generally
calculated as of the close of trading on every day the NYSE is open.

Class B shares are subject to a deferred sales charge if redeemed within 5 years
from the date of purchase. The deferred sales charge is a percentage of the NAV
of the shares at the time they are redeemed or the original purchase price,
whichever is less. Shares that are not subject to the deferred sales charge are
redeemed first. Then, shares held the longest will be the first to be redeemed.

The amount of the deferred sales charge is based upon the number of years since
the shares were purchased, as follows:

================================
NUMBER OF YEARS DEFERRED
SINCE PURCHASE SALES CHARGE
--------------------------------
1 5%
2 4%
3 3%
4 3%
5 2%
6 and more 0%
================================

The Distributor will waive the deferred sales charge under certain
circumstances. See "Waiver of the Deferred Sales Charge."

CLASS B DISTRIBUTION PLAN -- The Fund has adopted a Class B Distribution Plan
that allows the Fund to pay distribution fees to the Distributor. The
Distributor uses the fees to finance activities related to the sale of Class B
shares and services to shareholders. The distribution fee is equal to 1.00% of
the average daily net assets of the Fund's Class B shares. Because the
distribution fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of a shareholder's investment and may
cost an investor more than paying other types of sales charges.

Class B shares automatically convert to Class A shares on the eighth anniversary
of purchase. This is advantageous to such shareholders because Class A shares
are subject to a lower distribution fee than Class B shares. A pro rata amount
of Class B shares purchased through the reinvestment of dividends or other
distributions is also converted to Class A shares each time the shares purchased
directly are converted.

CLASS C SHARES -- Class C shares are not subject to a sales charge at the time
of purchase. An order for Class C shares will be priced at the Fund's NAV next
calculated after the order is accepted by the Fund. The Fund's NAV is generally
calculated as of the close of trading on every day the NYSE is open.

Class C shares are subject to a deferred sales charge of 1.00% if redeemed
within one year from the date of purchase. The deferred sales charge is a
percentage of the NAV of the shares at the time they are redeemed or the
original purchase price, whichever is less. Shares that are not subject to the
deferred sales charge are redeemed first. Then, shares held the longest will be
the first to be redeemed. The Distributor will waive the deferred sales charge
under certain circumstances. See "Waiver of the Deferred Sales Charge," page
11.

CLASS C DISTRIBUTION PLAN -- The Fund has adopted a Class C Distribution Plan
that allows the Fund to pay distribution fees to the Distributor. The
Distributor uses the fees to finance activities related to the sale of Class C
shares and services to shareholders. The distribution fee is equal to 1.00% of
the average daily net assets of the Fund's Class C shares. Because the
distribution fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of a shareholder's investment and may
cost an investor more than paying other types of sales charges.

BROKERAGE ENHANCEMENT PLAN -- The Fund has adopted a Brokerage Enhancement Plan
(the "Plan") in accordance with the provisions of Rule 12b-1 under the
Investment Company Act of 1940. However, to date, the Plan has not been
implemented. If implemented, the Plan would use available brokerage commissions
to promote the sale and distribution of Fund shares.

Under the Plan, the Fund may direct the Investment Manager or Sub-Adviser to use
certain broker-dealers for securities transactions, subject to the duty of best
execution. These broker-dealers have agreed either (1) to pay a portion of their
commission from the sale and purchase of securities to the Distributor or other
introducing brokers ("Brokerage Payments"), or (2) to provide brokerage credits,
benefits or services ("Brokerage Credits"). The Distributor will use all
Brokerage Payments and Credits (other than a minimal amount to defray its legal
and administrative costs) to finance activities that are meant to result in the
sale of the Fund's shares, including:

o holding or participating in seminars and sales meetings promoting the sale of
the Fund's shares

o paying marketing fees requested by broker-dealers who sell the Fund

o training sales personnel

o creating and mailing advertising and sales literature

o financing any other activity that is intended to result in the sale of the
Fund's shares.

The Plan permits the Brokerage Payments and Credits generated by securities
transactions from the Fund to be used for the benefit of other Security Funds as
well. The Plan is not expected to increase the brokerage costs of the Fund. For
more information about the Plan, please read the "Allocation of Portfolio
Brokerage" section of the Statement of Additional Information.

WAIVER OF DEFERRED SALES CHARGE -- The Distributor will waive the deferred sales
charge under the following circumstances:

o Upon the death of the shareholder if shares are redeemed within one year of
the shareholder's death

o Upon the disability of the shareholder prior to age 65 if shares are redeemed
within one year of the shareholder becoming disabled and the shareholder was
not disabled when the shares were purchased

o In connection with required minimum distributions from a retirement plan
qualified under Section 401(a), 401(k), 403(b) or 408 of the Internal Revenue
Code

o In connection with distributions from retirement plans qualified under
Section 401(a), 401(k) or 403(b) of the Internal Revenue Code for:

> returns of excess contributions to the plan

> retirement of a participant in the plan

> a loan from the plan (loan repayments are treated as new sales for
purposes of the deferred sales charge)

> financial hardship (as defined in regulations under the Code) of a
participant in a plan

> termination of employment of a participant in a plan

> any other permissible withdrawal under the terms of the plan.

CONFIRMATIONS AND STATEMENTS -- The Fund will send you a confirmation statement
after every transaction that affects your account balance or registration.
However, certain automatic transactions may be confirmed on a quarterly basis
including systematic withdrawals, automatic purchases and reinvested dividends.
Each shareholder will receive a quarterly statement setting forth a summary of
the transactions that occurred during the preceding quarter.

SELLING SHARES

Selling your shares of the Fund is called a "redemption," because the Fund buys
back the shares. A shareholder may sell shares at any time. Shares will be
redeemed at the NAV next determined after the order is received by the Fund's
transfer agent, less any applicable deferred sales charge. The Fund's NAV is
generally calculated as of the close of trading on every day the NYSE is open.
Any share certificates representing Fund shares being sold must be returned with
a request to sell the shares.

When redeeming recently purchased shares, if the Fund has not collected payment
for the shares, it may delay sending the proceeds until it has collected
payment, which may take up to 15 days.

BY MAIL -- To sell shares by mail, send a letter of instruction that includes:

o The name and signature of the account owner(s)

o The name of the Fund

o The dollar amount or number of shares to sell

o Where to send the proceeds

o A signature guarantee if

> The check will be mailed to a payee or address different than that of the
account owner, or

> The sale of shares is more than $25,000.

A signature guarantee helps protect against fraud. Banks, brokers, credit
unions, national securities exchanges and savings associations provide signature
guarantees. A notary public is not an eligible signature guarantor. For joint
accounts, both signatures must be guaranteed.

Mail your request to:

Security Management Company, LLC
P.O. Box 750525
Topeka, KS 66675-9135

Signature requirements vary based on the type of account you have:

o INDIVIDUAL OR JOINT TENANTS: Written instructions must be signed by an
individual shareholder, or in the case of joint accounts, all of the
shareholders, exactly as the name(s) appears on the account.

o UGMA OR UTMA: Written instructions must be signed by the custodian as it
appears on the account.

o SOLE PROPRIETOR OR GENERAL PARTNER: Written instructions must be signed by an
authorized individual as it appears on the account.

o CORPORATION OR ASSOCIATION: Written instructions must be signed by the
person(s) authorized to act on the account. A certified resolution dated
within six months of the date of receipt, authorizing the signer to act, must
accompany the request if not on file with the Fund.

o TRUST: Written instructions must be signed by the trustee(s). If the name of
the current trustee(s) does not appear on the account, a certified
certificate of incumbency dated within 60 days must also be submitted.

o RETIREMENT: Written instructions must be signed by the account owner.

BY TELEPHONE -- If you selected this option on your account application, you may
make redemptions from your account by calling 1-800-888-2461 on weekdays (except
holidays) between 7:00 a.m. and 6:00 p.m. Central time. The Fund requires that
requests for redemptions over $25,000 be in writing with signatures guaranteed.
You may not close your account by telephone or redeem shares for which a
certificate has been issued. If you would like to establish this option on an
existing account, please call 1-800-888-2461. Shareholders may not redeem shares
held in an Individual Retirement Account ("IRA") or 403(b)(7) account by
telephone.

BY BROKER -- You may redeem your shares through your broker. Brokers may charge
a commission upon the redemption of shares.

PAYMENT OF REDEMPTION PROCEEDS -- Payments may be made by check. Redemption
proceeds will be sent to the shareholder(s) of record at the address on our
records generally within seven days after receipt of a valid redemption request.
For a charge of $20 deducted from redemption proceeds, the Investment Manager
will provide a certified or cashier's check, or send the redemption proceeds by
express mail, upon the shareholder's request or send the proceeds by wire
transfer to the shareholder's bank account upon receipt of appropriate wire
transfer instructions.

In addition, redemption proceeds can be sent by electronic funds transfer, free
of charge, to the shareholder's bank account.

The Fund may suspend the right of redemption during any period when trading on
the NYSE is restricted or the Exchange is closed for a reason other than weekend
or holiday, or any emergency is deemed to exist by the Securities and Exchange
Commission.

DIVIDENDS AND TAXES

The Fund pays its shareholders dividends from its net investment income, and
distributes any net capital gains that it has realized, at least annually. Your
dividends and distributions will be reinvested in the Fund, unless you instruct
the Investment Manager otherwise. There are no fees or sales charges on
reinvestments.

TAX ON DISTRIBUTIONS -- Fund dividends and distributions are taxable to
shareholders (unless your investment is in an IRA or other tax-advantaged
retirement account) whether you reinvest your dividends or distributions or take
them in cash.

In addition to federal tax, dividends and distributions may be subject to state
and local taxes. If the Fund declares a dividend or distribution in October,
November or December but pays it in January, you may be taxed on that dividend
or distribution as if you received it in the previous year. In general,
dividends and distributions from the Fund are taxable as follows:

================================================================================
TAX RATE FOR 28%
TYPE OF DISTRIBUTION TAX RATE FOR 15% BRACKET BRACKET OR ABOVE
- --------------------------------------------------------------------------------
Income dividends Ordinary Income rate Ordinary Income rate
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary Income rate Ordinary Income rate
- --------------------------------------------------------------------------------
Long-term capital gains 10% 20%
- --------------------------------------------------------------------------------
Long-term capital gains
(held for 5 years or more) 8% 18%
================================================================================

Tax-deferred retirement accounts generally do not generate a tax liability
unless you are taking a distribution or making a withdrawal.

The Fund has "short-term capital gains" when it sells shares within 12 months
after buying them. The Fund has "long-term capital gains" when it sells shares
that it has owned for more than 12 months.

The Fund will mail you information concerning the tax status of the
distributions for each calendar year on or before January 31 of the following
year.

TAXES ON SALES OR EXCHANGES -- You may be taxed on any sale or exchange of Fund
shares. The amount of gain or loss will depend primarily upon how much you pay
for the shares, how much you sell them for, and how long you hold them.

The previous table can provide a guide for your potential tax liability when
selling or exchanging Fund shares. "Short-term capital gains" applies to Fund
shares sold or exchanged up to one year after buying them. "Long-term capital
gains" applies to shares held for more than one year.

BACKUP WITHHOLDING -- As with all mutual funds, the Fund may be required to
withhold U.S. federal income tax at the rate of 30% of all taxable distributions
payable to you if you fail to provide the Fund with your correct taxpayer
identification number or to make required certifications, or if you have been
notified by the Internal Revenue Service that you are subject to backup
withholding. Backup withholding is not an additional tax; rather, it is a way in
which the Internal Revenue Service ensures it will collect taxes otherwise due.
Any amounts withheld may be credited against your U.S. federal income tax
liability.

You should consult your tax professional about federal, state and local tax
consequences to you of an investment in the Fund. Please see the Statement of
Additional Information for additional tax information.

DETERMINATION OF NET ASSET VALUE

The net asset value per share (NAV) of the Fund is computed as of the close of
regular trading hours on the NYSE (normally 3 p.m. Central time) on days when
the Exchange is open. The Exchange is open Monday through Friday, except on
observation of the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

The Fund's NAV is generally based upon the market value of securities held in
the Fund's portfolio. If market prices are not available, the fair value of
securities is determined using procedures approved by the Fund's Board of
Directors. In addition, if between the time trading ends on a particular
security and the close of trading on the NYSE, events occur that materially
affect the value of the security, the Fund may value the security at its fair
value as determined in good faith by the Investment Manager under procedures
approved by the Board of Directors. In such a case, the Fund's net asset value
will be subject to the judgment of the Investment Manager rather than being
determined by the market.

Foreign securities are valued based on quotations from the primary market in
which they are traded, and are converted from the local currency into U.S.
dollars using current exchange rates. Foreign securities may trade in their
primary markets on weekends or other days when the Fund does not price its
shares. Therefore, the NAV of the Fund when holding foreign securities may
change on days when shareholders will not be able to buy or sell shares of the
Fund.

SHAREHOLDER SERVICES

ACCUMULATION PLAN -- An investor may choose to invest in the Fund through a
voluntary Accumulation Plan. This allows for an initial investment of $100
minimum and subsequent investments of $20 minimum at any time. An Accumulation
Plan involves no obligation to make periodic investments, and is terminable at
will.

Payments are made by sending a check to the Distributor who (acting as an agent
for the dealer) will purchase whole and fractional shares of the Fund as of the
close of business on such day as the payment is received. The investor will
receive a confirmation and statement after each investment.

Investors may also choose to use an Automatic Investment Plan (automatic bank
draft) to make Fund purchases. There is no additional charge for choosing to use
an Automatic Investment Plan. Withdrawals from your bank account may occur up to
three business days before the date scheduled to purchase Fund shares. An
application for an Automatic Investment Plan may be obtained from the Funds.

SYSTEMATIC WITHDRAWAL PROGRAM -- Shareholders who wish to receive regular
monthly, bi-monthly, quarterly, semiannual, or annual payments of $25 or more
may establish a Systematic Withdrawal Program. A shareholder may elect a payment
that is a specified percentage of the initial or current account value or a
specified dollar amount. A Systematic Withdrawal Program will be allowed only if
shares with a current aggregate net asset value of $5,000 or more are deposited
with the Investment Manager, which will act as agent for the shareholder under
the Program. Shares are liquidated at NAV. The Program may be terminated on
written notice, or it will terminate automatically if all shares are liquidated
or redeemed from the account.

A shareholder may establish a Systematic Withdrawal Program with respect to
Class B and Class C shares without the imposition of any applicable contingent
deferred sales charge, provided that such withdrawals do not in any 12-month
period, beginning on the date the Program is established, exceed 10% of the
value of the account on that date ("Free Systematic Withdrawals"). Free
Systematic Withdrawals are not available if a Program established with respect
to Class B or Class C shares provides for withdrawals in excess of 10% of the
value of the account in any Program year and, as a result, all withdrawals under
such a Program would be subject to any applicable contingent deferred sales
charge. Free Systematic Withdrawals will be made first by redeeming those shares
that are not subject to the contingent deferred sales charge and then by
redeeming shares held the longest. The contingent deferred sales charge
applicable to a redemption of Class B or Class C shares requested while Free
Systematic Withdrawals are being made will be calculated as described under
"Class B Shares" or "Class C Shares," as applicable. A Systematic Withdrawal
form may be obtained from the Funds.

EXCHANGE PRIVILEGE -- Shareholders of the Fund may exchange their shares for
shares of another Security Fund. An exchange is two transactions: a sale of
shares of one fund and the purchase of shares of another fund. In general, the
same policies that apply to purchases and sales apply to exchanges, including
the Fund's right to reject any order to purchase shares.

Shareholders who hold their shares in a tax-qualified retirement plan may
exchange shares of the Fund for shares of Security Capital Preservation Fund,
but may not exchange into Security Municipal Bond Fund. Shareholders also may
exchange their shares of the Fund for shares of Security Cash Fund, provided
that exchanges to Security Cash Fund are not available to shareholders who have
purchased through the following custodial accounts of the Investment Manager:
403(b)(7) accounts, SEP accounts and SIMPLE plans. All exchanges are made at the
relative NAVs of the Funds on the date of the exchange.

Exchanges may be made only in those states where shares of the Security Fund
into which an exchange is to be made are qualified for sale. No service fee or
sales charge is presently imposed on such an exchange. Shares of a particular
class of the Fund may be exchanged only for shares of the same class of another
available Fund or for Class A shares of Security Cash Fund, if available. At
present, Municipal Bond Fund does not offer Class C shares. Any applicable
contingent deferred sales charge will be imposed upon redemption and calculated
from the date of the initial purchase without regard to the time shares were
held in Security Cash Fund. For tax purposes, an exchange is a sale of shares
that may result in a taxable gain or loss. Special rules may apply to determine
the amount of gain or loss on an exchange occurring within ninety days after
purchase of the exchanged shares. Exchanges are made upon receipt of a properly
completed Exchange Authorization form. A current prospectus of the Fund into
which an exchange is made will be given to each shareholder exercising this
privilege.

The terms of an employee-sponsored retirement plan may affect a shareholder's
right to exchange shares as described above. Contact your plan sponsor or
administrator to determine if all of the exchange options discussed above are
available under your plan.

To exchange shares by telephone, a shareholder must hold shares in
non-certificate form and must either have completed the Telephone Exchange
section of the application or a Telephone Transfer Authorization form which may
be obtained from the Investment Manager. Once authorization has been received by
the Investment Manager, a shareholder may exchange shares by telephone by
calling the Fund at 1-800-888-2461, on weekdays (except holidays) between the
hours of 7:00 a.m. and 6:00 p.m. Central time. Exchange requests received by
telephone after the close of the NYSE (normally 3:00 p.m. Central time) will be
treated as if received on the next business day. The exchange privilege,
including telephone exchanges, dollar cost averaging and asset rebalancing, may
be changed or discontinued at any time by either the Investment Manager or the
Fund upon 60 days' notice to shareholders.

Because excessive trading by a shareholder can hurt the Fund's performance and
its other shareholders, the Fund reserve the right to limit the amount or number
of exchanges or reject any exchange if (1) the Fund or Investment Manager
believes that the Fund would be harmed or unable to invest effectively, or (2)
the Fund receives or anticipates simultaneous orders that may significantly
affect the Fund.

DOLLAR COST AVERAGING. This option is available only to shareholders of a
403(b)(7) account sponsored by the Investment Manager and opened on or after
June 5, 2000. The option allows such shareholders to make periodic exchanges of
shares from the Security Capital Preservation Fund (held in non-certificate
form) to one or more of the Funds available under the exchange privilege as
described above. Such periodic exchanges in which securities are purchased at
regular intervals are known as "dollar cost averaging." With dollar cost
averaging, the cost of the securities gets averaged over time and possibly over
various market cycles. Dollar cost averaging does not guarantee profits, nor
does it assure that a shareholder will not have losses.

Shareholders may obtain a dollar cost averaging request form from the Investment
Manager. Shareholders designate on the form whether amounts are to be exchanged
on the basis of a specific dollar amount or a specific number of shares. The
Investment Manager will exchange shares as requested on the first business day
of the month.

The Investment Manager will make exchanges until account value in the Security
Capital Preservation Fund is depleted or until you instruct the Investment
Manager to terminate dollar cost averaging. Dollar cost averaging may be
terminated at any time by written request to the Investment Manager.

ASSET REBALANCING. This option is available only to participants in a 403(b)(7)
account sponsored by the Investment Manager and opened on or after June 5, 2000.
This option allows such participants to automatically exchange shares of those
funds available under the exchange privilege as described above on a quarterly
basis to maintain a particular percentage allocation among the funds. Shares of
such funds must be held in non-certificate form. Account value allocated to a
fund will grow or decline in value at different rates during the selected
period, and asset rebalancing will automatically reallocate account value in the
funds to the allocation you select on a quarterly basis.

Shareholders may obtain an asset rebalancing request form from the Investment
Manager. You must designate on the form the applicable funds and the percentage
of account value to be maintained in each fund. Thereafter, the Investment
Manager will exchange shares of the funds to maintain that allocation on the
first business day of each calendar quarter. Asset rebalancing may be terminated
at any time by written request to the Investment Manager.

RETIREMENT PLANS -- The Fund has available tax-qualified retirement plans for
individuals, prototype plans for the self-employed, pension and profit sharing
plans for corporations and custodial accounts for employees of public school
systems and organizations meeting the requirements of Section 501(c)(3) of the
Internal Revenue Code. Further information concerning these plans is contained
in the Fund's Statement of Additional Information.

INVESTMENT POLICIES AND MANAGEMENT PRACTICES

This section takes a detailed look at some of the types of securities the Fund
may hold in its portfolio and the various kinds of management practices that may
be used in the portfolio. The Fund's holdings of certain types of investments
cannot exceed a maximum percentage of net assets. These percentage limitations
are set forth in the Statement of Additional Information. While the percentage
limitations provide a useful level of detail about the Fund's investment
program, they should not be viewed as an accurate gauge of the potential risk of
the investment. For example, in a given period, a 5% investment in futures
contracts could have significantly more of an impact on the Fund's share price
than its weighting in the portfolio. The net effect of a particular investment
depends on its volatility and the size of its overall return in relation to the
performance of the Fund's other investments. The Portfolio Managers of the Fund
have considerable leeway in choosing investment strategies and selecting
securities they believe will help the Fund achieve its objective. In seeking to
meet its investment objective, the Fund may invest in any type of security or
instrument whose investment characteristics are consistent with the Fund's
investment program.

The following pages describe some of the investments which may be made by the
Fund, as well as some of the management practices of the Funds.

FOREIGN SECURITIES -- Foreign investments involve certain special risks,
including, but not limited to, (i) unfavorable changes in currency exchange
rates; (ii) adverse political and economic developments; (iii) unreliable or
untimely information; (iv) limited legal recourse; (v) limited markets; and (vi)
higher operational expenses.

Foreign investments are normally issued and traded in foreign currencies. As a
result, their values may be affected by changes in the exchange rates between
particular foreign currencies and the U.S. dollar. Foreign investments may be
subject to the risks of seizure by a foreign government, imposition of
restrictions on the exchange or transport of foreign currency, and tax
increases. There may also be less information publicly available about a foreign
company than about most U.S. companies, and foreign companies are usually not
subject to accounting, auditing and financial reporting standards and practices
comparable to those in the United States. The legal remedies for investors in
foreign investments may be more limited than those available in the United
States. Certain foreign investments may be less liquid (harder to buy and sell)
and more volatile than domestic investments, which means the Fund may at times
be unable to sell its foreign investments at desirable prices. For the same
reason, the Fund may at times find it difficult to value its foreign
investments. Brokerage commissions and other fees are generally higher for
foreign investments than for domestic investments. The procedures and rules for
settling foreign transactions may also involve delays in payment, delivery or
recovery of money or investments. Foreign withholding taxes may reduce the
amount of income available to distribute to shareholders of the Funds. Each of
the Funds may invest in foreign securities.

SMALLER COMPANIES -- Small- or medium-sized companies are more likely than
larger companies to have limited product lines, markets or financial resources,
or to depend on a small, inexperienced management group. Stocks of these
companies may trade less frequently and in limited volume, and their prices may
fluctuate more than stocks of other companies. Stocks of these companies may
therefore be more vulnerable to adverse developments than those of larger
companies.

CONVERTIBLE SECURITIES AND WARRANTS -- The Fund may invest in debt or preferred
equity securities convertible into, or exchangeable for, equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than nonconvertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent years,
convertible securities have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price anytime during the life of
the warrants (generally, two or more years).

INITIAL PUBLIC OFFERING -- The Fund's investment in securities offered through
initial public offerings (IPOs) may have a magnified performance impact, either
positive or negative, on the Fund. There is no guarantee that as the Fund's
assets grow, it will continue to experience substantially similar performance by
investing in IPOs. Investments in IPOs may make the Fund subject to more erratic
price movements than the overall equity market.

HIGH YIELD SECURITIES -- Higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services are commonly referred
to as "junk bonds." The total return and yield of junk bonds can be expected to
fluctuate more than the total return and yield of higher-quality bonds. Junk
bonds (those rated below BBB or in default) are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. Successful investment in lower-medium and low-quality
bonds involves greater investment risk and is highly dependent on the Investment
Manager's credit analysis. A real or perceived economic downturn or higher
interest rates could cause a decline in high yield bond prices by lessening the
ability of issuers to make principal and interest payments. These bonds are
often thinly traded and can be more difficult to sell and value accurately than
high-quality bonds. Because objective pricing data may be less available,
judgment may play a greater role in the valuation process. In addition, the
entire junk bond market can experience sudden and sharp price swings due to a
variety of factors, including changes in economic forecasts, stock market
activity, large or sustained sales by major investors, a high-profile default,
or just a change in the market's psychology. This type of volatility is usually
associated more with stocks than bonds, but junk bond investors should be
prepared for it.

CASH RESERVES -- Cash reserves maintained by the Fund may include domestic and
foreign money market instruments, as well as certificates of deposit, bank
demand accounts and repurchase agreements. The Fund may establish and maintain
reserves as the Investment Manager or Mainstream believes is advisable to
facilitate the Fund's cash flow needs (e.g., redemptions, expenses and purchases
of portfolio securities) or for temporary, defensive purposes.

BORROWING -- Borrowings may be collateralized with Fund assets. To the extent
that the Fund purchases securities while it has outstanding borrowings, it is
using leverage, i.e., using borrowed funds for investment. Leveraging will
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed for leveraging will be
subject to interest costs that may or may not be recovered by appreciation of
the securities purchased; in certain cases, interest costs may exceed the return
received on the securities purchased. The Fund also may be required to maintain
minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.

FUTURES AND OPTIONS -- The Fund may utilize futures contracts and options on
futures and may purchase call and put options and write call and put options on
a "covered" basis. A call option is "covered" if the Fund owns the security
underlying the call or has an absolute right to acquire the security without
additional cash consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount as are held in a segregated account by
the Custodian). Futures (a type of potentially high-risk derivative) are often
used to manage or hedge risk because they enable the investor to buy or sell an
asset in the future at an agreed-upon price. Options (another type of
potentially high-risk derivative) give the investor the right (where the
investor purchases the options), or the obligation (where the investor writes
(sells) the options), to buy or sell an asset at a predetermined price in the
future. The Fund may also engage in forward foreign currency transactions. The
instruments listed above may be bought or sold for any number of reasons,
including: to manage exposure to changes in securities prices and foreign
currencies, to manage exposure to changes in interest rates and bond prices, as
an efficient means of adjusting overall exposure to certain markets, in an
effort to enhance income, to protect the value of portfolio securities, and to
adjust portfolio duration. Futures contracts and options may not always be
successful hedges; their prices can be highly volatile. Using them could lower
the Fund's total return, and the potential loss from the use of futures can
exceed the Fund's initial investment in such contracts.

SWAPS, CAPS, FLOORS AND COLLARS -- Interest rate and/or index swaps, and the
purchase or sale of related caps, floors and collars are used primarily to
preserve a return or spread on a particular investment or portion of its
portfolio as a technique for managing the portfolio's duration (i.e. the price
sensitivity to changes in interest rates) or to protect against any increase in
the price of securities the Fund anticipates purchasing at a later date. To the
extent the Fund enters into these types of transactions, it will be done to
hedge and not as a speculative investment, and the Fund will not sell interest
rate caps or floors if it does not own securities or other instruments providing
the income the Fund may be obligated to pay. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest on a notional amount of principal. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling the cap to the extent that a specified index exceeds a
predetermined interest rate. The purchase of an interest rate floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling the floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.

WHEN-ISSUED SECURITIES AND FORWARD COMMITMENT CONTRACTS -- The price of "when
issued," "forward commitment" or "delayed delivery" securities is fixed at the
time of the commitment to buy, but delivery and payment can take place a month
or more later. During the interim period, the market value of the securities can
fluctuate, and no interest accrues to the purchaser. At the time of delivery,
the value of the securities may be more or less than the purchase or sale price.
When the Fund purchases securities on this basis, there is a risk that the
securities may not be delivered and that the Fund may incur a loss.

SECURITIES LENDING -- For purposes of realizing additional income, the Fund may
lend its portfolio securities to certain borrowers. Any such loan will be
continuously secured by collateral at least equal to the value of the security
loaned. The risks in lending portfolio securities, as with other extensions of
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms deemed by the
Investment Manager to be of good standing and will not be made unless, in the
judgment of the Investment Manager, the consideration to be earned from such
loans would justify the risk.

GENERAL INFORMATION

SHAREHOLDER INQUIRIES -- Shareholders who have questions concerning their
account or wish to obtain additional information, may call the Fund (see back
cover for address and telephone numbers), or contact their securities dealer.

APPENDIX A

REDUCED SALES CHARGES

CLASS A SHARES -- Initial sales charges may be reduced or eliminated for persons
or organizations purchasing Class A shares of the Fund alone or in combination
with Class A shares of other Security Funds.

For purposes of qualifying for reduced sales charges on purchases made pursuant
to Rights of Accumulation or a Statement of Intention, the term "Purchaser"
includes the following persons: an individual, his or her spouse and children
under the age of 21; a trustee or other fiduciary of a single trust estate or
single fiduciary account established for their benefit; an organization exempt
from federal income tax under Section 501(c)(3) or (13) of the Internal Revenue
Code; or a pension, profit-sharing or other employee benefit plan whether or not
qualified under Section 401 of the Internal Revenue Code.

RIGHTS OF ACCUMULATION -- To reduce sales charges on purchases of Class A shares
of the Fund, a Purchaser may combine all previous purchases of Class A shares of
the Fund with a contemplated current purchase and receive the reduced applicable
front-end sales charge. The Distributor must be notified when a sale takes place
which might qualify for the reduced charge on the basis of previous purchases.

Rights of accumulation also apply to purchases representing a combination of the
Class A shares of the Fund, and other Security Funds, except Security Cash Fund,
in those states where shares of the fund being purchased are qualified for sale.

STATEMENT OF INTENTION -- A Purchaser may choose to sign a Statement of
Intention within 90 days after the first purchase to be included thereunder,
which will cover future purchases of Class A shares of the Fund, and other
Security Funds, except Security Cash Fund. The amount of these future purchases
shall be specified and must be made within a 13-month period (or 36-month period
for purchases of $1 million or more) to become eligible for the reduced
front-end sales charge applicable to the actual amount purchased under the
Statement. Shares equal to five percent (5%) of the amount specified in the
Statement of Intention will be held in escrow until the statement is completed
or terminated. These shares may be redeemed by the Fund if the Purchaser is
required to pay additional sales charges.

A Statement of Intention may be revised during the 13-month (or, if applicable,
36-month) period. Additional Class A shares received from reinvestment of income
dividends and capital gains distributions are included in the total amount used
to determine reduced sales charges. A Statement of Intention may be obtained
from the Fund.

REINSTATEMENT PRIVILEGE -- Shareholders who redeem their Class A shares of the
Fund have a one-time privilege (1) to reinstate their accounts by purchasing
Class A shares without a sales charge up to the dollar amount of the redemption
proceeds; or (2) to the extent the redeemed shares would have been eligible for
the exchange privilege, to purchase Class A shares of another of the Security
Funds, without a sales charge up to the dollar amount of the redemption
proceeds. To exercise this privilege, a shareholder must provide written notice
and a check in the amount of the reinvestment within thirty days after the
redemption request; the reinstatement will be made at the net asset value on the
date received by the Fund or the Security Funds, as appropriate.

PURCHASES AT NET ASSET VALUE -- Class A shares of the Fund may be purchased at
net asset value by (1) directors, officers and employees of the Fund, the Fund's
Investment Manager or Distributor; directors, officers and employees of Security
Benefit Life Insurance Company and its subsidiaries; agents licensed with
Security Benefit Life Insurance Company; spouses or minor children of any such
agents; as well as the following relatives of any such directors, officers and
employees (and their spouses): spouses, grandparents, parents, children,
grandchildren, siblings, nieces and nephews; (2) any trust, pension, profit
sharing or other benefit plan established by any of the foregoing corporations
for persons described above; (3) retirement plans where third party
administrators of such plans have entered into certain arrangements with the
Distributor or its affiliates provided that no commission is paid to dealers;
and (4) officers, directors, partners or registered representatives (and their
spouses and minor children) of broker-dealers who have a selling agreement with
the Distributor. Such sales are made upon the written assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be transferred or resold except through redemption or repurchase by or on
behalf of the Fund.

Class A shares of the Fund may be purchased at net asset value when the purchase
is made on the recommendation of (i) a registered investment adviser, trustee or
financial intermediary who has authority to make investment decisions on behalf
of the investor; or (ii) a certified financial planner or registered
broker-dealer who either charges periodic fees to its customers for financial
planning, investment advisory or asset management services, or provides such
services in connection with the establishment of an investment account for which
a comprehensive "wrap fee" is imposed. Class A shares of the Fund may also be
purchased at net asset value when the purchase is made by retirement plans that
(i) buy shares of the Security Funds worth $500,000 or more; (ii) have 100 or
more eligible employees at the time of purchase; (iii) certify it expects to
have annual plan purchases of shares of Security Funds of $200,000 or more; (iv)
are provided administrative services by certain third-party administrators that
have entered into a special service arrangement with the Security Funds relating
to such plans; or (v) have at the time of purchase, aggregate assets of at least
$1,000,000. Purchases made pursuant to this provision may be subject to a
deferred sales charge of up to 1% in the event of a redemption within one year
of the purchase.

The Distributor must be notified when a purchase is made that qualifies under
any of the above provisions.

FOR MORE INFORMATION

- --------------------------------------------------------------------------------
BY TELEPHONE-- Call 1-800-888-2461.

BY MAIL -- Write to:
Security Management Company, LLC
One Security Benefit Place
Topeka, KS 66636-0001

ON THE INTERNET -- Reports and other information about the Fund can be viewed
online or downloaded from:

SEC: On the EDGAR Database at http://www.sec.gov

SMC, LLC: http://www.securitybenefit.com

Additional information about the Fund (including the Statement of Additional
Information) can be reviewed and copied at the Securities and Exchange
Commission's Public Reference Room in Washington, DC. Information about the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-202-942-8090. Copies may be obtained, upon payment of a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov or by
writing the Public Reference Section of the Commission, Washington, DC
20549-0102.
- --------------------------------------------------------------------------------

STATEMENT OF ADDITIONAL INFORMATION -- The Fund's Statement of Additional
Information is available, without charge upon request by calling the Fund's
toll-free telephone number 1-800-888-2461. Shareholder inquiries should be
addressed to SMC, LLC, One Security Benefit Place, Topeka, Kansas 66636-0001, or
by calling the Fund's toll-free telephone number listed above. The Fund's
Statement of Additional Information is incorporated into this prospectus by
reference.

The Fund's Investment Company Act file number is listed below:

Security Equity Fund................ 811-1136
o Security Alpha Opportunity Series

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

SECURITY EQUITY FUND®

o ALPHA OPPORTUNITY SERIES(SM)
Members of The Security Benefit Group of Companies
One Security Benefit Place, Topeka, Kansas 66636-0001
(785) 438-3000
(800) 888-2461

This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the prospectus dated [________], 2003, as it may be
supplemented from time to time. A prospectus may be obtained by writing Security
Distributors, Inc., One Security Benefit Place, Topeka, Kansas 66636-0001, or by
calling (785) 438-3000 or (800) 888-2461.

STATEMENT OF ADDITIONAL INFORMATION
[__], 2003
RELATING TO THE PROSPECTUS DATED [ ], 2003,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
- --------------------------------------------------------------------------------

INVESTMENT MANAGER
Security Management Company, LLC
One Security Benefit Place
Topeka, Kansas 66636-0001

UNDERWRITER
Security Distributors, Inc.
One Security Benefit Place
Topeka, Kansas 66636-0001

CUSTODIANS
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106

Banc of America Securities, LLC
9 West 57th Street
New York, New York 10019

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

GENERAL INFORMATION......................................................... 3
INVESTMENT METHODS AND RISK FACTORS......................................... 3
Shares of Other Investment Companies...................................... 3
Repurchase Agreements..................................................... 3
Reverse Repurchase Agreements............................................. 3
When Issued and Forward Commitment Securities............................. 4
American Depositary Receipts.............................................. 4
Restricted Securities..................................................... 4
Real Estate Securities.................................................... 5
Foreign Investment Risks.................................................. 5
Non-Uniform Corporate Disclosure Standards and Governmental Regulation.... 6
Adverse Market Characteristics............................................ 6
Non-U.S. Withholding Taxes................................................ 6
Put and Call Options...................................................... 6
Trading in Futures........................................................ 11
Short Sales............................................................... 15
Swaps, Caps, Floors and Collars........................................... 16
Spread Transactions....................................................... 16
Hybrid Instruments........................................................ 16
Lending of Portfolio Securities........................................... 17
Leverage.................................................................. 17
Fixed Income Securities................................................... 17
High Yield Securities..................................................... 17
U.S. Government Obligations............................................... 19
INVESTMENT RESTRICTIONS..................................................... 19
Fundamental Policies...................................................... 19
Operating Policies........................................................ 20
OFFICERS AND DIRECTORS...................................................... 20
COMMITTEES.................................................................. 22
REMUNERATION OF DIRECTORS AND OTHERS........................................ 22
PRINCIPAL HOLDERS OF SECURITIES............................................. 23
DIRECTORS' OWNERSHIP OF SECURITIES.......................................... 23
HOW TO PURCHASE SHARES...................................................... 25
Alternative Purchase Options.............................................. 25
Class A Shares............................................................ 25
Class B Shares............................................................ 26
Class C Shares............................................................ 27
Distribution Plans........................................................ 27
Calculation and Waiver of Contingent Deferred Sales Charges............... 28
Arrangements With Broker-Dealers and Others............................... 28
Purchases at Net Asset Value.............................................. 29
Purchases for Employer-Sponsored Retirement Plans......................... 29
SYSTEMATIC WITHDRAWAL PROGRAM............................................... 30
INVESTMENT MANAGEMENT....................................................... 31
SUB-ADVISER................................................................. 33
CODE OF ETHICS.............................................................. 35
DISTRIBUTOR................................................................. 35
ALLOCATION OF PORTFOLIO BROKERAGE........................................... 35
BROKERAGE ENHANCEMENT PLAN.................................................. 36
HOW NET ASSET VALUE IS DETERMINED........................................... 37
HOW TO REDEEM SHARES........................................................ 38
Telephone Redemptions..................................................... 39
HOW TO EXCHANGE SHARES...................................................... 39
Exchange by Telephone..................................................... 40
DIVIDENDS AND TAXES......................................................... 40
Passive Foreign Investment Companies...................................... 42
Options, Futures and Forward Contracts and Swap Agreements................ 43
Market Discount........................................................... 43
Original Issue Discount................................................... 43
Constructive Sales........................................................ 44
Foreign Taxation.......................................................... 44
Foreign Currency Transactions............................................. 44
Other Taxes............................................................... 44
ORGANIZATION................................................................ 44
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT......................... 45
INDEPENDENT AUDITORS........................................................ 45
PERFORMANCE INFORMATION..................................................... 45
PERMISSIBLE ADVERTISING INFORMATION......................................... 46
RETIREMENT PLANS............................................................ 47
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)....................................... 48
ROTH IRAS................................................................... 49
COVERDELL EDUCATION SAVINGS ACCOUNTS........................................ 49
SIMPLE IRAS................................................................. 49
PENSION AND PROFIT-SHARING PLANS............................................ 50
403(B) RETIREMENT PLANS..................................................... 50
SIMPLIFIED EMPLOYEE PENSION (SEP) PLANS..................................... 50
FINANCIAL STATEMENTS....................................................... 50
APPENDIX A.................................................................. 51

GENERAL INFORMATION

Security Equity Fund was organized as a Kansas corporation on November 27, 1961
and is registered with the Securities and Exchange Commission ("SEC") as an
investment company. Such registration does not involve supervision by the SEC of
the management or policies of Security Equity Fund, which is an open-end
investment company that, upon the demand of the investor, must redeem its shares
and pay the investor the current net asset value ("NAV") thereof. (See "How to
Redeem Shares.")

Security Equity Fund, Alpha Opportunity Series (the "Fund" or "Alpha Opportunity
Fund") has its own investment objective and policies. Professional investment
advice is provided to the Fund by Security Management Company, LLC (the
"Investment Manager"). While there is no present intention to do so, the
investment objective and policies of the Fund may be changed by the Board of
Directors without the approval of shareholders. The Fund is also required to
operate within limitations imposed by its fundamental investment policies, which
may not be changed without shareholder approval. These limitations are set forth
under "Investment Restrictions." An investment in the Fund does not constitute a
complete investment program.

INVESTMENT METHODS AND RISK FACTORS

Some of the risk factors related to certain securities, instruments and
techniques that may be used by the Fund are described in the "Principal Risks"
and "Investment Policies and Management Practices" sections of the prospectus
and in this Statement of Additional Information. The following is a description
of certain additional risk factors related to various securities, instruments
and techniques. Also included is a general description of some of the investment
instruments, techniques and methods which may be used by the Fund. Although the
Fund may employ the techniques, instruments and methods described below,
consistent with its investment objective and policies and any applicable law, it
will not be required to do so.

SHARES OF OTHER INVESTMENT COMPANIES -- The Fund may invest in shares of other
investment companies. Investment in the shares of other investment companies has
the effect of requiring shareholders to pay the operating expenses of two mutual
funds.

REPURCHASE AGREEMENTS -- The Fund may utilize repurchase agreements on an
overnight basis. A repurchase agreement is a contract under which the Fund would
acquire a security for a relatively short period (usually not more than seven
days) subject to the obligation of the seller to repurchase and the Fund to
resell such security at a fixed time and price (representing the Fund's cost
plus interest). The Fund may enter into repurchase agreements with respect to
any portfolio securities that it may acquire consistent with its investment
policies and restrictions. The Fund may enter into repurchase agreements to meet
anticipated redemptions or pending investment or reinvestment of Fund assets in
portfolio securities. The Board of Directors of the Fund has delegated certain
responsibilities in connection with repurchase agreements to the Investment
Manager or Sub-Adviser. Those responsibilities include monitoring and evaluating
the Fund's use of repurchase agreements, evaluating the creditworthiness of
repurchase agreement counterparties and taking steps that are reasonably
designed to ensure that the Fund's repurchase agreements are fully
collateralized. Repurchase agreements subject the Fund to the risks that (i) it
may not be able to liquidate the securities immediately upon the insolvency of
the other party, or (ii) that amounts received in closing out a repurchase
transaction might be deemed voidable preferences upon the bankruptcy of the
other party.

REVERSE REPURCHASE AGREEMENTS -- The Fund may also invest in reverse repurchase
agreement transactions which involve the sale of U.S. Government securities held
by the Fund, with an agreement that the Fund will repurchase such securities at
an agreed upon price and date. The Fund may employ reverse repurchase agreements
when necessary to meet unanticipated net redemptions so as to avoid liquidating
other portfolio investments during unfavorable market conditions. At the time it
enters into a reverse repurchase agreement, the Fund will segregate cash and/or
liquid assets having a dollar value equal to the repurchase price. Reverse
repurchase agreements are considered to be borrowings under the Investment
Company Act of 1940, as amended ("1940 Act"). Reverse repurchase agreements,
together with other permitted borrowings, may constitute up to 33 1/3% of the
Fund's total assets. Under the 1940 Act, the Fund is required to maintain
continuous asset coverage of 300% with respect to borrowings and to sell (within
three days) sufficient portfolio holdings to restore such coverage if it should
decline to less than 300% due to market fluctuations or otherwise, even if such
liquidations of the Fund's holdings may be disadvantageous from an investment
standpoint. Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities or the Fund's NAV, and
money borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the income received from the securities purchased with
borrowed funds.

WHEN ISSUED AND FORWARD COMMITMENT SECURITIES -- Purchase or sale of securities
on a "forward commitment" basis may be used to hedge against anticipated changes
in interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When issued securities and forward
commitments may be sold prior to the settlement date, but the Fund will enter
into when issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be; however, the Fund
may dispose of a commitment prior to settlement if the Investment Manager or
Sub-Adviser, as applicable, deems it appropriate to do so. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when issued basis prior to delivery of the securities. If the Fund disposes of
the right to acquire a when issued security prior to its acquisition or disposes
of its right to deliver or receive against a forward commitment, it may incur a
gain or loss. At the time the Fund enters into a transaction on a when issued or
forward commitment basis, it will segregate cash or liquid securities equal to
the value of the when issued or forward commitment securities and will mark the
segregated assets to market daily. There is a risk that the securities may not
be delivered and that the Fund may incur a loss.

AMERICAN DEPOSITARY RECEIPTS -- The Fund may purchase ADRs which are
dollar-denominated receipts issued generally by U.S. banks and which represent
the deposit with the bank of a foreign company's securities. ADRs are publicly
traded on exchanges or over-the-counter in the United States. Investors should
consider carefully the substantial risks involved in investing in securities
issued by companies of foreign nations, which are in addition to the usual risks
inherent in domestic investments. ADRs, European Depositary Receipts ("EDRs")
and Global Depositary Receipts ("GDRs") or other securities convertible into
securities of issuers based in foreign countries are not necessarily denominated
in the same currency as the securities into which they may be converted. In
general, ADRs, in registered form, are denominated in U.S. dollars and are
designed for use in the U.S. securities markets, while EDRs (also referred to as
Continental Depositary Receipts ("CDRs")), in bearer form, may be denominated in
other currencies and are designed for use in European securities markets. ADRs
are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts evidencing a
similar arrangement. GDRs are global receipts evidencing a similar arrangement.
For purposes of the Fund's investment policies, ADRs, EDRs and GDRs are deemed
to have the same classification as the underlying securities they represent.
Thus, an ADR, EDR or GDR representing ownership of common stock will be treated
as common stock.

Depositary receipts are issued through "sponsored" or "unsponsored" facilities.
A sponsored facility is established jointly by the issuer of the underlying
security and a depositary, whereas a depositary may establish an unsponsored
facility without participation by the issuer of the deposited security. Holders
of unsponsored depositary receipts generally bear all the cost of such
facilities and the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through voting rights to the holders of such
receipts in respect of the deposited securities.

RESTRICTED SECURITIES -- The Fund may invest in restricted securities.
Restricted securities cannot be sold to the public without registration under
the Securities Act of 1933 ("1933 Act"). Unless registered for sale, restricted
securities can be sold only in privately negotiated transactions or pursuant to
an exemption from registration. Restricted securities are generally considered
illiquid and, therefore, subject to the Fund's limitation on illiquid
securities.

Restricted securities (including Rule 144A Securities) may involve a high degree
of business and financial risk which may result in substantial losses. The
securities may be less liquid than publicly traded securities. Although these
securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the Fund.
In particular, Rule 144A Securities may be resold only to qualified
institutional buyers in accordance with Rule 144A under the Securities Act of
1933. Rule 144A permits the resale to "qualified institutional buyers" of
"restricted securities" that, when issued, were not of the same class as
securities listed on a U.S. securities exchange or quoted in the National
Association of Securities Dealers, Inc. (NASD) Automated Quotation System (the
"Rule 144A Securities"). A "qualified institutional buyer" is defined by Rule
144A generally as an institution, acting for its own account or for the accounts
of other qualified institutional buyers, that in the aggregate owns and invests
on a discretionary basis at least $100 million in securities of issuers not
affiliated with the institution. A dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $10 million in securities of issuers
not affiliated with the dealer may also qualify as a qualified institutional
buyer, as well as an Exchange Act registered dealer acting in a riskless
principal transaction on behalf of a qualified institutional buyer.

The Fund's Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A Securities.
As permitted by Rule 144A, the Board of Directors has delegated this
responsibility to the Investment Manager or Sub-Adviser. In making the
determination regarding the liquidity of Rule 144A Securities, the Investment
Manager or Sub-Adviser will consider trading markets for the specific security
taking into account the unregistered nature of a Rule 144A security. In
addition, the Investment Manager or Sub-Adviser may consider: (1) the frequency
of trades and quotes; (2) the number of dealers and potential purchasers; (3)
dealer undertakings to make a market; and (4) the nature of the security and of
the market place trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). Investing in Rule
144A Securities and other restricted securities could have the effect of
increasing the amount of the Fund's assets invested in illiquid securities to
the extent that qualified institutional buyers become uninterested, for a time,
in purchasing these securities.

REAL ESTATE SECURITIES -- The Fund may invest in equity securities of REITs and
other real estate industry companies or companies with substantial real estate
investments and therefore, the Fund may be subject to certain risks associated
with direct ownership of real estate and with the real estate industry in
general. These risks include, among others: possible declines in the value of
real estate; possible lack of availability of mortgage funds; extended vacancies
of properties; risks related to general and local economic conditions;
overbuilding; increases in competition, property taxes and operating expenses;
changes in zoning laws; costs resulting from the clean-up of, and liability to
third parties for damages resulting from, environmental problems; casualty or
condemnation losses; uninsured damages from floods, earthquakes or other natural
disasters; limitations on and variations in rents; and changes in interest
rates.

REITs are pooled investment vehicles which invest primarily in income producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or hybrid REITs. Equity REITs invest
the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code, as amended (the "Code"). Finally, certain REITs may
be self-liquidating in that a specific term of existence is provided for in the
trust document. Such trusts run the risk of liquidating at an economically
inopportune time.

FOREIGN INVESTMENT RISKS -- Investment in foreign securities involves risks and
considerations not present in domestic investments. Foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to U.S.
companies. The securities of non-U.S. issuers generally are not registered with
the SEC, nor are the issuers thereof usually subject to the SEC's reporting
requirements. Accordingly, there may be less publicly available information
about foreign securities and issuers than is available with respect to U.S.
securities and issuers. Foreign securities markets, while growing in volume,
have for the most part substantially less volume than United States securities
markets and securities of foreign companies are generally less liquid and at
times their prices may be more volatile than prices of comparable United States
companies. Foreign stock exchanges, brokers and listed companies generally are
subject to less government supervision and regulation than in the United States.
The customary settlement time for foreign securities may be longer than the
customary settlement time for United States securities. The Fund's income and
gains from foreign issuers may be subject to non-U.S. withholding or other
taxes, thereby reducing its income and gains. In addition, with respect to some
foreign countries, there is the increased possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or diplomatic developments which
could affect the investments of the Fund in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
rate of savings and capital reinvestment, resource self-sufficiency and balance
of payments positions.

POLITICAL AND ECONOMIC RISKS -- Investing in securities of non-U.S. companies
may entail additional risks due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, the Fund
could lose its entire investment in any such country.

An investment in the Fund is subject to the political and economic risks
associated with investments in emerging markets. Even though opportunities for
investment may exist in emerging markets, any change in the leadership or
policies of the governments of those countries or in the leadership or policies
of any other government which exercises a significant influence over those
countries, may halt the expansion of or reverse the liberalization of foreign
investment policies now occurring and thereby eliminate any investment
opportunities which may currently exist.

Investors should note that upon the accession to power of authoritarian regimes,
the governments of a number of emerging market countries previously expropriated
large quantities of real and personal property similar to the property which
will be represented by the securities purchased by the Fund. The claims of
property owners against those governments were never finally settled. There can
be no assurance that any property represented by securities purchased by the
Fund will not also be expropriated, nationalized, or otherwise confiscated. If
such confiscation were to occur, the Fund could lose a substantial portion of
its investments in such countries. The Fund's investments would similarly be
adversely affected by exchange control regulation in any of those countries.

NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION --
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Such securities will not be registered with the SEC or in
some cases regulators of any foreign country, nor will the issuers thereof be
subject to the SEC's reporting requirements. Thus, there will be less available
information concerning foreign issuers of such securities held by the Fund than
is available concerning U.S. issuers. There is substantially less publicly
available information about foreign companies than there are reports and ratings
published about U.S. companies and the U.S. Government. In addition, where
public information is available, it may be less reliable than such information
regarding U.S. issuers.

ADVERSE MARKET CHARACTERISTICS -- Securities of many foreign issuers may be less
liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions usually are subject to fixed
commissions, which generally are higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause it to
miss attractive opportunities. Inability to dispose of a portfolio security due
to settlement problems either could result in losses to the Fund due to
subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser. The Investment Manager or Sub-Adviser will consider such
difficulties when determining the allocation of the Fund's assets.

NON-U.S. WITHHOLDING TAXES -- The Fund's investment income and gains from
foreign issuers may be subject to non-U.S. withholding and other taxes, thereby
reducing the Fund's investment income and gains.

PUT AND CALL OPTIONS -- WRITING (SELLING) COVERED CALL OPTIONS. A call option
gives the holder (buyer) the "right to purchase" a security or currency at a
specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to deliver the underlying security or
currency against payment of the exercise price. This obligation terminates upon
the expiration of the call option, or such earlier time at which the writer
effects a closing purchase transaction by repurchasing an option identical to
that previously sold.

The Fund may write (sell) "covered" call options and purchase options to close
out options previously written by the Fund. In writing covered call options, the
Fund expects to generate additional premium income which should serve to enhance
the Fund's total return and reduce the effect of any price decline of the
security or currency involved in the option. Covered call options will generally
be written on securities or currencies which, in the opinion of the Investment
Manager or Sub-Adviser, are not expected to have any major price increases or
moves in the near future but which, over the long term, are deemed to be
attractive investments for the Fund.

The Fund will write only covered call options. This means that the Fund will own
the security or currency subject to the option or an option to purchase the same
underlying security or currency, having an exercise price equal to or less than
the exercise price of the "covered" option, or will segregate with its
custodian, for the term of the option, cash or liquid securities having a value
equal to the fluctuating market value of the optioned securities or currencies.
Fund securities or currencies on which call options may be written will be
purchased solely on the basis of investment considerations consistent with the
Fund's investment objectives. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, the Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely, retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligations as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency.

Call options written by the Fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may be
below, equal to, or above the current market values of the underlying securities
or currencies at the time the options are written. From time to time, the Fund
may purchase an underlying security or currency for delivery in accordance with
an exercise notice of a call option assigned to it, rather than delivering such
security or currency from its portfolio. In such cases, additional costs may be
incurred.

The premium received is the market value of an option. The premium the Fund will
receive from writing a call option will reflect, among other things, the current
market price of the underlying security or currency, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security or currency, and the length of the option period. Once the
decision to write a call option has been made, the Investment Manager or
Sub-Adviser, in determining whether a particular call option should be written
on a particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Fund for writing covered call
options will be recorded as a liability of the Fund. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the NAV per share of the Fund is computed (close
of the NYSE), or, in the absence of such sale, the latest asked price. The
option will be terminated upon expiration of the option, the purchase of an
identical option in a closing transaction, or delivery of the underlying
security or currency upon the exercise of the option.

The Fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from the
writing of the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security
or currency, any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying security or
currency owned by the Fund.

WRITING (SELLING) COVERED PUT OPTIONS. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the obligation to buy, the
underlying security or currency at the exercise price during the option period
(American style) or at the expiration of the option (European style). So long as
the obligation of the writer continues, he may be assigned an exercise notice by
the broker-dealer through whom such option was sold, requiring him to make
payment of the exercise price against delivery of the underlying security or
currency. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
The Fund may write American or European style covered put options and purchase
options to close out options previously written by the Fund.

The Fund may write put options on a covered basis, which means that the Fund
would either (i) segregate cash or liquid securities in an amount not less than
the exercise price at all times while the put option is outstanding; (ii) sell
short the security or currency underlying the put option at the same or higher
price than the exercise price of the put option; or (iii) purchase an option to
sell the underlying security or currency subject to the option having an
exercise price equal to or greater than the exercise price of the "covered"
option at all times while the put option is outstanding. (The rules of a
clearing corporation currently require that such assets be deposited in escrow
to secure payment of the exercise price.) The Fund would generally write covered
put options in circumstances where the Investment Manager or Sub-Adviser wishes
to purchase the underlying security or currency for the Fund's portfolio at a
price lower than the current market price of the security or currency. In such
event the Fund would write a put option at an exercise price which, reduced by
the premium received on the option, reflects the lower price it is willing to
pay. Since the Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk in
such a transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received. Such
a decline could be substantial and result in a significant loss to the Fund. In
addition, the Fund, because it does not own the specific securities or
currencies which it may be required to purchase in the exercise of the put,
cannot benefit from appreciation, if any, with respect to such specific
securities or currencies.

PREMIUM RECEIVED FROM WRITING CALL OR PUT OPTIONS. The Fund will receive a
premium from writing a put or call option, which increases the Fund's return in
the event the option expires unexercised or is closed out at a profit. The
amount of the premium will reflect, among other things, the relationship of the
market price of the underlying security to the exercise price of the option, the
term of the option and the volatility of the market price of the underlying
security. By writing a call option, the Fund limits its opportunity to profit
from any increase in the market value of the underlying security above the
exercise price of the option. By writing a put option, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss if the purchase price exceeds the market value plus the amount of
the premium received, unless the security subsequently appreciates in value.

CLOSING TRANSACTIONS. Closing transactions may be effected in order to realize a
profit on an outstanding call option, to prevent an underlying security or
currency from being called, or, to permit the sale of the underlying security or
currency. The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The Fund will realize a
profit or loss from such transaction if the cost of such transaction is less or
more than the premium received from the writing of the option. Because increases
in the market price of a call option will generally reflect increases in the
market price of the underlying security, any loss resulting from the purchase of
a call option is likely to be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Fund.

Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to sell
a particular security or currency from its portfolio on which it has written a
call option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security or currency. There is, of course, no
assurance that the Fund will be able to effect such closing transactions at a
favorable price. If the Fund cannot enter into such a transaction, it may be
required to hold a security or currency that it might otherwise have sold. When
the Fund writes a covered call option, it runs the risk of not being able to
participate in the appreciation of the underlying securities or currencies above
the exercise price, as well as the risk of being required to hold on to
securities or currencies that are depreciating in value. This could result in
higher transaction costs. The Fund will pay transaction costs in connection with
the writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.

PURCHASING CALL OPTIONS. The Fund may purchase American or European call
options. The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase call
options for the purpose of increasing its current return.

Call options may also be purchased by the Fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this fashion,
the purchase of call options enables the Fund to acquire the securities or
currencies at the exercise price of the call option plus the premium paid. At
times the net cost of acquiring securities or currencies in this manner may be
less than the cost of acquiring the securities or currencies directly. This
technique may also be useful to the Fund in purchasing a large block of
securities or currencies that would be more difficult to acquire by direct
market purchases. So long as it holds such a call option rather than the
underlying security or currency itself, the Fund is partially protected from any
unexpected decline in the market price of the underlying security or currency
and in such event could allow the call option to expire, incurring a loss only
to the extent of the premium paid for the option.

As an operating policy, the Fund will purchase a put or call option only if
after such purchase, the value of all call and put options held by the Fund will
not exceed 5% of the Fund's total assets. The Fund may also purchase call
options on underlying securities or currencies it owns in order to protect
unrealized gains on call options previously written by it. Call options may also
be purchased at times to avoid realizing losses. For example, where the Fund has
written a call option on an underlying security or currency having a current
market value below the price at which such security or currency was purchased by
the Fund, an increase in the market price could result in the exercise of the
call option written by the Fund and the realization of a loss on the underlying
security or currency with the same exercise price and expiration date as the
option previously written.

PURCHASING PUT OPTIONS. The Fund may purchase put options. The Fund may enter
into closing sale transactions with respect to such options, exercise them or
permit them to expire. The Fund may purchase a put option on an underlying
security or currency (a "protective put") owned by the Fund as a defensive
technique in order to protect against an anticipated decline in the value of the
security or currency. Such hedge protection is provided only during the life of
the put option when the Fund, as the holder of the put option, is able to sell
the underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange value.
The premium paid for the put option and any transaction costs would reduce any
capital gain otherwise available for distribution when the security or currency
is eventually sold.

The Fund may purchase put options at a time when the Fund does not own the
underlying security or currency. By purchasing put options on a security or
currency it does not own, the Fund seeks to benefit from a decline in the market
price of the underlying security or currency. If the put option is not sold when
it has remaining value, and if the market price of the underlying security or
currency remains equal to or greater than the exercise price during the life of
the put option, the Fund will lose its entire investment in the put option. In
order for the purchase of a put option to be profitable, the market price of the
underlying security or currency must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put option is sold
in a closing sale transaction.

DEALER OPTIONS. The Fund may engage in transactions involving dealer options.
Certain risks are specific to dealer options. While the Fund would look to a
clearing corporation to exercise exchange-traded options, if the Fund were to
purchase a dealer option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Exchange-traded options
generally have a continuous liquid market while dealer options have none.
Consequently, the Fund will generally be able to realize the value of a dealer
option it has purchased only by exercising it or reselling it to the dealer who
issued it. Similarly, when the Fund writes a dealer option, it generally will be
able to close out the option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally wrote
the option. While the Fund will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate a dealer option at a favorable price at any time prior to
expiration. Failure by the dealer to do so would result in the loss of the
premium paid by the Fund as well as loss of the expected benefit of the
transaction. Until the Fund, as a covered dealer call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used as cover until the option expires or is
exercised. In the event of insolvency of the contra party, the Fund may be
unable to liquidate a dealer option. With respect to options written by the
Fund, the inability to enter into a closing transaction may result in material
losses to the Fund. For example, since the Fund must maintain a secured position
with respect to any call option on a security it writes, the Fund may not sell
the assets which it has segregated to secure the position while it is obligated
under the option. This requirement may impair the Fund's ability to sell
portfolio securities at a time when such sale might be advantageous.

The Staff of the SEC has taken the position that purchased dealer options and
the assets used to secure the written dealer options are illiquid securities.
The Fund may treat the cover used for written OTC options as liquid if the
dealer agrees that the Fund may repurchase the OTC option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
OTC option would be considered illiquid only to the extent the maximum
repurchase price under the formula exceeds the intrinsic value of the option. To
this extent, the Fund will treat dealer options as subject to the Fund's
limitation on illiquid securities. If the SEC changes its position on the
liquidity of dealer options, the Fund will change its treatment of such
instrument accordingly.

CERTAIN RISK FACTORS IN WRITING CALL OPTIONS AND IN PURCHASING CALL AND PUT
OPTIONS. During the option period, the Fund, as writer of a call option has, in
return for the premium received on the option, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The writer has no control over the time when
it may be required to fulfill its obligation as a writer of the option. The risk
of purchasing a call or put option is that the Fund may lose the premium it paid
plus transaction costs. If the Fund does not exercise the option and is unable
to close out the position prior to expiration of the option, it will lose its
entire investment.

An option position may be closed out only on an exchange which provides a
secondary market. There can be no assurance that a liquid secondary market will
exist for a particular option at a particular time and that the Fund, can close
out its position by effecting a closing transaction. If the Fund is unable to
effect a closing purchase transaction, it cannot sell the underlying security
until the option expires or the option is exercised. Accordingly, the Fund may
not be able to sell the underlying security at a time when it might otherwise be
advantageous to do so. Possible reasons for the absence of a liquid secondary
market include the following: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities; (iv) inadequacy of the
facilities of an exchange or the clearing corporation to handle trading volume;
and (v) a decision by one or more exchanges to discontinue the trading of
options or impose restrictions on orders. In addition, the hours of trading for
options may not conform to the hours during which the underlying securities are
traded. To the extent that the options markets close before the markets for the
underlying securities, significant price and rate movements can take place in
the underlying markets that cannot be reflected in the options markets. The
purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary Fund
securities transactions.

Each exchange has established limitations governing the maximum number of call
options, whether or not covered, which may be written by a single investor
acting alone or in concert with others (regardless of whether such options are
written on the same or different exchanges or are held or written on one or more
accounts or through one or more brokers). An exchange may order the liquidation
of positions found to be in violation of these limits and it may impose other
sanctions or restrictions.

OPTIONS ON STOCK INDICES. Options on stock indices are similar to options on
specific securities except that, rather than the right to take or make delivery
of the specific security at a specific price, an option on a stock index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of that stock index is greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option. This
amount of cash is equal to such difference between the closing price of the
index and the exercise price of the option expressed in dollars multiplied by a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Unlike options on specific
securities, all settlements of options on stock indices are in cash and gain or
loss depends on general movements in the stocks included in the index rather
than price movements in particular stocks. A stock index futures contract is an
agreement in which one party agrees to deliver to the other an amount of cash
equal to a specific amount multiplied by the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical delivery of securities is
made.

RISK FACTORS IN OPTIONS ON INDICES. Because the value of an index option depends
upon the movements in the level of the index rather than upon movements in the
price of a particular security, whether the Fund will realize a gain or a loss
on the purchase or sale of an option on an index depends upon the movements in
the level of prices in the market generally or in an industry or market segment
rather than upon movements in the price of the individual security. Accordingly,
successful use of positions will depend upon the ability of the Investment
Manager or Sub-Adviser to predict correctly movements in the direction of the
market generally or in the direction of a particular industry. This requires
different skills and techniques than predicting changes in the prices of
individual securities.

Index prices may be distorted if trading of securities included in the index is
interrupted. Trading in index options also may be interrupted in certain
circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, the Fund would not be able to close
out options which it had written or purchased and, if restrictions on exercise
were imposed, might be unable to exercise an option it purchased, which would
result in substantial losses.

Price movements in Fund securities will not correlate perfectly with movements
in the level of the index and therefore, the Fund bears the risk that the price
of the securities may not increase as much as the level of the index. In this
event, the Fund would bear a loss on the call which would not be completely
offset by movements in the prices of the securities. It is also possible that
the index may rise when the value of the Fund's securities does not. If this
occurred, the Fund would experience a loss on the call which would not be offset
by an increase in the value of its securities and might also experience a loss
in the market value of its securities.

Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call on the index, the Fund will be required to liquidate
securities in order to satisfy the exercise.

When the Fund has written a call on an index, there is also the risk that the
market may decline between the time the Fund has the call exercised against it,
at a price which is fixed as of the closing level of the index on the date of
exercise, and the time the Fund is able to sell securities. As with options on
securities, the Investment Manager or Sub-Adviser will not learn that a call has
been exercised until the day following the exercise date, but, unlike a call on
securities where the Fund would be able to deliver the underlying security in
settlement, the Fund may have to sell part of its securities in order to make
settlement in cash, and the price of such securities might decline before they
could be sold.

If the Fund exercises a put option on an index which it has purchased before
final determination of the closing index value for the day, it runs the risk
that the level of the underlying index may change before closing. If this change
causes the exercised option to fall "out-of-the-money" the Fund will be required
to pay the difference between the closing index value and the exercise price of
the option (multiplied by the applicable multiplier) to the assigned writer.
Although the Fund may be able to minimize this risk by withholding exercise
instructions until just before the daily cutoff time or by selling rather than
exercising an option when the index level is close to the exercise price, it may
not be possible to eliminate this risk entirely because the cutoff time for
index options may be earlier than those fixed for other types of options and may
occur before definitive closing index values are announced.

TRADING IN FUTURES -- The Fund may enter into futures contracts, including stock
and bond index, interest rate and currency futures ("futures" or "futures
contracts"). A futures contract provides for the future sale by one party and
purchase by another party of a specific financial instrument (e.g., units of a
stock index) for a specified price, date, time and place designated at the time
the contract is made. Brokerage fees are incurred when a futures contract is
bought or sold and margin deposits must be maintained. Entering into a contract
to buy is commonly referred to as buying or purchasing a contract or holding a
long position. Entering into a contract to sell is commonly referred to as
selling a contract or holding a short position.

An example of a stock index futures contract follows. The Standard & Poor's 500
Stock Index ("S&P 500 Index") is composed of 500 selected common stocks, most of
which are listed on the NYSE. The S&P 500 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 500 Index,
contracts are to buy or sell 250 units. Thus, if the value of the S&P 500 Index
were $950, one contract would be worth $237,500 (250 units x $950). The stock
index futures contract specifies that no delivery of the actual stock making up
the index will take place. Instead, settlement in cash occurs. Over the life of
the contract, the gain or loss realized by the Fund will equal the difference
between the purchase (or sale) price of the contract and the price at which the
contract is terminated. For example, if the Fund enters into a futures contract
to buy 250 units of the S&P 500 Index at a specified future date at a contract
price of $950 and the S&P 500 Index is at $954 on that future date, the Fund
will gain $1,000 (250 units x gain of $4). If the Fund enters into a futures
contract to sell 250 units of the stock index at a specified future date at a
contract price of $950 and the S&P 500 Index is at $952 on that future date, the
Fund will lose $500 (250 units x loss of $2).

Unlike when the Fund purchases or sells a security, no price would be paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the Fund's open positions in
futures contracts, the Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of cash or liquid
securities known as "initial margin." The margin required for a particular
futures contract is set by the exchange on which the contract is traded, and may
be significantly modified from time to time by the exchange during the term of
the contract. Futures contracts are customarily purchased and sold on margins
that may range upward from less than 5% of the value of the contract being
traded.

Margin is the amount of funds that must be deposited by the Fund with its
custodian in a segregated account in the name of the futures commission merchant
(or, in some cases, may be held on deposit directly with the futures commission
merchant) in order to initiate futures trading and to maintain the Fund's open
position in futures contracts. A margin deposit is intended to ensure the Fund's
performance of the futures contract. The margin required for a particular
futures contract is set by the exchange on which the futures contract is traded,
and may be significantly modified from time to time by the exchange during the
term of the futures contract.

If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes in the futures
contract so that the margin deposit exceeds the required margin, the broker will
pay the excess to the Fund.

These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.

Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most futures
contracts are usually closed out before the delivery date. Closing out an open
futures contract sale or purchase is effected by entering into an offsetting
futures contract purchase or sale, respectively, for the same aggregate amount
of the identical securities and the same delivery date. If the offsetting
purchase price is less than the original sale price, the Fund realizes a gain;
if it is more, the Fund realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, the Fund realizes a gain; if it
is less, the Fund realizes a loss. The transaction costs must also be included
in these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the futures contract.

Options on futures are similar to options on underlying instruments except that
options on futures give the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), rather than to purchase or
sell the futures contract, at a specified exercise price at any time during the
period of the option. The writer of an option on a futures contract is required
to deposit margin pursuant to requirements similar to those applicable to
futures contracts. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds (in the case of a call) or is less than
(in the case of a put) the exercise price of the option on the futures contract.
Alternatively, settlement may be made totally in cash. Purchasers of options who
fail to exercise their options prior to the exercise date suffer a loss of the
premium paid.

Commissions on financial futures contracts and related options transactions may
be higher than those which would apply to purchases and sales of securities
directly. From time to time, a single order to purchase or sell futures
contracts (or options thereon) may be made on behalf of the Fund and other
mutual funds or series of mutual funds for which the Investment Manager or
Sub-Adviser serves as adviser or sub-adviser, respectively. Such aggregated
orders would be allocated among the Fund and such other mutual funds or series
of mutual funds in a fair and non-discriminatory manner.

A public market exists in interest rate futures contracts covering primarily the
following financial instruments: U.S. Treasury bonds; U.S. Treasury notes;
Government National Mortgage Association ("GNMA") modified pass-through
mortgage-backed securities; three-month U.S. Treasury bills; 90-day commercial
paper; bank certificates of deposit; and Eurodollar certificates of deposit. It
is expected that futures contracts trading in additional financial instruments
will be authorized. The standard contract size is generally $100,000 for futures
contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA pass-through
securities and $1,000,000 for the other designated futures contracts. A public
market exists in futures contracts covering a number of indexes, including, but
not limited to, the Standard & Poor's 500 Index, the Standard & Poor's 100
Index, the NASDAQ 100 Index, the Value Line Composite Index and the NYSE
Composite Index.

Stock index futures contracts may be used to provide a hedge for a portion of
the Fund's portfolio, as a cash management tool, or as an efficient way for the
Investment Manager or Sub-Adviser to implement either an increase or decrease in
portfolio market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the NYSE Composite Stock Index and the
Value Line Composite Stock Index. The Fund may, however, purchase or sell
futures contracts with respect to any stock index. Nevertheless, to hedge the
Fund's portfolio successfully, the Fund must sell futures contracts with respect
to indexes or subindexes whose movements will have a significant correlation
with movements in the prices of the Fund's securities.

Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the Fund. In this regard, the Fund
could sell interest rate or currency futures as an offset against the effect of
expected increases in interest rates or currency exchange rates and purchase
such futures as an offset against the effect of expected declines in interest
rates or currency exchange rates.

The Fund may enter into futures contracts which are traded on national or
foreign futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal financial futures exchanges in
the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Fund's objectives in these
areas.

CERTAIN RISKS RELATING TO FUTURES CONTRACTS AND RELATED OPTIONS. There are
special risks involved in futures transactions.

VOLATILITY AND LEVERAGE. The prices of futures contracts are volatile and are
influenced, among other things, by actual and anticipated changes in the market
and interest rates, which in turn are affected by fiscal and monetary policies
and national and international policies and economic events.

Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.

Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss or
gain, to the investor. For example, if at the time of purchase, 10% of the value
of the futures contract is deposited as margin, a subsequent 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out. A 15% decrease would result in a loss equal to 150% of the
original margin deposit, if the contract were closed out. Thus, a purchase or
sale of a futures contract may result in losses in excess of the amount invested
in the futures contract. However, the Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline. Furthermore, in
the case of a futures contract purchase, in order to be certain that the Fund
has sufficient assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract cash or liquid securities equal in value
to the current value of the underlying instrument less the margin deposit.

LIQUIDITY. The Fund may elect to close some or all of its futures positions at
any time prior to their expiration. The Fund would do so to reduce exposure
represented by long futures positions or increase exposure represented by short
futures positions. The Fund may close its positions by taking opposite positions
which would operate to terminate the Fund's position in the futures contracts.
Final determinations of variation margin would then be made, additional cash
would be required to be paid by or released to the Fund, and the Fund would
realize a loss or a gain.

Futures contracts may be closed out ONLY on the exchange or board of trade where
the contracts were initially traded. For example, stock index futures contracts
can currently be purchased or sold with respect to the S&P 500 Index on the
Chicago Mercantile Exchange, the NYSE Composite Stock Index on the New York
Futures Exchange and the Value Line Composite Stock Index on the Kansas City
Board of Trade. Although the Fund intends to purchase or sell futures contracts
only on exchanges or boards of trade where there appears to be an active market,
there is no assurance that a liquid market on an exchange or board of trade will
exist for any particular contract at any particular time. In such event, it
might not be possible to close a futures contract, and in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, the Fund would continue to hold securities
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the securities, if any, might
partially or completely offset losses on the futures contract. However, as
described below, there is no guarantee that the price of the securities will, in
fact, correlate with the price movements in the futures contract and thus
provide an offset to losses on a futures contract.

HEDGING RISK. A decision of whether, when, and how to hedge involves skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or market trends. There are several risks
in connection with the use by the Fund of futures contracts as a hedging device.
One risk arises because of the imperfect correlation between movements in the
prices of the futures and movements in the prices of the underlying instruments
which are the subject of the hedge. The Investment Manager or Sub-Adviser will,
however, attempt to reduce this risk by entering into futures contracts whose
movements, in its judgment, will have a significant correlation with movements
in the prices of the Fund's underlying instruments sought to be hedged.

Successful use of futures contracts by the Fund for hedging purposes is also
subject to the Investment Manager's or Sub-Adviser's ability to correctly
predict movements in the direction of the market. It is possible that, when the
Fund has sold futures to hedge its portfolio against a decline in the market,
the index, indices, or instruments underlying futures might advance and the
value of the underlying instruments held in the Fund's portfolio might decline.
If this were to occur, the Fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while this
might occur to a certain degree, the Investment Manager believes that over time
the value of the Fund's portfolio will tend to move in the same direction as the
market indices used to hedge the portfolio. It is also possible that if the Fund
were to hedge against the possibility of a decline in the market (adversely
affecting the underlying instruments held in its portfolio) and prices instead
increased, the Fund would lose part or all of the benefit of increased value of
those underlying instruments that it had hedged, because it would have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund had insufficient cash, it might have to sell underlying instruments to
meet daily variation margin requirements. Such sales of underlying instruments
might be, but would not necessarily be, at increased prices (which would reflect
the rising market). The Fund might have to sell underlying instruments at a time
when it would be disadvantageous to do so.

In addition to the possibility that there might be an imperfect correlation, or
no correlation at all, between price movements in the futures contracts and the
portion of the portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the underlying instruments
due to certain market distortions. First, all participants in the futures market
are subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors might close future contracts
through offsetting transactions which could distort the normal relationship
between the underlying instruments and futures markets. Second, the margin
requirements in the futures market are less onerous than margin requirements in
the securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price distortions.
Due to the possibility of price distortion in the futures market and also
because of the imperfect correlation between movements in the underlying
instruments and movements in the prices of futures contracts, even a correct
forecast of general market trends by the Investment Manager or Sub-Adviser might
not result in a successful hedging transaction over a very short time period.

CERTAIN RISKS OF OPTIONS ON FUTURES CONTRACTS. The Fund may seek to close out an
option position by writing or buying an offsetting option covering the same
index, underlying instruments, or contract and having the same exercise price
and expiration date. The ability to establish and close out positions on such
options will be subject to the maintenance of a liquid secondary market. Reasons
for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options, or underlying instruments; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.

REGULATORY LIMITATIONS. The Fund will engage in transactions in futures
contracts and options thereon only for bona fide hedging, yield enhancement and
risk management purposes, in each case in accordance with the rules and
regulations of the CFTC.

The Fund may not enter into futures contracts or options thereon if, with
respect to positions which do not qualify as bona fide hedging under applicable
CFTC rules, either (i) the sum of the amounts of initial margin deposits on the
Fund's existing futures and premiums paid for options on futures would exceed 5%
of the NAV of the Fund after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; provided, however,
that in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5% limitation; or (ii)
the notional value of the futures contracts purchased from non-hedging purposes
is no greater than the liquidation value of the Fund's portfolio.

To the extent necessary to comply with applicable regulations, in instances
involving the purchase of futures contracts or call options thereon or the
writing of put options thereon by the Fund, an amount of cash or liquid
securities, equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be identified in an account on
the books of the Fund or with the Fund's custodian to cover the position, or
alternative cover will be employed.

In addition, CFTC regulations may impose limitations on the Fund's ability to
engage in certain yield enhancement and risk management strategies. If the CFTC
or other regulatory authorities adopt different (including less stringent) or
additional restrictions, the Fund would comply with such new restrictions.

PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. As noted
above, a currency futures contract sale creates an obligation by the Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by the Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.

SHORT SALES -- The Fund may make short sales "against the box," in which the
Fund enters into a short sale of a security it owns. In a short sale that is not
"against the box," the Fund sells a security which it does not own, in
anticipation of a decline in the market value of the security. To complete the
sale, the Fund must borrow the security generally from the broker through which
the short sale is made in order to make delivery to the buyer. The Fund must
replace the security borrowed by purchasing it at the market price at the time
of replacement. The Fund is said to have a "short position" in securities sold
until it delivers them to the broker.

Short sales by the Fund that are not made "against the box" create opportunities
to increase the Fund's return but, at the same time, involve specific risk
considerations and may be considered a speculative technique. Since the Fund in
effect profits from a decline in the price of the securities sold short without
the need to invest the full purchase price of the securities on the date of the
short sale, the Fund's NAV per share tends to increase more when the securities
it has sold short decrease in value, and to decrease more when the securities it
has sold short increase in value, than would otherwise be the case if it had not
engaged in such short sales. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to pay in connection with the short sale.
Short sales theoretically involve unlimited loss potential, as the market price
of securities sold short may continually increase, although the Fund may
mitigate such losses by replacing the securities sold short before the market
price has increased significantly. Under adverse market conditions the Fund
might have difficulty purchasing securities to meet its short sale delivery
obligations, and might have to sell portfolio securities to raise the capital
necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor such sales.

If the Fund makes a short sale "against the box," the Fund would not immediately
deliver the securities sold and would not receive the proceeds from the sale.
The seller is said to have a short position in the securities sold until it
delivers the securities sold, at which time it receives the proceeds of the
sale. To secure its obligation to deliver securities sold short, the Fund will
deposit in escrow in a separate account with the Custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.

The Fund's decision to make a short sale "against the box" may be a technique to
hedge against market risks when the Investment Manager or Sub-Adviser believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position would
be reduced by a gain in the short position. The extent to which such gains or
losses in the long position are reduced will depend upon the amount of
securities sold short relative to the amount of the securities the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.

In the view of the Commission, a short sale involves the creation of a "senior
security" as such term is defined in the 1940 Act, unless the sale is "against
the box" and the securities sold short are placed in a segregated account (not
with the broker), or unless the Fund's obligation to deliver the securities sold
short is "covered" by placing in a segregated account (not with the broker)
cash, U.S. Government securities or other liquid debt or equity securities in an
amount equal to the difference between the market value of the securities sold
short at the time of the short sale and any such collateral required to be
deposited with a broker in connection with the sale (not including the proceeds
from the short sale), which difference is adjusted daily for changes in the
value of the securities sold short. The total value of the cash, U.S. Government
securities or other liquid debt or equity securities deposited with the broker
and otherwise segregated may not at any time be less than the market value of
the securities sold short at the time of the short sale. The Fund will comply
with these requirements.

SWAPS, CAPS, FLOORS AND COLLARS -- The Fund may enter into interest rate,
securities index, commodity, or security and currency exchange rate swap
agreements for any lawful purpose consistent with the Fund's investment
objective, such as for the purpose of attempting to obtain or preserve a
particular desired return or spread at a lower cost to the Fund than if the Fund
had invested directly in an instrument that yielded that desired return or
spread. The Fund also may enter into swaps in order to protect against an
increase in the price of, or the currency exchange rate applicable to,
securities that the Fund anticipates purchasing at a later date. Swap agreements
are two-party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to several years. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. Swap agreements may include interest rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interests rates exceed a specified rate, or "cap";
interest rate floors under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor"; and interest rate collars, under which a party
sells a cap and purchases a floor, or vice versa, in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.

The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by the Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, the Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
value of the positions held by each party to the agreement (the "net amount").
The Fund's obligation under a swap agreement will be accrued daily (offset
against amounts owed to the Fund) and any accrued but unpaid net amounts owed to
a swap counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid securities.

Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend, in part, on the Investment Manager or
Sub-Adviser's ability to predict correctly whether certain types of investments
are likely to produce greater returns than other investments. Swap agreements
may be considered to be illiquid. Moreover, the Fund bears the risk of loss of
the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. Certain restrictions
imposed on the Fund by the Internal Revenue Code may limit the Fund's ability to
use swap agreements. The swaps market is largely unregulated.

The Fund will enter swap agreements only with counterparties that the Investment
Manager or Sub-Adviser reasonably believes are capable of performing under the
swap agreements. If there is a default by the other party to such a transaction,
the Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.

SPREAD TRANSACTIONS -- The Fund may purchase covered spread options from
securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put, or sell, a security that it owns at a fixed dollar spread
or fixed yield spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to the Fund in purchasing
covered spread options is the cost of the premium paid for the spread option and
any transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used to
protect the Fund against adverse changes in prevailing credit quality spreads,
i.e., the yield spread between high quality and lower quality securities. Such
protection is only provided during the life of the spread option.

HYBRID INSTRUMENTS -- Hybrid instruments combine the elements of futures
contracts or options with those of debt, preferred equity or a depositary
instrument ("Hybrid Instruments"). Often these Hybrid Instruments are indexed to
the price of a commodity or particular currency or a domestic or foreign debt or
equity securities index. Hybrid Instruments may take a variety of forms,
including, but not limited to, debt instruments with interest or principal
payments or redemption terms determined by reference to the value of a currency
or commodity at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. The risks of
investing in Hybrid Instruments reflect a combination of the risks from
investing in securities, futures and currencies, including volatility and lack
of liquidity. Reference is made to the discussion of futures and forward
contracts in this Statement of Additional Information for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Fund and the seller of the Hybrid Instrument,
the creditworthiness of the contract party to the transaction would be a risk
factor which the Fund would have to consider. Hybrid Instruments also may not be
subject to regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and sale
of securities by and to U.S. persons, or any other governmental regulatory
authority.

LENDING OF PORTFOLIO SECURITIES -- For the purpose of realizing additional
income, the Fund may make secured loans of Fund securities amounting to not more
than 33 1/3% of its total assets. Securities loans are made to broker/dealers,
institutional investors, or other persons pursuant to agreements requiring that
the loans be continuously secured by collateral at least equal at all times to
the value of the securities lent marked to market on a daily basis. The
collateral received will consist of cash, U.S. Government securities, letters of
credit or such other collateral as may be permitted under its investment
program. While the securities are being lent, the Fund will continue to receive
the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund has a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period of time which coincides
with the normal settlement period for purchases and sales of such securities in
such foreign markets. The Fund will not have the right to vote securities while
they are being lent, but it will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to persons deemed
by the Investment Manager or Sub-Adviser to be of good standing and will not be
made unless, in the judgment of the Investment Manager or Sub-Adviser, the
consideration to be earned from such loans would justify the risk.

LEVERAGE -- The Fund may use leverage. Leveraging creates an opportunity for
increased net income but, at the same time, creates special risk considerations.
For example, leveraging may exaggerate changes in the NAV of the Fund's shares
and in the yield on the Fund's portfolio. Although the principal of such
borrowings will be fixed, the Fund's assets may change in value during the time
the borrowing is outstanding. Since any decline in value of the Fund's
investments will be borne entirely by the Fund's shareholders (and not by those
persons providing the leverage to the Fund), the effect of leverage in a
declining market would be a greater decrease in NAV than if the Fund were not so
leveraged. Leveraging will create interest expenses for the Fund, which can
exceed the investment return from the borrowed funds. To the extent the
investment return derived from securities purchased with borrowed funds exceeds
the interest the Fund will have to pay, the Fund's investment return will be
greater than if leveraging were not used. Conversely, if the investment return
from the assets retained with borrowed funds is not sufficient to cover the cost
of leveraging, the investment return of the Fund will be less than if leveraging
were not used.

FIXED INCOME SECURITIES -- Yields on short, intermediate, and long-term fixed
income securities are dependent on a variety of factors, including the general
conditions of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt securities
usually vary, depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a decline in
interest rates will generally increase the value of portfolio investments. The
ability of the Fund to achieve its investment objectives is also dependent on
the continuing ability of the issuers of the debt securities in which the Fund
invests to meet their obligations for the payment of interest and principal when
due.

HIGH YIELD SECURITIES -- Low-rated and comparable unrated securities, while
generally offering higher yields than investment-grade securities with similar
maturities, involve greater risks, including the possibility of default or
bankruptcy. They are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. The special risk
considerations in connection with such investments are discussed below. See
Appendix A of this Statement of Additional Information for a discussion of
securities ratings.

The low-rated and comparable unrated securities market is relatively new, and
its growth paralleled a long economic expansion. As a result, it is not clear
how this market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.

All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
low-rated and comparable unrated securities tend to reflect individual corporate
developments to a greater extent than do higher-rated securities, which react
primarily to fluctuations in the general level of interest rates. Low-rated and
comparable unrated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. As a result, they generally involve
more credit risks than securities in the higher-rated categories. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of low-rated and comparable unrated securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations may also be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecasts, or the unavailability of additional
financing. The risk of loss due to default by an issuer of low-rated and
comparable unrated securities is significantly greater than issuers of
higher-rated securities because such securities are generally unsecured and are
often subordinated to other creditors. Further, if the issuer of a low-rated and
comparable unrated security defaulted, the Fund might incur additional expenses
to seek recovery. Periods of economic uncertainty and changes would also
generally result in increased volatility in the market prices of low-rated and
comparable unrated securities and thus in the Fund's NAV.

Credit ratings issued by credit-rating agencies evaluate the safety of principal
and interest payments of rated securities. They do not, however, evaluate the
market value risk of low-rated and comparable unrated securities and, therefore,
may not fully reflect the true risks of an investment. In addition,
credit-rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in low-rated and
comparable unrated securities will be more dependent on the Investment Manager
or Sub-Adviser's credit analysis than would be the case with investments in
investment-grade debt securities. The Investment Manager or Sub-Adviser employs
its own credit research and analysis, which includes a study of existing debt,
capital structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history, and the current trend
of earnings. The Investment Manager or Sub-Adviser monitors the investments in
the Fund's portfolio and carefully evaluates whether to dispose of or to retain
low-rated and comparable unrated securities whose credit ratings or credit
quality may have changed.

The Fund may have difficulty disposing of certain low-rated and comparable
unrated securities because there may be a thin trading market for such
securities. Because not all dealers maintain markets in all low-rated and
comparable unrated securities, there is no established retail secondary market
for many of these securities. The Fund anticipates that such securities could be
sold only to a limited number of dealers or institutional investors. To the
extent a secondary trading market does exist, it is generally not as liquid as
the secondary market for higher-rated securities. The lack of a liquid secondary
market may have an adverse impact on the market price of the security. As a
result, the Fund's asset value and ability to dispose of particular securities,
when necessary to meet a Series' liquidity needs or in response to a specific
economic event, may be affected. The lack of a liquid secondary market for
certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing such securities. Market
quotations are generally available on many low-rated and comparable unrated
issues only from a limited number of dealers and may not necessarily represent
firm bids of such dealers or prices for actual sales. During periods of thin
trading, the spread between bid and asked prices is likely to increase
significantly. In addition, adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of
low-rated and comparable unrated securities, especially in a thinly-traded
market.

Recent legislation has been adopted and from time to time, proposals have been
discussed regarding new legislation designed to limit the use of certain
low-rated and comparable unrated securities by certain issuers. An example of
legislation is a recent law which requires federally insured savings and loan
associations to divest their investment in these securities over time. New
legislation could further reduce the market because such legislation, generally,
could negatively affect the financial condition of the issuers of high-yield
securities, and could adversely affect the market in general. It is not
currently possible to determine the impact of the recent legislation on this
market. However, it is anticipated that if additional legislation is enacted or
proposed, it could have a material effect on the value of low-rated and
comparable unrated securities and the existence of a secondary trading market
for the securities.

U.S. GOVERNMENT OBLIGATIONS -- The Fund may invest in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the
United States. In the case of securities not backed by the full faith and credit
of the United States, the Fund must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitments. Securities in which the Fund
may invest that are not backed by the full faith and credit of the United States
include, but are not limited to, obligations of the Tennessee Valley Authority,
the Federal Home Loan Mortgage Corporation and the U.S. Postal Services, each of
which has the right to borrow from the U.S. Treasury to meet its obligations,
and obligations of the Federal Farm Credit System and the Federal Home Loan
Banks, both of whose obligations may be satisfied only by the individual credits
of each issuing agency. Securities which are backed by the full faith and credit
of the United States include obligations of the Government National Mortgage
Association, the Farmers Home Administration, and the Export-Import Bank.

INVESTMENT RESTRICTIONS

The Fund operates within certain fundamental policies. These fundamental
policies may not be changed without the approval of the lesser of (i) 67% or
more of the Fund's shares present at a meeting of shareholders if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy, or (ii) more than 50% of the Fund's outstanding voting shares. Other
restrictions in the form of operating policies are subject to change by the
Fund's Board of Directors without shareholder approval. Any investment
restrictions that involve a maximum percentage of securities or assets shall not
be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition of securities or assets of,
or borrowing by, the Fund. Calculation of the Fund's total assets for compliance
with any of the following fundamental or operating policies or any other
investment restrictions set forth in the Fund's prospectus or Statement of
Additional Information will not include cash collateral held in connection with
the Fund's securities lending activities.

FUNDAMENTAL POLICIES -- The fundamental policies of the Fund are:

1. PERCENT LIMIT ON ASSETS INVESTED IN ANY ONE ISSUER Not to invest more than
5% of its total assets in the securities of any one issuer (other than
obligations of, or guaranteed by, the U.S. Government, its agencies and
instrumentalities); provided that this limitation applies only with respect
to 75% of the Fund's total assets.

2. PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUER Not to purchase a
security if, as a result, with respect to 75% of the value of the Fund's
total assets, more than 10% of the outstanding voting securities of any
issuer would be held by the Fund (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities).

3. UNDERWRITING Not to act as underwriter of securities issued by others,
except to the extent that the Fund may be considered an underwriter within
the meaning of the Securities Act of 1933 in the disposition of restricted
securities.

4. INDUSTRY CONCENTRATION Not to invest in an amount equal to, or in excess of,
25% or more of the Fund's total assets in a particular industry (other than
securities of the U.S. Government, its agencies or instrumentalities).

5. REAL ESTATE Not to purchase or sell real estate unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent
the Fund from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business).

6. COMMODITIES Not to purchase or sell physical commodities, except that the
Fund may enter into futures contracts and options thereon.

7. LOANS Not to lend any security or make any other loan if, as a result, more
than 33 1/3% of the Fund's total assets would be lent to other parties,
except, (i) through the purchase of a portion of an issue of debt securities
in accordance with its investment objectives and policies, or (ii) by
engaging in repurchase agreements with respect to portfolio securities.

8. BORROWING Not to borrow in excess of 33 1/3% of the Fund's total assets.

9. SENIOR SECURITIES Not to issue senior securities, except as permitted under
the 1940 Act.

For the purposes of fundamental policies two and four above, each governmental
subdivision, i.e., state, territory, possession of the United States or any
political subdivision of any of the foregoing, including agencies, authorities,
instrumentalities, or similar entities, or of the District of Columbia shall be
considered a separate issuer if its assets and revenues are separate from those
of the governmental body creating it and the security is backed only by its own
assets and revenues. Further, in the case of an industrial development bond, if
the security is backed only by the assets and revenues of a non-governmental
user, then such non-governmental user will be deemed to be the sole issuer. If
an industrial development bond or government issued security is guaranteed by a
governmental or other entity, such guarantee would be considered a separate
security issued by the guarantor. For the purpose of fundamental policy four,
industries are determined by reference to the classifications of industries set
forth in the Fund's semiannual and annual reports.

OPERATING POLICIES -- The operating policies of the Fund are:

1. LOANS The Fund may not lend assets other than securities to other parties.
(This limitation does not apply to purchases of debt securities or to
repurchase agreements.)

2. BORROWING The Fund may not borrow money or securities for any purposes
except that borrowing up to 10% of the Fund's total assets from commercial
banks is permitted for emergency or temporary purposes.

3. OPTIONS The Fund may buy and sell exchange-traded and over-the-counter put
and call options, including index options, securities options, currency
options and options on futures, provided that a call or put may be purchased
only if after such purchase, the value of all call and put options held by
the Fund will not exceed 5% of the Fund's total assets. The Fund may write
only covered put and call options.

4. OIL AND GAS PROGRAMS The Fund may not invest in oil, gas, or mineral leases
or other mineral exploration, or development of programs.

5. INVESTMENT COMPANIES Except in connection with a merger, consolidation,
acquisition, or reorganization, the Fund may not invest in securities of
other investment companies, except in compliance with the 1940 Act.

6. CONTROL OF PORTFOLIO COMPANIES The Fund may not invest in companies for the
purpose of exercising management or control.

7. MARGINS The Fund does not intend to purchase securities on margin, except
that the Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments in connection
with futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.

8. LIQUIDITY The Fund may invest up to 15% of its net assets in illiquid
securities which are securities that may not be sold or disposed of in the
ordinary course of business within seven days at approximately the value at
which the Fund was valuing the security.

OFFICERS AND DIRECTORS

The officers and directors of the Fund and their principal occupations for at
least the last five years are as follows.

NAME, ADDRESS, POSITIONS HELD WITH THE FUND AND PRINCIPAL OCCUPATIONS DURING THE
PAST FIVE YEARS

DONALD A. CHUBB, JR.** (56)
- ---------------------------
(Birth Date: December 14, 1946)
2222 SW 29th Street, Topeka, Kansas 66611
POSITION HELD WITH THE FUND--Director
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since 1994
PRINCIPAL OCCUPATIONS--Business broker, Griffith & Blair Realtors. Prior to
1997, Manager, Star Sign, Inc.
NUMBER OF PORTFOLIOS OVERSEEN IN SECURITY FUNDS(SM) COMPLEX--38

PENNY A. LUMPKIN** (63)
- -----------------------
(Birth Date: August 20, 1939)
3616 Canterbury Town Road, Topeka, Kansas 66610
POSITION HELD WITH THE FUND--Director
TERM OF OFFICE--Until the next annual meeting or until her successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since 1993
PRINCIPAL OCCUPATIONS--President, Vivian's Gift Shop (Corporate Retail). Vice
President, Palmer Companies, Inc. (Small Business and Shopping Center
Development), PLB (Real Estate Equipment Leasing), and Town Crier (Retail).
Prior to 1999, Vice President and Treasurer, Palmer News, Inc.; Vice
President, M/S News, Inc. and Secretary, Kansas City Periodicals and prior to
2002, Vice President Bellaire Shopping Center (Managing and Leasing) and
Partner, Goodwin Enterprises (Retail).
NUMBER OF PORTFOLIOS OVERSEEN IN SECURITY FUNDS COMPLEX--38

MARK L. MORRIS, JR.** (68)
- --------------------------
(Birth Date: February 3, 1934)
5500 SW 7th Street, Topeka, Kansas 66606
POSITION HELD WITH THE FUND--Director
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since 1991
PRINCIPAL OCCUPATIONS--Independent Investor, Morris Co. (personal investments).
Former General Partner, Mark Morris Associates (Veterinary Research and
Education).
NUMBER OF PORTFOLIOS OVERSEEN IN SECURITY FUNDS COMPLEX--38

MAYNARD F. OLIVERIUS (59)
- -------------------------
(Birth Date: December 18, 1943)
1500 SW 10th Avenue, Topeka, Kansas 66604
POSITION HELD WITH THE FUND--Director
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since 1998
PRINCIPAL OCCUPATIONS--President and Chief Executive Officer, Stormont-Vail
HealthCare.

NUMBER OF PORTFOLIOS OVERSEEN IN SECURITY FUNDS COMPLEX--38

The following officers and directors are interested persons of the Fund. Unless
otherwise noted, the address of each of the following officers and directors is
One Security Benefit Place, Topeka, Kansas 66636-0001.

JOHN D. CLELAND* (66)
- ---------------------
(Birth Date: May 1, 1936)
POSITION HELD WITH THE FUND--Chairman of the Board and Director
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since 1991 (Director) and since February, 2000 (Chairman
of the Board)
PRINCIPAL OCCUPATIONS--Retired. Prior to January 1, 2003, Senior Vice President,
Security Benefit Group, Inc. and Security Benefit Life Insurance Company.
NUMBER OF PORTFOLIOS OVERSEEN IN SECURITY FUNDS COMPLEX--38

JAMES R. SCHMANK* (49)
- ----------------------
(Birth Date: February 21, 1953)
POSITION HELD WITH THE FUND--President and Director
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since 1997 (Director) and since February, 2000 (President)
PRINCIPAL OCCUPATIONS--President and Managing Member Representative, Security
Management Company, LLC; Senior Vice President, Security Benefit Group, Inc.
and Security Benefit Life Insurance Company; Director, Security Distributors,
Inc.; Director and Treasurer, First Advantage Insurance Agency, Inc.;
Director, Vice President and Treasurer, First Security Benefit Life Insurance
and Annuity Company of New York
NUMBER OF PORTFOLIOS OVERSEEN IN SECURITY FUNDS COMPLEX--38

STEVEN M. BOWSER (43)
- ---------------------
(Birth Date: February 11, 1960)
POSITION HELD WITH THE FUND--Vice President
PRINCIPAL OCCUPATIONS--Vice President and Senior Portfolio Manager, Security
Management Company, LLC; Vice President and Senior Portfolio Manager, Security
Benefit Group, Inc. and Security Benefit Life Insurance Company.
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified.
LENGTH OF TIME SERVED--since 2003.

MARK LAMB (43)
- --------------
(Birth Date: February 3, 1960)
POSITION HELD WITH THE FUND--Vice President
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since 2003
PRINCIPAL OCCUPATIONS--Vice President and Portfolio Manager, Security Management
Company, LLC, Security Benefit Group, Inc. and Security Benefit Life Insurance
Company.

TERRY A. MILBERGER (54)
- -----------------------
(Birth Date: March 10, 1948)
POSITION HELD WITH THE FUND--Vice President
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since 1982
PRINCIPAL OCCUPATIONS--Senior Vice President and Senior Portfolio Manager,
Security Management Company, LLC; Senior Vice President, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company.

MARK MITCHELL (38)
- ------------------
(Birth Date: August 24, 1964)
POSITION HELD WITH THE FUND--Vice President
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since 2003
PRINCIPAL OCCUPATIONS--Vice President and Portfolio Manager, Security Management
Company, LLC.

AMY J. LEE (42)
- ---------------
(Birth Date: June 5, 1961)
POSITION HELD WITH THE FUND--Secretary
TERM OF OFFICE--Until the next annual meeting or until her successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since 1987
PRINCIPAL OCCUPATIONS--Secretary, Security Management Company, LLC, First
Advantage Insurance Agency, Inc., Security Financial Resources Collective
Investments, LLC and Security Distributors, Inc.; Vice President, Associate
General Counsel and Assistant Secretary, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.

BRENDA M. HARWOOD (39)
- ----------------------
(Birth Date: November 3, 1963)
POSITION HELD WITH THE FUND--Treasurer
TERM OF OFFICE--Until the next annual meeting or until her successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since May, 1998
PRINCIPAL OCCUPATIONS--Assistant Vice President and Treasurer, Security
Management Company, LLC; Assistant Vice President, Security Benefit Group,
Inc. and Security Benefit Life Insurance Company; Vice President and Director,
Security Distributors, Inc.

CINDY L. SHIELDS (36)
- ---------------------
(Birth Date: June 5, 1967)
POSITION HELD WITH THE FUND--Vice President
TERM OF OFFICE--Until the next annual meeting or until her successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since May 1998
PRINCIPAL OCCUPATIONS--Vice President - Head of Equity Asset Management,
Security Management Company, LLC, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.

JAMES P. SCHIER (45)
- --------------------
(Birth Date: December 28, 1957)
POSITION HELD WITH THE FUND--Vice President
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since May 1998
PRINCIPAL OCCUPATIONS--Vice President and Senior Portfolio Manager, Security
Management Company, LLC; Vice President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company. Prior to February 1997, Assistant
Vice President and Senior Research Analyst, Security Management Company, LLC.

CHRISTOPHER D. SWICKARD (37)
- ----------------------------
(Birth Date: October 9, 1965)
POSITION HELD WITH THE FUND--Assistant Secretary
TERM OF OFFICE--Until the next annual meeting or until his successor shall have
been duly elected and qualified
LENGTH OF TIME SERVED--since May 1996
PRINCIPAL OCCUPATIONS--Assistant Secretary, Security Management Company, LLC;
Second Vice President and Assistant Counsel, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.

*These directors are deemed to be "interested persons" of the Fund under the
1940 Act, as amended, by reason of their positions with the Fund's Investment
Manager and/or the parent of the Investment Manager.

**These directors serve on the Fund's joint audit committee, the purpose of
which is to meet with the independent auditors, to review the work of the
auditors, and to oversee the handling by Security Management Company, LLC of
the accounting functions for the Fund and other Security Funds.

The directors and officers of the Fund hold identical offices in each of the
other funds managed by the Investment Manager, with the exceptions noted below.
Mr. Bowser, Mr. Lamb, Mr. Milberger, Mr. Mitchell and Ms. Shields are Vice
President only of Security Equity Fund and SBL Fund; and Mr. Schier is Vice
President only of Security Equity Fund, SBL Fund and Security Mid Cap Growth
Fund. Ms. Lee holds identical offices for the Fund's distributor, Security
Distributors, Inc., Mr. Schmank serves as Director, and Ms. Harwood serves as
Director and Vice President of the Distributor.

COMMITTEES

The Board of Directors has an Audit Committee, the purpose of which is to meet
with the independent auditors, to review the work of the auditors, and to
oversee the handling by Security Management Company, LLC of the accounting
functions for the Fund and other Security Funds. The Audit Committee currently
consists of Messrs. Chubb, Morris and Oliverius and Ms. Lumpkin. The Audit
Committee held two meetings during the fiscal year ended September 30, 2002.

REMUNERATION OF DIRECTORS AND OTHERS

The Fund's directors, except those directors who are "interested persons" of the
Fund, receive from Security Equity Fund an annual retainer of $2,083 and a fee
of $3,500 per meeting, plus reasonable travel costs, for each meeting of the
board attended. In addition, certain directors who are members of the Fund's
joint audit committee receive a fee of $2,000 per meeting and reasonable travel
costs for each meeting of the Fund's audit committee attended. The Fund pays its
respective share of directors' fees, audit committee fees and travel costs based
on relative net assets of the Fund and the other Security Funds.

The Investment Manager compensates its officers and directors who may also serve
as officers or directors of the Fund. The Fund does not pay any fees to, or
reimburse expenses of, directors who are considered "interested persons" of the
Fund. The aggregate compensation paid by the Fund to each of the directors
during the fiscal year ended September 30, 2002, and the aggregate compensation
paid to each of the directors during calendar year 2002 by all seven of the
registered investment companies to which the Investment Manager provides
investment advisory services (collectively, the "Security Fund Complex"), are
set forth below. Each of the directors is a director of each of the other
registered investment companies in the Security Fund Complex.

- -------------------------------------------------------------------------------
AGGREGATE
COMPENSATION ESTIMATED
------------ ANNUAL TOTAL
SECURITY BENEFITS COMPENSATION FROM THE
NAME OF DIRECTOR EQUITY UPON SECURITY FUND COMPLEX,
OF THE FUND FUND RETIREMENT INCLUDING THE FUND
- -------------------------------------------------------------------------------
Donald A. Chubb, Jr. $3,958 $0 $47,500
- -------------------------------------------------------------------------------
John D. Cleland 0 0 0
- -------------------------------------------------------------------------------
Penny A. Lumpkin 3,958 0 47,500
- -------------------------------------------------------------------------------
Mark L. Morris, Jr. 3,958 0 47,500
- -------------------------------------------------------------------------------
Maynard Oliverius 3,583 0 43,000
- -------------------------------------------------------------------------------
James R. Schmank 0 0 0
- -------------------------------------------------------------------------------

PRINCIPAL HOLDERS OF SECURITIES

On June 1, 2003, the Fund's officers and directors (as a group) beneficially
owned less than one percent of the total outstanding shares of the Fund. As of
June 1, 2003, no person owned, of record and beneficially, 5% or more of a class
of the Fund's outstanding securities.

DIRECTORS' OWNERSHIP OF SECURITIES

As of June 1, 2003, the Directors of the Fund did not beneficially own shares of
the Fund and beneficially owned shares of other mutual funds in the family of
mutual funds overseen by the Directors in the dollar ranges set forth below:

=======================================================================================
AGGREGATE DOLLAR
RANGE OF EQUITY
SECURITIES IN ALL
DOLLAR RANGE REGISTERED INVESTMENT
OF EQUITY COMPANIES OVERSEEN BY
SECURITIES DIRECTOR IN FAMILY OF
NAME OF DIRECTOR NAME OF FUND IN FUND INVESTMENT COMPANIES
- ---------------------------------------------------------------------------------------
Donald A. Chubb, Jr. Security Equity Fund,
Select 25 Series $10,001-$50,000 Over $100,000
----------------------------------------------------------------
Security Equity Fund,
Equity Series $10,001-$50,000
----------------------------------------------------------------
Security Equity Fund,
Global Series $10,001-$50,000
----------------------------------------------------------------
Security Income Fund, $1-$10,000
Diversified Income
Series
----------------------------------------------------------------
Security Cash Fund $1-$10,000
----------------------------------------------------------------
Security Mid
Cap Growth Fund $10,001-$50,000
----------------------------------------------------------------
Security Large
Cap Value Fund $1-$10,000
----------------------------------------------------------------
Security Equity Fund, $1-$10,000
Small Cap Growth
Series
----------------------------------------------------------------
SBL Fund, Large
Cap Value Series $1-$10,000
----------------------------------------------------------------
SBL Fund, Social
Awareness Series $1-$10,000
----------------------------------------------------------------
SBL Fund,
Equity Series $10,001-$50,000
- ---------------------------------------------------------------------------------------
Penny A. Lumpkin Security Equity Fund,
Select 25 Series $1-$10,000 $50,001-$100,000
----------------------------------------------------------------
Security Mid
Cap Growth Fund $1-$10,000
----------------------------------------------------------------
Security Equity Fund,
Equity Series $10,001-$50,000
----------------------------------------------------------------
Security Municipal
Bond Fund $1-$10,000
----------------------------------------------------------------
Security Equity Fund,
Global Series $10,001-$50,000
----------------------------------------------------------------
Security Income Fund, $1-$10,000
Diversified Income
Series
----------------------------------------------------------------
Security Large
Cap Value Fund $1-$10,000
----------------------------------------------------------------
Security Equity Fund,
Mid Cap Value Series $1-$10,000
----------------------------------------------------------------
Security Cash Fund $1-$10,000
----------------------------------------------------------------
SBL Fund, Large
Cap Value Series $1-$10,000
- ---------------------------------------------------------------------------------------
Mark L. Morris, Jr. Security Income Fund,
Diversified Income
Series $10,001-$50,000 Over $100,000
----------------------------------------------------------------
Security Mid
Cap Growth Fund $50,001-$100,000
- ---------------------------------------------------------------------------------------
Maynard Oliverius SBL Fund, Small
Cap Value Series $10,001-$50,000 Over $100,000
----------------------------------------------------------------
Security Equity Fund,
Select 25 Series $10,001-$50,000
----------------------------------------------------------------
Security Income Fund,
Capital Preservation
Series Over $100,000
=======================================================================================

As of June 1, 2003, the following directors who are "interested persons" of the
Fund did not beneficially own shares of the Fund and beneficially owned shares
of other mutual funds in the family of mutual funds overseen by the directors in
the dollar ranges set forth below:

=======================================================================================
AGGREGATE DOLLAR
RANGE OF EQUITY
SECURITIES IN ALL
DOLLAR RANGE REGISTERED INVESTMENT
OF EQUITY COMPANIES OVERSEEN BY
SECURITIES DIRECTOR IN FAMILY OF
NAME OF DIRECTOR NAME OF FUND IN FUND INVESTMENT COMPANIES
- ---------------------------------------------------------------------------------------
James R. Schmank Security Equity Fund,
Equity Series Over $100,000 Over $100,000
----------------------------------------------------------------
Security Equity Fund,
Global Series Over $100,000
----------------------------------------------------------------
Security Equity Fund,
Large Cap Growth
Series $1-$10,000
----------------------------------------------------------------
Security Equity Fund,
Select 25 Series $50,001-$100,000
----------------------------------------------------------------
Security Equity Fund,
Small Cap Growth
Series $10,001-$50,000
----------------------------------------------------------------
Security Mid
Cap Growth Fund Over $100,000
----------------------------------------------------------------
Security Equity Fund,
Mid Cap Value Series Over $100,000
----------------------------------------------------------------
Security Equity Fund,
Technology Series $1-$10,000
----------------------------------------------------------------
Security Cash Fund $1-$10,000
----------------------------------------------------------------
Security Municipal
Bond Fund $1-$10,000
- ---------------------------------------------------------------------------------------
John D. Cleland Security Equity Fund,
Equity Series $10,001-$50,000 Over $100,000
----------------------------------------------------------------
Security Equity Fund,
Select 25 Series $50,001-$100,000
----------------------------------------------------------------
Security Equity Fund,
Mid Cap Value Series Over $100,000
----------------------------------------------------------------
Security Equity Fund,
Global Series $10,001-$50,000
----------------------------------------------------------------
Security Cash Fund $1-$10,000
----------------------------------------------------------------
Security Equity Fund,
Technology Series $10,001-$50,000
----------------------------------------------------------------
Security Equity Fund, $10,001-$50,000
Small Cap Growth
Series
----------------------------------------------------------------
Security Large
Cap Value Fund $1-$10,000
----------------------------------------------------------------
Security Mid Cap
Growth Fund $10,001-$50,000
=======================================================================================

HOW TO PURCHASE SHARES

Investors may purchase shares of the Fund through authorized dealers who are
members of the NASD. The minimum initial investment is $100. The minimum
subsequent investment is $100 unless made through an Accumulation Plan which
allows for subsequent investments of $20 as described in the prospectus. An
application may be obtained from the Investment Manager.

Orders for the purchase of shares of the Fund will be confirmed at an offering
price equal to the NAV per share next determined after receipt of the order in
proper form by Security Distributors, Inc. (the "Distributor") (generally as of
the close of the Exchange on that day) plus the sales charge in the case of
Class A shares. Orders received by dealers or other firms prior to the close of
the Exchange and received by the Distributor prior to the close of its business
day will be confirmed at the offering price effective as of the close of the
Exchange on that day. Dealers and other financial services firms are obligated
to transmit orders promptly.

The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders.

As a convenience to investors and to save operating expenses, the Fund does not
issue certificates for Fund shares.

ALTERNATIVE PURCHASE OPTIONS -- The Fund offers three classes of shares:

CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a sales
charge at the time of purchase. Class A shares are not subject to a sales charge
when they are redeemed (except that shares sold in an amount of $1,000,000 or
more without a front-end sales charge will be subject to a contingent deferred
sales charge of 1% for one year).

CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a sales
charge at the time of purchase, but are subject to a deferred sales charge if
they are redeemed within five years of the date of purchase. Class B shares will
automatically convert to Class A shares at the end of eight years after
purchase.

CLASS C SHARES - LEVEL LOAD OPTION. Class C shares are sold without a sales
charge at the time of purchase, but are subject to a contingent deferred sales
charge if they are redeemed within one year of the date of purchase.

CLASS A SHARES -- Class A shares are offered at NAV plus an initial sales charge
as follows:

==========================================================================================
SALES CHARGE
----------------------------------------------------
PERCENTAGE
AMOUNT OF PURCHASE PERCENTAGE OF PERCENTAGE OF NET REALLOWABLE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED TO DEALERS
- ------------------------------------------------------------------------------------------
Less than $50,000 5.75% 6.10% 5.00%
- ------------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.75 4.99 4.00
- ------------------------------------------------------------------------------------------
$100, 000 but less than $250,000 3.75 3.90 3.00
- ------------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.75 2.83 2.25
- ------------------------------------------------------------------------------------------
$500,000 but less than $1,000,000 2.00 2.04 1.75
- ------------------------------------------------------------------------------------------
$1,000,000 and over None None (See below)
==========================================================================================

The Underwriter will pay a commission to dealers on purchases of $1,000,000 or
more as follows: 1.00% on sales up to $5,000,000, plus 0.50% on sales of
$5,000,000 or more up to $10,000,000, and 0.10% on any amount of $10,000,000 or
more. The Underwriter may also pay a commission of up to 1% to dealers who
initiate or are responsible for purchases of $500,000 or more by certain
retirement plans as described under "Purchases at Net Asset Value" in the
prospectus. Such purchases may be subject to a deferred sales charge of up to 1%
in the event of a redemption within one year of the purchase.

The Investment Manager may, at its expense, pay a service fee to dealers who
satisfy certain criteria established by the Investment Manager from time to time
relating to the volume of their sales of Class A shares of the Fund and certain
other Security Funds during prior periods and certain other factors, including
providing to their clients who are shareholders of the Fund certain services,
which include assisting in maintaining records, processing purchase and
redemption requests and establishing shareholder accounts, assisting
shareholders in changing account options or enrolling in specific plans, and
providing shareholders with information regarding the Fund and related
developments. Service fees are paid quarterly and may be discontinued at any
time.

As discussed in the prospectus, the Fund has adopted a Distribution Plan for
their Class A shares pursuant to Rule 12b-1 under the 1940 Act. The Plan
authorizes the Fund to pay an annual fee to the Distributor of 0.25% of the
average daily NAV of the Class A shares of the Fund to finance various
activities relating to the distribution of such shares to investors. These
expenses include, but are not limited to, the payment of compensation (including
compensation to securities dealers and other financial institutions and
organizations) to obtain various administrative services for the Fund. These
services include, among other things, processing new shareholder account
applications and serving as the primary source of information to customers in
answering questions concerning the Fund and their transactions with the Fund.

Amounts paid by the Fund are currently used to pay dealers and other firms that
make Class A shares available to their customers a service fee for account
maintenance and personal service to shareholders. The service fee is payable
quarterly in the amount of 0.25%, on an annual basis, of Aggregate Account
Value. "Aggregate Account Value" is the average daily NAV of Class A accounts
opened after July 31, 1990 that were sold by such dealers and other firms and
remain outstanding on the books of the Fund. (Service fees are paid only on
Aggregate Account Value of $100,000 or more.) The service fee may also be used
to pay for sub-administration and/or sub-transfer agency services provided for
the benefit of the Fund.

CLASS B SHARES -- Class B shares are offered at NAV, without an initial sales
charge. With certain exceptions, the Fund may impose a deferred sales charge on
shares redeemed within five years of the date of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by the Distributor.

Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the investor made a purchase
payment from which an amount is being redeemed, according to the following
schedule:

===========================================
YEAR SINCE PURCHASE CONTINGENT DEFERRED
PAYMENT WAS MADE SALES CHARGE
-------------------------------------------
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and Following 0%
===========================================

Class B shares (except shares purchased through the reinvestment of dividends
and other distributions paid with respect to Class B shares) will automatically
convert, on the eighth anniversary of the date such shares were purchased, to
Class A shares which are subject to a lower distribution fee. This automatic
conversion of Class B shares will take place without imposition of a front-end
sales charge or exchange fee. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to the Investment
Manager.) All shares purchased through reinvestment of dividends and other
distributions paid with respect to Class B shares ("reinvestment shares") will
be considered to be held in a separate subaccount. Each time any Class B shares
(other than those held in the subaccount) convert to Class A shares, a pro rata
portion of the reinvestment shares held in the subaccount will also convert to
Class A shares. Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. Because the NAV per share of the Class
A shares may be higher or lower than that of the Class B shares at the time of
conversion, although the dollar value will be the same, a shareholder may
receive more or less Class A shares than the number of Class B shares converted.
Under current law, it is the Fund's opinion that such a conversion will not
constitute a taxable event under federal income tax law. In the event that this
ceases to be the case, the Board of Directors will consider what action, if any,
is appropriate and in the best interests of the Class B shareholders.

The Fund bears some of the costs of selling its Class B shares under a
Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act. This Plan
provides for payments at an annual rate of 1.00% of the average daily NAV of
Class B shares. Amounts paid by the Fund are currently used to pay dealers and
other firms that make Class B shares available to their customers (1) a
commission at the time of purchase normally equal to 4.00% of the value of each
share sold and (2) a service fee for account maintenance and personal service to
shareholders payable for the first year, initially, and for each year
thereafter, quarterly, in an amount equal to 0.25% annually of the average daily
NAV of Class B shares sold by such dealers and other firms and remaining
outstanding on the books of the Fund. The service fee may also be used to pay
for sub-administration and/or sub-transfer agency services provided for the
benefit of the Fund.

CLASS C SHARES -- Class C shares are offered at NAV, without an initial sales
charge. With certain exceptions, the Fund may impose a deferred sales charge on
shares redeemed within one year of the date of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by the Distributor.

The Fund bears some of the costs of selling its Class C shares under a
Distribution Plan adopted with respect to its Class C shares ("Class C
Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act. This Plan
provides for payments at an annual rate of 1.00% of the average daily NAV of
Class C shares. Amounts paid by the Fund are currently used to pay dealers and
other firms that make Class C shares available to their customers (1) a
commission at the time of purchase normally equal to 0.75% of the value of each
share sold, and for each year thereafter, quarterly, in an amount equal to 0.75%
annually of the average daily NAV of Class C shares sold by such dealers and
other firms and remaining outstanding on the books of the Fund and (2) a service
fee payable for the first year initially, and for each year thereafter,
quarterly, in an amount equal to 0.25% annually of the average daily NAV of
Class C shares sold by such dealers and other firms and remaining outstanding on
the books of the Fund. The service fee may also be used to pay for
sub-administration and/or sub-transfer agency services provided for the benefit
of the Fund.

DISTRIBUTION PLANS -- As discussed above, the Fund has adopted Distribution
Plans pursuant to Rule 12b-1 under the 1940 Act, as set forth in the table
below.

=========================
DISTRIBUTION PLAN
-------------------------
Class A Distribution Plan
Class B Distribution Plan
Class C Distribution Plan
=========================

Under the Distribution Plans, the Distributor is authorized to pay service fees
and commissions to dealers and other firms that sell shares of the applicable
class, engage in advertising, prepare and distribute sales literature and engage
in other promotional activities on behalf of the Fund. The Distributor is
required to report in writing to the Board of Directors of the Fund, and the
board will review at least quarterly the amounts and purpose of any payments
made under each Plan. The Distributor is also required to furnish the board with
such other information as may reasonably be requested in order to enable the
board to make an informed determination of whether the Plan should be continued.

Each Plan will continue from year to year, provided that such continuance is
approved at least annually by a vote of a majority of the Board of Directors of
the Fund, including a majority of the independent directors cast in person at a
meeting called for the purpose of voting on such continuance. Any agreement
relating to the implementation of the Plan terminates automatically if it is
assigned. The Plan may not be amended to increase materially the amount of
payments thereunder without approval of the shareholders of the applicable class
of the Fund.

Because all amounts paid pursuant to the Distribution Plan are paid to the
Distributor, the Investment Manager and its officers, directors and employees,
including Messrs. Cleland and Schmank (directors of the Fund), Messrs. Bowser,
Lamb, Milberger, Schier, Swickard, Ms. Harwood, Ms. Lee and Ms. Shields
(officers of the Fund), all may be deemed to have a direct or indirect financial
interest in the operation of the Distribution Plan. None of the independent
directors has a direct or indirect financial interest in the operation of the
Distribution Plan.

Benefits from the Distribution Plan may accrue to the Fund and its shareholders
from the growth in assets due to sales of shares to the public pursuant to the
Distribution Agreement with the Distributor. Increases in the net assets of the
Fund from sales pursuant to its respective Distribution Plans and Agreements may
benefit shareholders by reducing per share expenses, permitting increased
investment flexibility and diversification of such Fund's assets, and
facilitating economies of scale (e.g., block purchases) in the Fund's securities
transactions.

Rules of the NASD limit the aggregate amount that a Fund may pay annually in
distribution costs for the sale of its shares to 6.25% of gross sales of shares
since the inception of the Distribution Plan, plus interest at the prime rate
plus 1% on such amount (less any contingent deferred sales charges paid by
shareholders to the Distributor). The Distributor monitors this limit with
regard to the Fund's share classes. The Distributor intends, but is not
obligated, to continue to pay or accrue distribution charges incurred in
connection with a Distribution Plan which exceed current annual payments
permitted to be received by the Distributor from the Fund. The Distributor
intends to seek full payment of such charges from the Fund (together with annual
interest thereon at the prime rate plus 1%) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within permitted
limits.

A Distribution Plan may be terminated at any time by vote of its directors who
are not interested persons of the Fund as defined in the 1940 Act or by vote of
a majority of the outstanding shares of the applicable class. In the event a
Distribution Plan is terminated by the shareholders or the Fund's Board of
Directors, the payments made to the Distributor pursuant to the Plan up to that
time would be retained by the Distributor. Any expenses incurred by the
Distributor in excess of those payments would be absorbed by the Distributor.
The Fund makes no payments in connection with the sales of its shares other than
the distribution fee paid to the Distributor.

CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES -- Any contingent
deferred sales charge imposed upon redemption of Class A shares (purchased in
amounts of $1,000,000 or more), Class B shares and Class C shares is a
percentage of the lesser of (1) the NAV of the shares redeemed or (2) the net
cost of such shares. No contingent deferred sales charge is imposed upon
redemption of amounts derived from (1) increases in the value above the net cost
of such shares due to increases in the NAV per share of the Fund; (2) shares
acquired through reinvestment of income dividends and capital gain
distributions; or (3) Class A shares (purchased in amounts of $1,000,000 or
more), or Class C shares, held for more than one year, or Class B shares held
for more than five years. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares held
the longest will be the first to be redeemed.

The contingent deferred sales charge is waived: (1) following the death of a
shareholder if redemption is made within one year after death; (2) upon the
disability (as defined in section 72(m)(7) of the Internal Revenue Code) of a
shareholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the shareholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under Section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under Section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
contingent deferred sales charge), (iv) "financial hardship" of a participant in
the plan, as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time, (v) termination of employment of
a participant in the plan, (vi) any other permissible withdrawal under the terms
of the plan. The contingent deferred sales charge will also be waived in the
case of certain redemptions of Class B or Class C shares of the Fund pursuant to
a systematic withdrawal program. (See "Systematic Withdrawal Program.")

ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS -- The Investment Manager or
Distributor, from time to time, will pay a bonus, to certain dealers whose
representatives have sold or are expected to sell significant amounts of the
Fund and/or certain other funds managed by the Investment Manager. Bonus
compensation may include reallowance of the entire sales charge and may also
include, with respect to Class A shares, an amount which exceeds the entire
sales charge and, with respect to Class B or Class C shares, an amount which
exceeds the maximum commission. The Distributor, or the Investment Manager, may
also provide financial assistance to certain dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns, and/or shareholder services and programs
regarding the Fund and/or one or more of the other funds managed by the
Investment Manager. In addition, the Investment Manager or Distributor may
sponsor training or education meetings at various locations. In connection with
such meetings it is expected that the Investment Manager or Distributor would
pay the travel, lodging and other expenses of representatives of the dealers in
attendance. The Fund Administrator or Distributor may also pay certain
transaction or order processing costs incurred by dealers who sell Fund shares
through clearing dealers. Certain of the foregoing arrangements may be financed
by payments to the Distributor under a Rule 12b-1 Distribution Plan. These
arrangements do not change the price an investor will pay for shares or the
amount that the Fund will receive from such sale. No compensation will be
offered to the extent it is prohibited by the laws of any state or
self-regulatory agency, such as the NASD. A dealer to whom substantially the
entire sales charge of Class A shares is reallowed may be deemed to be an
"underwriter" under federal securities laws.

The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Fund for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above.

The Investment Manager or Distributor also may pay a marketing allowance to
dealers who meet certain eligibility criteria. This allowance is paid with
reference to new sales of Fund shares in a calendar year and may be discontinued
at any time. To be eligible for this allowance in any given year, the dealer
must sell a minimum of $2,000,000 of Class A, Class B and Class C shares during
that year. The applicable marketing allowance factors are set forth in the
accompanying table.

===============================================================
APPLICABLE MARKETING
AGGREGATE NEW SALES ALLOWANCE FACTOR*
---------------------------------------------------------------
Less than $2 million 0.00%
---------------------------------------------------------------
$2 million but less than $5 million 0.15%
---------------------------------------------------------------
$5 million but less than $10 million 0.25%
---------------------------------------------------------------
$10 million but less than $15 million 0.35%
---------------------------------------------------------------
$15 million but less than $20 million 0.50%
---------------------------------------------------------------
or $20 million or more 0.75%
---------------------------------------------------------------
*The maximum marketing allowance factor applicable per this
schedule will be applied to all new sales in the calendar year
to determine the marketing allowance payable for such year.
===============================================================

PURCHASES AT NET ASSET VALUE -- Class A shares of the Fund may be purchased at
NAV by (1) directors, officers and employees of the Fund, the Fund's Investment
Manager or Distributor; directors, officers and employees of Security Benefit
Life Insurance Company ("SBL") and its subsidiaries; agents licensed with SBL;
spouses or minor children of any such agents; as well as the following relatives
of any such directors, officers and employees (and their spouses): spouses,
grandparents, parents, children, grandchildren, siblings, nieces and nephews;
(2) any trust, pension, profit sharing or other benefit plan established by any
of the foregoing corporations for persons described above; (3) retirement plans
where third party administrators of such plans have entered into certain
arrangements with the Distributor or its affiliates provided that no commission
is paid to dealers; and (4) officers, directors, partners or registered
representatives (and their spouses and minor children) of broker-dealers who
have a selling agreement with the Distributor. Such sales are made upon the
written assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be transferred or resold except
through redemption or repurchase by or on behalf of the Fund.

Class A shares of the Fund may be purchased at NAV when the purchase is made on
the recommendation of (i) a registered investment adviser, trustee or financial
intermediary who has authority to make investment decisions on behalf of the
investor; or (ii) a certified financial planner or registered broker-dealer who
either charges periodic fees to its customers for financial planning, investment
advisory or asset management services, or provides such services in connection
with the establishment of an investment account for which a comprehensive "wrap
fee" is imposed. Class A shares of the Fund may also be purchased at NAV when
the purchase is made by retirement plans that (i) buy shares of the Security
Funds worth $500,000 or more; (ii) have 100 or more eligible employees at the
time of purchase; (iii) certify it expects to have annual plan purchases of
shares of Security Funds of $200,000 or more; (iv) are provided administrative
services by certain third-party administrators that have entered into a special
service arrangement with the Security Funds relating to such plans; or (v) have
at the time of purchase, aggregate assets of at least $1,000,000. Purchases made
pursuant to this provision may be subject to a deferred sales charge of up to 1%
in the event of a redemption within one year of the purchase.

The Distributor must be notified when a purchase is made that qualifies under
any of the above provisions.

PURCHASES FOR EMPLOYER-SPONSORED RETIREMENT PLANS -- Security Financial
Resources, Inc., an affiliated company of the Distributor, offers plan
recordkeeping services on a fee basis to employer-sponsored retirement plans.
Employer-sponsored retirement plans that have entered into an agreement to
receive such services from Security Financial Resources, Inc. may purchase Class
A shares of the Fund at NAV under certain circumstances. Such plans would first
purchase Class C shares of the Fund for an initial period of time that would
vary with the size of the plan, amount of assets flowing into the plan and level
of service provided by the dealer. After that initial period of time has
elapsed, the plan would exchange at NAV existing Class C shares for Class A
shares of the Fund, and new purchases under the plans would be made in Class A
shares at NAV.

The schedule below sets forth the amount of time that retirement plan assets
would remain invested in Class C shares before they would be eligible for
exchange to Class A shares of the Fund. The schedule below also sets forth the
commissions paid to dealers in connection with sales of Fund shares with respect
to such retirement plans, which commissions replace those normally paid in
connection with sales of Class C shares.

================================================================================
NUMBER OF YEARS COMMISSION BY YEAR OF PURCHASE*
INVESTED IN -------------------------------
ELIGIBLE PLANS CLASS C SHARES 1 2 3 4 5+
- --------------------------------------------------------------------------------
Less than $1.5 mil. in
assets or $400,000 in flow 8 years 5% 4% 3% 2% 1%
- --------------------------------------------------------------------------------
Less than $1.5 mil. in
assets or $400,000 in flow 8 years 6% 4% 2% 1% 1%
- --------------------------------------------------------------------------------
Less than $5 mil. in
assets or $1 mil. in flow 6 years 4% 3% 2% 1% 1%
- --------------------------------------------------------------------------------
Less than $5 mil. in
assets or $1 mil. in flow 5 years 3% 2% 1% 1% 1%
- --------------------------------------------------------------------------------
Less than $10 mil. in
assets or $2 mil. in flow 3 years 2% 1% 1% 1% 1%
- --------------------------------------------------------------------------------
Less than $10 mil. in
assets or $2 mil. in flow 0 years** 1%++ 1% 1% 1% 1%
- --------------------------------------------------------------------------------
*The commission is a percentage of the amount invested. The year of purchase is
measured from the date of the plan's initial investment in the Fund.
Notwithstanding the foregoing schedule, if 50% or more of the plan assets
allocated to the Fund is redeemed within the four-year period beginning on the
date of the plan's initial investment in the Fund, the commission will
immediately drop to 1% for all subsequent purchases.

**Amounts will be invested in Class A shares at NAV.

++Certain dealers may receive 1.25% in year 1.
================================================================================

The Distributor may also enter into arrangements with dealers whereby it agrees
to "annualize" the first-year commission expected to be paid on the purchase of
Fund shares by retirement plans receiving plan recordkeeping services from
Security Financial Resources, Inc. Such arrangements will typically provide for
an up-front payment by the Distributor to the dealer of a specified percentage
of the first-year's expected commissions attributable to a particular retirement
plan.

In some circumstances, a retirement plan that was not previously receiving plan
recordkeeping services from Security Financial Resources, Inc. may transfer its
assets in an arrangement where it receives such services. In such circumstances,
the Distributor may pay the dealer a commission on the transferred assets that
is different from the commission otherwise set forth in the table above, but
typically not in excess of 1.25% of the transferred amount.

In addition to the commissions set forth above, dealers will receive a service
fee payable beginning in the 13th month following the plan's initial investment.
The Distributor pays service fees quarterly, in an amount equal to 0.25%
annually of the average daily NAV of Class C shares sold by dealers in
connection with such employer-sponsored retirement plans and remaining
outstanding on the books of the Fund.

SYSTEMATIC WITHDRAWAL PROGRAM

A Systematic Withdrawal Program may be established by shareholders who wish to
receive regular monthly, bi-monthly, quarterly, semiannual or annual payments of
$25 or more. A shareholder may elect a payment that is a specified percentage of
the initial or current account value or a specified dollar amount. The Program
may also be based upon the liquidation of a fixed or variable number of shares
provided that the amount withdrawn monthly is at least $25. However, the Fund
does not recommend this (or any other amount) as an appropriate monthly
withdrawal. Shares with a current aggregate offering price of $5,000 or more
must be deposited with the Investment Manager acting as agent for the
shareholder under the Program. There is no service charge on the Program.

Sufficient shares will be liquidated at NAV to meet the specified withdrawals.
Liquidation of shares may deplete the investment, particularly in the event of a
market decline. Payments cannot be considered as actual yield or income since
part of such payments is a return of capital. Such withdrawals constitute a
taxable event to the shareholder. The maintenance of a Withdrawal Program
concurrently with purchases of additional shares of the Fund would be
disadvantageous because of the sales commission payable in respect to such
purchases. During the withdrawal period, no payments will be accepted under an
Accumulation Plan. Income dividends and capital gains distributions are
automatically reinvested at NAV. If an investor has an Accumulation Plan in
effect, it must be terminated before a Systematic Withdrawal Program may be
initiated.

A shareholder may establish a Systematic Withdrawal Program with respect to
Class B or Class C shares without the imposition of any applicable contingent
deferred sales charge, provided that such withdrawals do not in any 12-month
period, beginning on the date the Program is established, exceed 10% of the
value of the account on that date ("Free Systematic Withdrawals"). Free
Systematic Withdrawals are not available if a Program established with respect
to Class B or Class C shares provides for withdrawals in excess of 10% of the
value of the account in any Program year and, as a result, all withdrawals under
such a Program are subject to any applicable contingent deferred sales charge.
Free Systematic Withdrawals will be made first by redeeming those shares that
are not subject to the contingent deferred sales charge and then by redeeming
shares held the longest. The contingent deferred sales charge applicable to a
redemption of Class B and Class C shares requested while Free Systematic
Withdrawals are being made will be calculated as described under "Calculation
and Waiver of Contingent Deferred Sales Charges."

The shareholder receives confirmation of each transaction showing the source of
the payment and the share balance remaining in the Program. A Program may be
terminated on written notice by the shareholder or by the Fund, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account.

INVESTMENT MANAGEMENT

The Investment Manager, located at One Security Benefit Place, Topeka, Kansas,
has served as investment adviser to Security Equity Fund, since January 1, 1964.
The Investment Manager also acts as investment adviser to Security Large Cap
Value Fund, Security Mid Cap Growth Fund, Security Income Fund, Security Cash
Fund, SBL Fund, and Security Municipal Bond Fund. The Investment Manager is a
limited liability company controlled by its members, SBL and Security Benefit
Group, Inc. ("SBG"). SBG is an insurance and financial services holding company
wholly-owned by SBL, One Security Benefit Place, Topeka, Kansas 66636-0001. SBL,
a stock life insurance company, incorporated under the laws of Kansas, is
controlled by Security Benefit Corp. ("SBC"). SBC is wholly owned by Security
Benefit Mutual Holding Company, which is in turn controlled by SBL
policyholders. SBL together with its subsidiaries, has approximately $8.9
billion of assets under management as of September 30, 2002.

The Investment Manager serves as investment adviser to Security Equity Fund
under the Investment Management and Services Agreement, which was approved by
the Board of Directors on May 2, 2003. Pursuant to the Investment Management and
Services Agreement, the Investment Manager furnishes investment advisory,
statistical and research services to the Fund, supervises and arranges for the
purchase and sale of securities on behalf of the Fund, and provides for the
compilation and maintenance of records pertaining to the investment advisory
function.

Pursuant to the Investment Management and Services Agreement, the Investment
Manager also performs administrative functions and the bookkeeping, accounting
and pricing functions for the Fund, and performs all shareholder servicing
functions, including transferring record ownership, processing purchase and
redemption transactions, answering inquiries, mailing shareholder communications
and acting as the dividend disbursing agent.

The Fund pays all of its respective expenses not assumed by the Investment
Manager or the Distributor, including organization expenses; directors' fees;
fees of the Fund's custodian; taxes and governmental fees; interest charges; any
membership dues; brokerage commissions; expenses of preparing and distributing
reports to shareholders; costs of shareholder and other meetings; Class A, Class
B and Class C distribution fees; and legal, auditing and accounting expenses.
The Fund also pays for the preparation and distribution of the prospectus to its
shareholders and all expenses in connection with registration under the 1940 Act
and the registration of its capital stock under federal and state securities
laws. The Fund pays nonrecurring expenses that may arise, including litigation
expenses affecting the Fund.

The Investment Manager has agreed to reimburse the Fund or waive a portion of
its management fee for any amount by which the total annual expenses of the Fund
(including management fees, but excluding interest, taxes, brokerage
commissions, extraordinary expenses and Class A, Class B and Class C
distribution fees) for any fiscal year exceeds the level of expenses which the
Fund is permitted to bear under the most restrictive expense limitation imposed
by any state in which shares of the Fund are then qualified for sale. (The
Investment Manager is not aware of any state that currently imposes limits on
the level of mutual fund expenses.)

Separate fees are paid by the Fund to the Investment Manager for investment
advisory, administrative and transfer agency services.

The pro rata adjustment upward or downward will be determined based upon the
investment performance of the Class A shares of Alpha Opportunity Fund relative
to the investment record of the S&P 500 Index. The amount of any upward
adjustment in the Base Fee will be equal to 0.75% multiplied by the ratio of the
number of percentage points by which the investment performance of the Class A
shares of Alpha Opportunity Fund exceed the investment record of the S&P 500
Index as compared to 15 percentage points.

For example, if the investment performance of Alpha Opportunity Fund was 6.6%
and the investment record of the S&P 500 Index was 0%, the ratio would be 6.6 to
15, or 44%, times 0.75%, for an upward adjustment of 0.33%. The amount of any
downward adjustment in the Base Fee will be equal to 0.75% multiplied by the
ratio of the number of percentage points by which the investment performance of
Alpha Opportunity Fund is less than the investment record of the S&P 500 Index
as compared to 15 percentage points.

The maximum performance adjustment upward or downward is 0.75% annually.
Depending on the performance of the Class A shares of Alpha Opportunity Fund,
the Investment Manager may receive a maximum of 2.75% or a minimum of 1.25% in
annual management fees from the Alpha Opportunity Fund.

During its first 12 months of operations, Alpha Opportunity Fund will pay the
Investment Manager the base fee of 2.00% without any performance adjustment.
Performance adjustments will begin on [ ], 2004 based upon Alpha Opportunity
Fund's performance during the 12 months ended [ ], 2004. Thereafter, the
Investment Manager will calculate the performance adjustment for Alpha
Opportunity Fund at the end of each calendar month based upon the investment
performance of the Fund's Class A shares during the twelve-month period ending
on the last day of the prior month compared to the investment record of the S&P
500 Index during the same period.

The following table includes examples showing the fees that the Investment
Manager would earn at various levels of investment performance of the Alpha
Opportunity Fund and the S&P 500 Index:

=============================================================
% POINT TOTAL
DIFFERENCE PERFORMANCE MANAGEMENT
BETWEEN CLASS A BASE ADJUSTMENT FEE PAID TO
SHARES AND ADVISORY FROM BASE INVESTMENT
S&P 500 INDEX FEE ADVISORY FEE MANAGER
-------------------------------------------------------------
15% 2.00% +0.75% 2.75%
-------------------------------------------------------------
10% 2.00% +0.50% 2.50%
-------------------------------------------------------------
5% 2.00% +0.25% 2.25%
-------------------------------------------------------------
0% 2.00% 0.00% 2.00%
-------------------------------------------------------------
-5% 2.00% -0.25% 1.75%
-------------------------------------------------------------
-10% 2.00% -0.50% 1.50%
-------------------------------------------------------------
-15% 2.00% -0.75% 1.25%
=============================================================

The Investment Manager pays from its assets, and not from the Alpha Opportunity
Fund's assets, an investment sub-advisory fee to the Fund's sub-adviser,
Mainstream, that includes both a base fee and a performance adjustment
component. This fee is described below in more detail. For purposes of the above
discussion, as well as the description of the fee paid to Mainstream, the
"investment performance" of the Fund (or portion thereof) is calculated assuming
the reinvestment of dividends and capital gains distributions, and the
"investment record" of the S&P 500 Index is calculated based on its change in
level, adjusted for any cash distributions from the companies whose securities
comprise the index.

The Investment Manager also receives, on an annual basis, an administrative fee
equal to 0.145% of the average daily net assets of the Alpha Opportunity Fund.
For transfer agency services provided to the Fund, the Investment Manager
receives an annual maintenance fee of $8.00 per account, and a transaction fee
of $1.00 per transaction. For purposes of calculating the annual maintenance
fee, the shareholder transaction and dividend transaction fee, the Investment
Manager is permitted to count as a shareholder, each person that holds a
beneficial interest in the Fund through an omnibus account; provided that the
Investment Manager is paying a third party, such as a bank, insurance company or
third-party administrator for sub-administration, sub-accounting and/or
sub-transfer agency fees for keeping individual shareholder records.

The Fund's Investment Management and Services Agreement is renewable annually by
the Fund's Board of Directors or by a vote of a majority of the Fund's
outstanding securities and, in either event, by a majority of the Board who are
not parties to the Agreement or interested persons of any such party. The
Agreement provides that it may be terminated without penalty at any time by
either party on 60 days' notice and is automatically terminated in the event of
assignment.

The Investment Management and Services Agreement has been approved by the Board
of Directors with respect to the Fund. In determining whether it was appropriate
to approve the Agreement, the Board of Directors requested information, provided
by the Investment Manager, that it believed to be reasonably necessary to reach
its conclusion. The Board of Directors carefully evaluated this information and
was advised by legal counsel, including independent legal counsel to the
independent directors, with respect to its deliberations. Based on its review of
the information requested and provided, the Board of Directors determined that
the Agreement is consistent with the best interests of the Fund and its
shareholders, and enables the Fund to receive high quality services at a cost
that is appropriate, reasonable, and in the best interests of the Fund and its
shareholders. The Board of Directors made these determinations on the basis of
the following considerations, among others:

1. The investment advisory fees payable to the Investment Manager under the
Agreement are fair and reasonable in light of the services to be provided,
the anticipated costs of these services, the profitability of the Investment
Manager's relationship with the Fund, and the comparability of the proposed
fees for the Fund to fees paid by comparable mutual funds;

2. The nature, quality and extent of the investment advisory services expected
to be provided by the Investment Manager, in light of the high quality
services provided to the other mutual funds advised by the Investment
Manager and their historic performance, including achievement of stated
investment objectives;

3. The Investment Manager's representations regarding its staffing and
capabilities to manage the Fund, including the retention of personnel with
significant portfolio management experience;

4. The Investment Manager's entrepreneurial commitment to the management and
success of the Fund, which could entail a substantial commitment of
resources to the successful operation of the Fund;

5. The overall high quality of the personnel, operations, financial condition,
investment management capabilities, methodologies, and performance of the
Investment Manager;

6. The profitability to the Investment Manager of the investment management
fee, including the performance fee component of the management fee, assuming
hypothetical investment performance of the Class A shares of Alpha
Opportunity Fund that was 15% above, 15% below and the same as the
investment record of the S&P 500 Index;

7. The monthly reallocation of the Alpha Opportunity Fund's assets between
Mainstream and the Investment Manager to an approximately equal allocation
to avoid the potential conflict of interest for the Investment Manager to
make investment decisions that favored the Investment Manager over
Mainstream; and

8. The fairness and reasonableness of the investment advisory fees payable with
respect to the Alpha Opportunity Fund in light of the nature, quality and
extent of the investment services expected to be provided or procured, the
active management style to be used with respect to the active management
component of the Fund, the anticipated costs associated with providing or
procuring these services, the unique nature of the investment being offered
through a registered investment company, the comparability of the fees paid
to fees paid by other pooled investment vehicles or accounts with comparable
investment objectives and strategies, the historic performance of investment
vehicles utilizing comparable investment strategies, the potential to
achieve absolute positive returns during adverse market conditions while
maintaining significant exposure to market upside potential, and the
Investment Manager's willingness to link the level of investment advisory
fees paid by investors to the relative investment performance achieved by
management of the Fund.

Accordingly, in light of the above considerations and such other facts and
information it considered relevant, the Board of Directors unanimously approved
the Agreement with respect to the Fund.

SUB-ADVISER

The Investment Manager has entered into a sub-advisory agreement with Mainstream
Investment Advisers, LLC ("Mainstream"), 101 West Spring Street, Suite 401, New
Albany, Indiana 47150, to provide investment advisory services with regard to a
portion of the total assets of the Alpha Opportunity Fund. Pursuant to this
agreement, Mainstream furnishes investment advisory services, supervises and
arranges for the purchase and sale of securities on behalf of a portion of the
assets of the Alpha Opportunity Fund and provides for the compilation and
maintenance of records pertaining to such investment advisory services, subject
to the control and supervision of the Fund's Board of Directors and the
Investment Manager. For such services, the Investment Manager pays Mainstream an
annual fee equal to 2.50% of that portion of the Alpha Opportunity Fund's assets
managed by Mainstream. The sub-advisory fee will be adjusted upward or downward,
depending on how that portion of Alpha Opportunity Fund's assets performed
relative to the S&P 500 Index.

The pro rata adjustment upward or downward will be determined based upon the
investment performance of that portion of Alpha Opportunity Fund's assets
managed by Mainstream relative to the investment record of the S&P 500 Index.
The amount of any upward adjustment in the Base Fee will be equal to 1.50%
multiplied by the ratio of the number of percentage points by which the
investment performance of the Alpha Opportunity Fund assets managed by
Mainstream exceeds the investment record of the S&P 500 Index as compared to 30
percentage points.

For example, if the investment performance of that portion of Alpha Opportunity
Fund's assets managed by Mainstream was 6.6% and the investment record of the
S&P 500 Index was 0%, the ratio would be 6.6 to 30, or 22%, times 1.50%, for an
upward adjustment of 0.33%. The amount of any downward adjustment in the Base
Fee will be equal to 1.50% multiplied by the ratio of the number of percentage
points by which the investment performance of that portion of Alpha Opportunity
Fund's assets managed by Mainstream is less than the investment record of the
S&P 500 Index as compared to 30 percentage points.

The maximum performance adjustment upward or downward is 1.50% annually.
Depending on the performance of that portion of the Fund's assets managed by
Mainstream, the Investment Manager may pay Mainstream a maximum of 4.00% or a
minimum of 1.00% in annual sub-advisory fees.

During its first 12 months of operations, the Investment Manager will pay
Mainstream the base fee of 2.50% without any adjustment for performance.
Performance adjustments will begin on [ ], 2004 based upon the performance
during the 12 months ended [ ], 2004 of that portion of Alpha Opportunity Fund's
assets managed by Mainstream. Thereafter, the Investment Manager will calculate
the performance adjustment at the end of each calendar month based upon the
investment performance of the assets managed by Mainstream during the
twelve-month period ending on the last day of the prior month compared to the
investment record of the S&P 500 Index during the same period.

The following table includes examples showing the fees that Mainstream would
earn at various levels of performance of that portion of the Alpha Opportunity
Fund that it manages and the S&P 500 Index:

=============================================================
% POINT
DIFFERENCE TOTAL
BETWEEN PORTION BASE SUB-ADVISORY
OF ASSETS AND ADVISORY PERFORMANCE FEE PAID TO
S&P 500 INDEX FEE ADJUSTMENT MAINSTREAM
-------------------------------------------------------------
+30 2.50% +1.50% 4.00%
-------------------------------------------------------------
+20 2.50% +1.00% 3.50%
-------------------------------------------------------------
+10 2.50% +0.50% 3.00%
-------------------------------------------------------------
0 2.50% 0.00% 2.50%
-------------------------------------------------------------
-10 2.50% -0.50% 2.00%
-------------------------------------------------------------
-20 2.50% -1.00% 1.50%
-------------------------------------------------------------
-30 2.50% -1.50% 1.00%
=============================================================

The Alpha Opportunity Fund's assets are reallocated between Mainstream and the
Investment Manager on a monthly basis to an approximately equal allocation. This
procedure ensures that the Investment Manager cannot make allocation decisions
that favor the Investment Manager over Mainstream.

Mainstream is a limited liability company controlled by its members, William
Jenkins and William Gernert. Mainstream, which focuses on providing advisory
services to high net worth individuals and institutional investors, manages
approximately $143 million in assets as of March 31, 2003. The Alpha Opportunity
Fund is the first registered investment company managed (at least in part) by
Mainstream.

The Sub-Advisory Agreement with Mainstream has been approved by the Board of
Directors with respect to the Fund. In determining whether it was appropriate to
approve the Agreement, the Board of Directors requested information, provided by
the Investment Manager, that it believed to be reasonably necessary to reach its
conclusion. The Board of Directors carefully evaluated this information and was
advised by legal counsel with respect to its deliberations. Based on its review
of the information requested and provided, the Board of Directors determined
that the Sub-Advisory Agreement is consistent with the best interests of the
Fund and its shareholders, and enables the Fund to receive high quality services
at a cost that is appropriate, reasonable, and in the best interests of the Fund
and its shareholders. The Board of Directors made these determinations on the
basis of the following considerations, among others:

1. The fees payable to Mainstream under the Sub-Advisory Agreement are fair and
reasonable in light of the services to be provided, the anticipated costs of
these services, and the comparability of the proposed fee to fees paid by
comparable mutual funds or other types of investment vehicles;

2. The nature, quality and extent of the investment advisory services expected
to be provided by Mainstream;

3. Comparison of the Fund's estimated expense ratio and those of similarly
situated mutual funds;

4. Any fall-out benefits, or indirect profits to Mainstream from its
relationship to the Fund (i.e., soft dollars);

5. The amount of the sub-advisory fee, including the performance fee component,
assuming hypothetical investment performance of the Class A shares of the
Fund that was 15% above, 15% below and the same as the investment record of
the S&P 500 Index; and

6. The fairness and reasonableness of the sub-advisory fees payable with
respect to the Fund in light of the nature, quality and extent of the
investment services expected to be provided by Mainstream, the active
management style to be used with respect to the active management component
of the Fund, the anticipated costs associated with providing these services,
the unique nature of the investment being offered through a registered
investment company, the comparability of the fees paid to fees paid by other
pooled investment vehicles or accounts with comparable investment objectives
and strategies, the historic performance of investment vehicles or accounts
managed by Mainstream utilizing comparable investment strategies, the
potential to achieve absolute positive returns during adverse market
conditions while maintaining significant exposure to market upside
potential, and Mainstream's willingness to align its economic interests via
the performance adjustment with those of investors in the Fund.

Accordingly, in light of the above considerations and such other facts and
information it considered relevant, the Board of Directors unanimously approved
the Sub-Advisory Agreement between the Investment Manager and Mainstream.

CODE OF ETHICS

The Fund, the Investment Manager and the Distributor each has adopted a written
code of ethics (the "Code of Ethics") which governs the personal securities
transactions of "access persons" of the Fund. Access persons may invest in
securities, including securities that may be purchased or held by the Fund;
provided that they obtain prior clearance before engaging in securities
transactions, or engage only in transactions that do not exceed certain DE
MINIMIS amounts as set forth in the Code of Ethics. Access persons include
officers and directors of the Fund and Investment Manager and employees that
participate in, or obtain information regarding, the purchase or sale of
securities by the Fund or whose job relates to the making of any recommendations
with respect to such purchases or sales. All access persons must report their
personal securities transactions within ten days of the end of each calendar
quarter.

Access persons will not be permitted to effect transactions in a security above
certain DE MINIMIS amounts if it: (a) is being considered for purchase or sale
by the Fund; or (b) is being purchased or sold by the Fund. Portfolio managers,
research analysts and traders are also prohibited from purchasing or selling a
security within seven calendar days before or after the Fund that he or she
manages trades in that security (the "blackout period"). The exception for DE
MINIMIS transactions is not available to such access persons during the blackout
period. Any material violation of the Code of Ethics is reported to the Board of
the Fund. The Board also reviews the administration of the Code of Ethics on an
annual basis. In addition, Mainstream has adopted its own code of ethics to
which the personal securities transactions of its portfolio managers and other
access persons are subject. The Code of Ethics is on public file with the SEC
and is available from the Commission.

DISTRIBUTOR

The Distributor, a Kansas corporation and wholly-owned subsidiary of SBG, serves
as the principal underwriter for shares of the Fund pursuant to a Distribution
Agreement with the Fund. The Distributor also acts as principal underwriter for
Security Mid Cap Growth Fund, Security Large Cap Value Fund, Security Income
Fund, Security Municipal Bond Fund and SBL Fund.

The Distributor receives a maximum commission on sales of Class A shares of
5.75% and allows a maximum discount of 5% from the offering price to authorized
dealers on the Fund shares sold. The discount is the same for all dealers, but
the Distributor at its discretion may increase the discount for specific
periods. Salespersons employed by dealers may also be licensed to sell insurance
with SBL.

The Distributor, on behalf of the Fund, may act as a broker in the purchase and
sale of securities, provided that any such transactions and any commissions
shall comply with requirements of the 1940 Act and all rules and regulations of
the SEC. The Distributor has not acted as a broker.

The Fund's Distribution Agreement is renewable annually either by its Board of
Directors or by the vote of a majority of the Fund's outstanding securities,
and, in either event, by a majority of the board who are not parties to the
contract or interested persons of any such party. The contract may be terminated
by either party upon 60 days' written notice.

ALLOCATION OF PORTFOLIO BROKERAGE

Transactions in portfolio securities shall be effected in such manner as deemed
to be in the best interests of the Fund. In reaching a judgment relative to the
qualifications of a broker-dealer ("broker") to obtain the best execution of a
particular transaction, all relevant factors and circumstances will be taken
into account by the Investment Manager or Sub-Adviser, including the overall
reasonableness of commissions paid to a broker, the firm's general execution and
operational capabilities, and its reliability and financial condition. Subject
to the foregoing considerations, the execution of portfolio transactions may be
directed to brokers who furnish investment information or research services to
the Investment Manager or Sub-Adviser. Such investment information and research
services include advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities and purchasers or sellers of securities, and furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts. Such investment information and
research services may be furnished by brokers in many ways, including: (1)
on-line data base systems, the equipment for which is provided by the broker,
that enable the Investment Manager to have real-time access to market
information, including quotations; (2) economic research services, such as
publications, chart services and advice from economists concerning macroeconomic
information; and (3) analytical investment information concerning particular
corporations.

In some cases, the computer and other equipment furnished by the broker may have
additional uses that are not related to the investment services and research
information. In such cases, the Investment Manager or Sub-Adviser must allocate
the value of the computer and other equipment into research and non-research
categories. Since that portion allocable to research can be paid from Fund
brokerage commissions rather than being paid by the Investment Manager or
Sub-Adviser, the Investment Manager and Sub-Adviser will have a conflict of
interest in making the allocation. Finally, the investment services or research
information provided to the Investment Manager or Sub-Adviser may be produced by
parties other than the broker effecting the portfolio transaction.

If a transaction is directed to a broker supplying investment services or
research information, the transaction charges (i.e., a commission or a charge
that is deemed to be the equivalent of a commission) paid for such transaction
may be in excess of the transaction charges another broker would have charged
for effecting that transaction provided that the Investment Manager or
Sub-Adviser as applicable shall have determined in good faith that the
transaction charges are reasonable in relation to the value of the investment
information or the research services provided, viewed in terms of either that
particular transaction or the overall responsibilities of the Investment Manager
or Sub-Adviser with respect to all accounts as to which it exercises investment
discretion. The Investment Manager or Sub-Adviser may use all, none, or some of
such information and services in providing investment advisory services to each
of the mutual funds under its management, including the Fund. Portfolio
transactions, may also be placed with the Distributor (including transactions in
which the security is being underwritten by an affiliated broker/dealer) to the
extent and in the manner permitted by applicable law.

In addition, brokerage transactions may be placed with broker-dealers who sell
shares of the funds managed by the Investment Manager and who may or may not
also provide investment information and research services. The Investment
Manager may, consistent with the NASD's Conduct Rules, consider sales of shares
of the Fund in the selection of a broker.

The Fund may also buy securities from, or sell securities to, dealers acting as
principals or market makers. Except as noted below, the Investment Manager
generally will not purchase investment information or research services in
connection with such principal transactions. The Investment Manager and
Sub-Adviser, however, may purchase investment information or research services
in connection with riskless principal transactions that are reported pursuant to
certain NASD rules that ensure transparency as to security price and transaction
charges, or in connection with transactions in other markets having regulations
that ensure comparable transparency of security prices and charges. In addition,
the Investment Manager and Sub-Adviser may purchase investment information or
research services in connection with investments in underwritten fixed price
offerings consistent with the so-called "Papilisky" rules of the NASD.

Securities held by the Fund may also be held by other investment advisory
clients of the Investment Manager and/or Sub-Adviser, including other investment
companies. In addition, SBL, may also hold some of the same securities as the
Fund. When selecting securities for purchase or sale for the Fund, the
Investment Manager may at the same time be purchasing or selling the same
securities for one or more of such other accounts. Subject to the Investment
Manager's obligation to seek best execution, such purchases or sales may be
executed simultaneously or "bunched." It is the policy of the Investment Manager
not to favor one account over the other. Any purchase or sale orders executed
simultaneously (which may also include orders from SBL) are allocated at the
average price and as nearly as practicable on a pro rata basis (transaction
costs will also be shared on a pro rata basis) in proportion to the amounts
desired to be purchased or sold by each account. In those instances where it is
not practical to allocate purchase or sale orders on a pro rata basis, then the
allocation will be made on a rotating or other equitable basis. While it is
conceivable that in certain instances this procedure could adversely affect the
price or number of shares involved in the Fund's transaction, it is believed
that the procedure generally contributes to better overall execution of the
Fund's portfolio transactions. With respect to the allocation of initial public
offerings ("IPOs"), the Investment Manager may determine not to purchase such
offerings for certain of its clients (including investment company clients) due
to the limited number of shares typically available to the Investment Manager in
an IPO.

BROKERAGE ENHANCEMENT PLAN

The Board of Directors of the Fund, including all of the Directors who are not
"interested persons" (as defined in the 1940 Act) of the Fund, the Investment
Manager or the Distributor (referred to as the "Independent Directors"), has
voted pursuant to the provisions of Rule 12b-1 under the 1940 Act to adopt a
Brokerage Enhancement Plan (the "Plan") for the purpose of utilizing the Fund's
brokerage commissions, to the extent available, to promote the sale and
distribution of the Fund's shares. However, to date, the Fund has not
implemented the Plan.

Under the Plan, the Distributor, on behalf of the Fund is authorized to direct
the Investment Manager or Sub-Adviser to effect brokerage transactions in
portfolio securities through certain broker-dealers, consistent with the
obligation to achieve best price and execution. These broker-dealers have agreed
either (i) to pay a portion of their commission from the purchase and sale of
securities to the Distributor or other introducing brokers ("Brokerage
Payments") that provide distribution activities, or (ii) or to provide brokerage
credits, benefits or other services ("Brokerage Credits") to be used for
distribution activities in addition to the execution of the trade. The
Distributor will use a part of the Brokerage Payments to defray legal and
administrative costs associated with implementation of the Plan. These expenses
are expected to be minimal. The remainder of the Brokerage Payments or Brokerage
Credits generated will be used by the Distributor to finance activities
principally intended to result in the sale of the Fund's shares. These
activities will include, but are not limited to:

o holding or participating in seminars and sales meetings promoting the sale of
the Fund's shares

o paying marketing fees requested by broker-dealers who sell shares of the Fund

o training sales personnel

o creating and mailing advertising and sales literature

o financing any other activity that is intended to result in the sale of the
Fund's shares.

The Distributor is obligated to use all amounts generated under the Plan for
distribution expenses, except for a small amount to be used to defray the
incidental costs associated with implementation of the Plan. The Plan may
indirectly benefit the Distributor in that amounts expended under the Plan may
help defray, in whole or in part, distribution expenses that otherwise might be
borne by the Distributor or an affiliate.

The Plan provides (i) that it will be subject to annual approval by the
Directors and the Independent Directors; (ii) that the Distributor must provide
the Directors a quarterly written report of payments made under the Plan and the
purpose of the payments; and (iii) that the Plan may be terminated at any time
by the vote of a majority of the Independent Directors. The Plan may not be
amended to increase materially the amount to be spent for distribution without
shareholder approval, and all material Plan amendments must be approved by a
vote of the Independent Directors. In addition, the selection and nomination of
the Independent Directors must be committed to the Independent Directors.

HOW NET ASSET VALUE IS DETERMINED

The per share NAV of the Fund is determined by dividing the total value of its
securities and other assets, less liabilities, by the total number of shares
outstanding. The public offering price for the Fund is its NAV per share plus,
in the case of Class A shares, the applicable sales charge. The NAV and offering
price are computed once daily as of the close of regular trading hours on the
NYSE (normally 3:00 p.m. Central time) on each day the Exchange is open for
trading, which is Monday through Friday, except for the following dates when the
exchange is closed in observance of federal holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.

The offering price determined at the close of business on the NYSE on each day
on which the Exchange is open will be applicable to all orders for the purchase
of Fund shares received by the dealer prior to such close of business and
transmitted to the Fund prior to the close of their business day (normally 5:00
p.m. Central time unless the NYSE closes early). Orders accepted by the dealer
after the close of business of the NYSE or on a day when the NYSE is closed will
be filled on the basis of the offering price determined as of the close of
business of the NYSE on the next day on which the NYSE is open. It is the
responsibility of the dealer to promptly transmit orders to the Fund.

In determining NAV, securities listed or traded on a national securities
exchange are valued on the basis of the last sale price. If there are no sales
on a particular day, then the securities shall be valued at the last bid price.
All other securities for which market quotations are available are valued on the
basis of the last current bid price. If there is no bid price, or if the bid
price is deemed to be unsatisfactory by the Board of Directors or the Investment
Manager, then the securities shall be valued in good faith by such method as the
Board of Directors determines will reflect their fair market value.

In addition, if between the time trading ends on a particular security and the
close of trading on the NYSE, events occur that materially affect the value of
the security, the Fund may value the security at its fair value as determined in
good faith by the Investment Manager under procedures approved by the Board of
Directors. In such a case, the Fund's NAV will be subject to the judgment of the
Investment Manager rather than being determined by the market.

Because the expenses of distribution are borne by Class A shares through a
front-end sales charge and by Class B and Class C shares through an ongoing
distribution fee, the expenses attributable to each class of shares will differ,
resulting in different NAVs. The NAV of Class B and Class C shares will
generally be lower than the NAV of Class A shares as a result of the
distribution fee charged to Class B and Class C shares. It is expected, however,
that the NAV per share will tend to converge immediately after the payment of
dividends which will differ in amount for Class A, B and C shares by
approximately the amount of the different distribution expenses attributable to
Class A, B and C shares.

HOW TO REDEEM SHARES

Shareholders may turn in their shares directly to the Investment Manager for
redemption at NAV (which may be more or less than the investor's cost, depending
upon the market value of the portfolio securities at the time of redemption).
The redemption price in cash will be the NAV next determined after the time when
such shares are tendered for redemption less any applicable contingent deferred
sales charge.

Shares will be redeemed on request of the shareholder in proper order to the
Investment Manager, which serves as the Fund's transfer agent. A request is made
in proper order by submitting the following items to the Investment Manager: (1)
a written request for redemption signed by all registered owners exactly as the
account is registered, including fiduciary titles, if any, and specifying the
account number and the dollar amount or number of shares to be redeemed; (2) a
guarantee of all signatures on the written request or on the share certificate
or accompanying stock power; (3) any share certificates issued for any of the
shares to be redeemed; and (4) any additional documents which may be required by
the Investment Manager for redemption by corporations or other organizations,
executors, administrators, trustees, custodians or the like. Transfers of shares
are subject to the same requirements. A signature guarantee is not required for
redemptions of $25,000 or less, requested by and payable to all shareholders of
record for an account, to be sent to the address of record. The signature
guarantee must be provided by an eligible guarantor institution, such as a bank,
broker, credit union, national securities exchange or savings association. The
Investment Manager reserves the right to reject any signature guarantee pursuant
to its written procedures which may be revised in the future. To avoid delay in
redemption or transfer, shareholders having questions should contact the
Investment Manager.

The Articles of Incorporation of Security Equity Fund provide that the Board of
Directors, without the vote or consent of the shareholders, may adopt a plan to
redeem at NAV all shares in any shareholder account in which there has been no
investment (other than the reinvestment of income dividends or capital gains
distributions) for the last six months and in which there are fewer than 25
shares or such fewer number of shares as may be specified by the Board of
Directors. Any plan of involuntary redemption adopted by the Board of Directors
shall provide that the plan is in the economic best interests of the Fund or is
necessary to reduce disproportionately burdensome expenses in servicing
shareholder accounts. Such plan shall further provide that prior notice of at
least six months shall be given to a shareholder before involuntary redemption,
and that the shareholder will have at least six months from the date of the
notice to avoid redemption by increasing his or her account to at least the
minimum number of shares established in the Articles of Incorporation, or such
fewer shares as are specified in the plan.

When investing in the Fund, shareholders are required to furnish their tax
identification number and to state whether or not they are subject to
withholding for prior underreporting, certified under penalties of perjury as
prescribed by the Internal Revenue Code. To the extent permitted by law, the
redemption proceeds of shareholders who fail to furnish this information will be
reduced by $50 to reimburse for the IRS penalty imposed for failure to report
the tax identification number on information reports.

Payment in cash of the amount due on redemption, less any applicable deferred
sales charge, for shares redeemed will be made within seven days after tender,
except that the Fund may suspend the right of redemption during any period when
trading on the NYSE is restricted or such Exchange is closed for other than
weekends or holidays, or any emergency is deemed to exist by the SEC. When a
redemption request is received, the redemption proceeds are deposited into a
redemption account established by the Distributor and the Distributor sends a
check in the amount of redemption proceeds to the shareholder. The Distributor
earns interest on the amounts maintained in the redemption account. Conversely,
the Distributor causes payments to be made to the Fund in the case of orders for
purchase of Fund shares before it actually receives federal funds.

In addition to the foregoing redemption procedure, the Fund repurchases shares
from broker-dealers at the price determined as of the close of business on the
day such offer is confirmed. The Distributor has been authorized, as agent, to
make such repurchases for the Fund's account. Dealers may charge a commission on
the repurchase of shares.

The repurchase or redemption of shares held in a tax-qualified retirement plan
must be effected through the trustee of the plan and may result in adverse tax
consequences. (See "Retirement Plans.")

At various times the Fund may be requested to redeem shares for which it has not
yet received good payment. Accordingly, the Fund may delay the mailing of a
redemption check until such time as they have assured themselves that good
payment (e.g., cash or certified check on a U.S. bank) has been collected for
the purchase of such shares.

The Fund intends to pay redemption proceeds in cash. However, under unusual
conditions that make payment in cash unwise (and for the protection of the
remaining shareholders of the Fund), the Fund reserves the right to pay all, or
part, of the redemption proceeds in liquid securities with a market value equal
to the redemption price ("redemption in kind"). In the event a shareholder were
to receive a redemption in kind of portfolio securities of the Fund, it would be
the responsibility of the shareholder to dispose of the securities. The
shareholder would be at risk that the value of the securities would decline
prior to their sale, that it would be difficult to sell the securities, and that
brokerage fees could be incurred.

TELEPHONE REDEMPTIONS -- A shareholder may redeem uncertificated shares in
amounts up to $25,000 by telephone request, provided the shareholder has
completed the Telephone Redemption section of the application or a Telephone
Redemption form which may be obtained from the Investment Manager. The proceeds
of a telephone redemption will be sent to the shareholder at his or her address
as set forth in the application or in a subsequent written authorization with a
signature guarantee. Once authorization has been received by the Investment
Manager, a shareholder may redeem shares by calling the Fund at (800) 888-2461,
on weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m.
Central time. Redemption requests received by telephone after the close of the
NYSE (normally 3:00 p.m. Central time) will be treated as if received on the
next business day. Telephone redemptions are not accepted for IRA and 403(b)(7)
accounts. A shareholder who authorizes telephone redemptions authorizes the
Investment Manager to act upon the instructions of any person identifying
themselves as the owner of the account or the owner's broker. The Investment
Manager has established procedures to confirm that instructions communicated by
telephone are genuine and may be liable for any losses due to fraudulent or
unauthorized instructions if it fails to comply with its procedures. The
Investment Manager's procedures require that any person requesting a redemption
by telephone provide the account registration and number, the owner's tax
identification number, and the dollar amount or number of shares to be redeemed,
and such instructions must be received on a recorded line. Neither the Fund, the
Investment Manager, nor the Distributor will be liable for any loss, liability,
cost or expense arising out of any redemption request provided that the
Investment Manager complied with its procedures. Thus, a shareholder who
authorizes telephone redemptions may bear the risk of loss from a fraudulent or
unauthorized request. The telephone redemption privilege may be changed or
discontinued at any time by the Investment Manager or the Fund.

During periods of severe market or economic conditions, telephone redemptions
may be difficult to implement and shareholders should make redemptions by mail
as described under "How to Redeem Shares."

HOW TO EXCHANGE SHARES

Shareholders of the Fund may exchange their shares for shares of of certain
other Security Funds, which currently include Security Global Fund, Security
Social Awareness Fund, Security Mid Cap Value Fund, Security Small Cap Growth
Fund, Security Enhanced Index Fund, Security International Fund, Security Select
25 Fund, Security Large Cap Growth Fund, Security Technology Fund, Security
Equity Fund, Security Mid Cap Growth Fund, Security Large Cap Value Fund,
Security Diversified Income Fund, Security High Yield Fund, and Security
Municipal Bond Fund. Shareholders who hold their shares in a tax-qualified
retirement plan may also exchange shares of the Fund for shares of Security
Capital Preservation Fund, but may not exchange into Security Municipal Bond
Fund. Shareholders may also exchange their shares of the Fund for shares of
Security Cash Fund, provided that exchanges to Security Cash Fund are not
available to shareholders who have purchased through the following custodial
accounts of the Investment Manager: 403(b)(7) accounts, SEP accounts and SIMPLE
plans. Exchanges may be made only in those states where shares of the fund into
which an exchange is to be made are available for sale.

Class A, Class B and Class C shares of the Fund may be exchanged for Class A,
Class B and Class C shares, respectively, of another of the available funds or
for shares of Security Cash Fund, a money market fund that offers a single class
of shares. No exchanges of Class C shares are allowed with a Fund that does not
offer such Class of shares, except that a shareholder may exchange Class C
shares for shares of Security Cash Fund. Any contingent deferred sales charge
applicable to such Class A, Class B or Class C shares will be imposed upon
redemption and calculated from the date of the initial purchase without regard
to the time such shares were held in Security Cash Fund. Such transactions
generally have the same tax consequences as ordinary sales and purchases. No
service fee is presently imposed on such an exchange. They are not tax-free
exchanges.

Exchanges are made promptly upon receipt of a properly completed Exchange
Authorization form and (if issued) share certificates in good order for
transfer. If the shareholder is a corporation, partnership, agent, fiduciary or
surviving joint owner, additional documentation of a customary nature, such as a
stock power and guaranteed signature, will be required. (See "How to Redeem
Shares.")

This privilege may be changed or discontinued at any time at the discretion of
the management of the Fund upon 60 days' notice to shareholders. It is
contemplated, however, that the privilege will be extended in the absence of
objection by regulatory authorities and provided shares of the respective funds
are available and may be legally sold in the jurisdiction in which the
shareholder resides. A current prospectus of the Fund into which an exchange is
made will be given to each shareholder exercising this privilege.

EXCHANGE BY TELEPHONE -- To exchange shares by telephone, a shareholder must
have completed either the Telephone Exchange section of the application or a
Telephone Transfer Authorization form which may be obtained from the Investment
Manager. Authorization must be on file with the Investment Manager before
exchanges may be made by telephone. Once authorization has been received by the
Investment Manager, a shareholder may exchange shares by telephone by calling
the Fund at (800) 888-2461, on weekdays (except holidays) between the hours of
7:00 a.m. and 6:00 p.m. Central time. Exchange requests received after the close
of the NYSE (normally 3:00 p.m. Central time) will be treated as if received on
the next business day. Shares which are held in certificate form may not be
exchanged by telephone.

The telephone exchange privilege is only permitted between accounts with
identical registrations. The Investment Manager has established procedures to
confirm that instructions communicated by telephone are genuine and may be
liable for any losses due to fraudulent or unauthorized instructions if it fails
to comply with its procedures. The Investment Manager's procedures require that
any person requesting an exchange by telephone provide the account registration
and number, the tax identification number, the dollar amount or number of shares
to be exchanged, and the names of the Security Funds from which and into which
the exchange is to be made, and such instructions must be received on a recorded
line. Neither the Fund, the Investment Manager nor the Distributor will be
liable for any loss, liability, cost or expense arising out of any request,
including any fraudulent request provided the Investment Manager complied with
its procedures. Thus, a shareholder who authorizes telephone exchanges may bear
the risk of loss in the event of a fraudulent or unauthorized request. This
telephone exchange privilege may be changed or discontinued at any time at the
discretion of the management of the Fund. In particular, the Fund may set limits
on the amount and frequency of such exchanges, in general or as to any
individual who abuses such privilege.

DIVIDENDS AND TAXES

It is the Fund's policy to pay dividends from net investment income as from time
to time declared by the Board of Directors, and to distribute realized capital
gains (if any) in excess of any capital losses and capital loss carryovers, at
least once a year. Because Class A shares of the Fund bear most of the costs of
distribution of such shares through payment of a front-end sales charge, while
Class B and Class C shares of the Fund bear such costs through a higher
distribution fee, expenses attributable to Class B and Class C shares,
generally, will be higher and as a result, income distributions paid by the Fund
with respect to Class B and Class C shares generally will be lower than those
paid with respect to Class A shares. Because the value of a share is based
directly on the amount of the net assets rather than on the principle of supply
and demand, any distribution of capital gains or payment of an income dividend
will result in a decrease in the value of a share equal to the amount paid. All
such dividends and distributions are automatically reinvested on the payable
date in shares of the Fund at NAV as of the record date (reduced by an amount
equal to the amount of the dividend or distribution), unless the Investment
Manager is previously notified in writing by the shareholder that such dividends
or distributions are to be received in cash. A shareholder may request that such
dividends or distributions be directly deposited to the shareholder's bank
account. A shareholder who elected not to reinvest dividends or distributions
paid with respect to Class A shares may, at any time within 30 days after the
payment date, reinvest a dividend check without imposition of a sales charge.

The following summarizes certain federal income tax considerations generally
affecting the Fund and its shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or its shareholders, and
the discussion here is not intended as a substitute for careful tax planning.
The discussion is based upon present provisions of the Code, the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, and disposition of Fund shares, as well
as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.

For federal income tax purposes, dividends paid by the Fund from net investment
income may qualify for the corporate stockholder's dividends received deduction
to the extent the Fund designates the amount distributed as a qualified
dividend. The aggregate amount designated as a qualified dividend by the Fund
cannot exceed the aggregate amount of dividends received by the Fund from
domestic corporations for the taxable year. The corporate dividends received
deduction will be limited if the shares with respect to which the dividends are
received are treated as debt-financed or are deemed to have been held less than
46 days. In addition, a corporate stockholder must hold Fund shares for at least
46 days to be eligible to claim the dividends received deduction. All dividends
from net investment income, together with distributions of any realized net
short-term capital gains, whether paid direct to the shareholder or reinvested
in shares of the Fund, are taxable as ordinary income.

The excess of net long-term capital gains over short-term capital losses
realized and distributed by the Fund or reinvested in Fund shares will generally
be taxable to shareholders as long-term gain. Net capital gains from assets held
for one year or less will be taxed as ordinary income. Distributions will be
subject to these capital gains rates regardless of how long a shareholder has
held Fund shares. Advice as to the tax status of each year's dividends and
distributions will be mailed annually. A purchase of shares shortly before
payment of a dividend or distribution is disadvantageous because the dividend or
distribution to the purchaser has the effect of reducing the per share NAV of
the shares by the amount of the dividends or distributions. In addition, all or
a portion of such dividends or distributions (although in effect a return of
capital) may be taxable.

The Fund intends to qualify annually and to elect to be treated as a regulated
investment company under the Code.

To qualify as a regulated investment company, the Fund must, among other things:
(i) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies ("Qualifying Income Test"); (ii) diversify its
holdings so that, at the end of each quarter of the taxable year, (a) at least
50% of the market value of the Fund's assets is represented by cash, cash items,
U.S. Government securities, the securities of other regulated investment
companies, and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or of two or more issuers which the Fund controls (as that term is
defined in the relevant provisions of the Code) and which are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses; and (iii) distribute at least 90% of the sum of its investment
company taxable income (which includes, among other items, dividends, interest,
and net short-term capital gains in excess of any net long-term capital losses)
and its net tax-exempt interest each taxable year. The Treasury Department is
authorized to promulgate regulations under which foreign currency gains would
constitute qualifying income for purposes of the Qualifying Income Test only if
such gains are directly related to investing in securities (or options and
futures with respect to securities). To date, no such regulations have been
issued.

Certain requirements relating to the qualification of the Fund as a regulated
investment company may limit the extent to which the Fund will be able to engage
in certain investment practices, including transactions in futures contracts and
other types of derivative securities transactions. In addition, if the Fund were
unable to dispose of portfolio securities due to settlement problems relating to
foreign investments or due to the holding of illiquid securities, the Fund's
ability to qualify as a regulated investment company might be affected.

A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. The
Fund intends to distribute to its shareholders, at least annually, all or
substantially all of its investment company taxable income and any net capital
gains.

Generally, regulated investment companies, like the Fund, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, the Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution is treated as paid on December 31 of the calendar
year if it is declared by a Fund in October, November or December of that year
to shareholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions are taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.

If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, the Fund was unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Fund would
not qualify for the favorable federal income tax treatment afforded regulated
investment companies, or, even if it did so qualify, it might become liable for
federal taxes on undistributed income. In addition, the ability of the Fund to
obtain timely and accurate information relating to its investments is a
significant factor in complying with the requirements applicable to regulated
investment companies in making tax-related computations. Thus, if the Fund were
unable to obtain accurate information on a timely basis, it might be unable to
qualify as a regulated investment company, or its tax computations might be
subject to revisions (which could result in the imposition of taxes, interest
and penalties).

Generally, gain or loss realized upon the sale or redemption of shares
(including the exchange of shares for shares of another fund) will be capital
gain or loss if the shares are capital assets in the shareholder's hands, and
will be taxable to shareholders as long-term capital gains if the shares had
been held for more than one year at the time of sale or redemption. Net capital
gains on shares held for less than one year will be taxable to shareholders as
ordinary income. Investors should be aware that any loss realized upon the sale
or redemption of shares held for six months or less will be treated as a
long-term capital loss to the extent of any distribution of long-term capital
gain to the shareholder with respect to such shares. In addition, any loss
realized on a sale or exchange of shares will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days, beginning 30 days
before and ending 30 days after the date the shares are disposed of, such as
pursuant to the reinvestment of dividends. In such case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.

Under certain circumstances, the sales charge incurred in acquiring Class A
shares of the Fund may not be taken into account in determining the gain or loss
on the disposition of those shares. This rule applies in circumstances when
shares of the Fund are exchanged within 90 days after the date they were
purchased and new shares in a regulated investment company are acquired without
a sales charge or at a reduced sales charge. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result of
having incurred the sales charge initially. Instead, the portion of the sales
charge affected by this rule will be treated as an amount paid for the new
shares.

The Fund is required by law to withhold 30% of taxable dividends and
distributions to shareholders who do not furnish their correct taxpayer
identification numbers, or are otherwise subject to the backup withholding
provisions of the Code.

The Fund and each other Series of Security Equity Fund will be treated
separately in determining the amounts of income and capital gains distributions.
For this purpose, the Fund will reflect only its income and gains, net of
losses.

PASSIVE FOREIGN INVESTMENT COMPANIES -- The Fund may invest in stocks of foreign
companies that are classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign company is classified as a PFIC if at
least one half of its assets constitutes investment-type assets or 75% or more
of its gross income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over a period during which the Fund held the PFIC stock. The
Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (an interest factor will be added to the tax, as if the tax had actually
been payable in such prior taxable years) even though the Fund distributes the
corresponding income to shareholders. Excess distributions include any gain from
the sale of PFIC stock as well as certain distributions from a PFIC. All excess
distributions are taxable as ordinary income.

The Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, the Fund generally
would be required to include in its gross income its share of the earnings of a
PFIC on a current basis, regardless of whether any distributions are received
from the PFIC. If this election is made, the special rules, discussed above,
relating to the taxation of excess distributions, would not apply. In addition,
another election may be available that would involve marking to market the
Fund's PFIC stock at the end of each taxable year (and on certain other dates
prescribed in the Code), with the result that unrealized gains are treated as
though they were realized. If this election were made, tax at the Fund level
under the PFIC rules would be eliminated, but the Fund could, in limited
circumstances, incur nondeductible interest charges. The Fund's intention to
qualify annually as a regulated investment company may limit the Fund's
elections with respect to PFIC stock.

Because the application of the PFIC rules may affect, among other things, the
character of gains, the amount of gain or loss and the timing of the recognition
of income with respect to PFIC stock, as well as subject the Fund itself to tax
on certain income from PFIC stock, the amount that must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not invest in PFIC stock.

OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS -- Certain options,
futures contracts, and forward contracts in which the Fund may invest may be
"Section 1256 contracts." Gains or losses on Section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses;
however, foreign currency gains or losses arising from certain Section 1256
contracts may be treated as ordinary income or loss. Also, Section 1256
contracts held by the Fund at the end of each taxable year (and at certain other
times as prescribed pursuant to the Code) are "marked to market" with the result
that unrealized gains or losses are treated as though they were realized.

Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options, futures, forward
contracts, swap agreements and other financial contracts to the Fund are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by the Fund which is taxed as ordinary income when distributed to
shareholders.

The Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.

Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.

Because only a few regulations regarding the treatment of swap agreements, and
related caps, floors and collars, have been implemented, the tax consequences of
such transactions are not entirely clear. The Fund intends to account for such
transactions in a manner deemed by it to be appropriate, but the Internal
Revenue Service might not necessarily accept such treatment. If it did not, the
status of the Fund as a regulated investment company might be affected.

The requirements applicable to the Fund's qualification as a regulated
investment company may limit the extent to which the Fund will be able to engage
in transactions in options, futures contracts, forward contracts, swap
agreements and other financial contracts.

MARKET DISCOUNT -- If the Fund purchases a debt security at a price lower than
the stated redemption price of such debt security, the excess of the stated
redemption price over the purchase amount is "market discount." If the amount of
market discount is more than a DE MINIMIS amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to a portion of the market discount on the
debt security that has accrued but has not previously been includable in income.
In general, the amount of market discount that must be included for each period
is equal to the lesser of (i) the amount of market discount accruing during such
period (plus any accrued market discount for prior periods not previously taken
into account) or (ii) the amount of the principal payment with respect to such
period. Generally, market discount accrues on a daily basis for each day the
debt security is held by the Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest. Gain realized on the disposition of a market discount obligation must
be recognized as ordinary interest income (not capital gain) to the extent of
the "accrued market discount."

ORIGINAL ISSUE DISCOUNT -- Certain debt securities acquired by the Fund may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies.

Some debt securities may be purchased by the Fund at a discount that exceeds the
original issue discount on such debt securities, if any. This additional
discount represents market discount for federal income tax purposes (see above).

CONSTRUCTIVE SALES -- Recently enacted rules may affect timing and character of
gain if the Fund engages in transactions that reduce or eliminate its risk of
loss with respect to appreciated financial positions. If the Fund enters into
certain transactions in property while holding substantially identical property,
the Fund would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
Fund's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the Fund's holding period and the application of various loss
deferral provisions of the Code.

FOREIGN TAXATION -- Income received by the Fund from sources within a foreign
country may be subject to withholding and other taxes imposed by that country.
Tax conventions between certain countries and the U.S. may reduce or eliminate
such taxes.

The payment of such taxes will reduce the amount of dividends and distributions
paid to the Fund's shareholders. So long as the Fund qualifies as a regulated
investment company, certain distribution requirements are satisfied, and more
than 50% of the Fund's assets at the close of the taxable year consists of
securities of foreign corporations, the Fund may elect, subject to limitation,
to pass through its foreign tax credits to its shareholders.

FOREIGN CURRENCY TRANSACTIONS -- Under the Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
income or other receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time that the Fund actually collects such
receivables or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.

OTHER TAXES -- The foregoing discussion is general in nature and is not intended
to provide an exhaustive presentation of the tax consequences of investing in
the Fund. Distributions may also be subject to additional state, local and
foreign taxes, depending on each shareholder's particular situation. Depending
upon the nature and extent of the Fund's contacts with a state or local
jurisdiction, the Fund may be subject to the tax laws of such jurisdiction if it
is regarded under applicable law as doing business in, or as having income
derived from, the jurisdiction. Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.

ORGANIZATION

The Articles of Incorporation of Security Equity Fund provide for the issuance
of an indefinite number of shares of common stock in one or more classes or
series. Security Equity Fund has authorized capital stock of $0.25 par value and
currently issues its shares in eleven series, Equity Fund, Alpha Opportunity
Fund, Global Fund, Social Awareness Fund, Mid Cap Value Fund, Small Cap Growth
Fund, Enhanced Index Fund, International Fund, Select 25 Fund, Large Cap Growth
Fund and Technology Fund. The shares of each series of Security Equity Fund
represent a pro rata beneficial interest in that Fund's net assets and in the
earnings and profits or losses derived from the investment of such assets.

The Fund currently issues three classes of shares which participate
proportionately based on their relative NAVs in dividends and distributions and
have equal voting, liquidation and other rights except that (i) expenses related
to the distribution of each class of shares or other expenses that the Board of
Directors may designate as class expenses from time to time, are borne solely by
each class; (ii) each class of shares has exclusive voting rights with respect
to any Distribution Plan adopted for that class; (iii) each class has different
exchange privileges; and (iv) each class has a different designation. When
issued and paid for, the shares will be fully paid and non-assessable by the
Fund. Shares may be exchanged as described under "How to Exchange Shares," but
will have no other preference, conversion, exchange or preemptive rights. Shares
are transferable, redeemable and assignable and have cumulative voting
privileges for the election of directors.

On certain matters, such as the election of directors, all shares of the series
of Security Equity Fund, Equity Fund, Alpha Opportunity Fund, Global Fund,
Social Awareness Fund, Mid Cap Value Fund, Small Cap Growth Fund, Enhanced Index
Fund, International Fund, Select 25 Fund, Large Cap Growth Fund and Technology
Fund, vote together, with each share having one vote. On other matters affecting
a particular series, such as the investment advisory contract or the fundamental
policies, only shares of that series are entitled to vote, and a majority vote
of the shares of that series is required for approval of the proposal.

Security Equity Fund does not generally hold annual meetings of shareholders and
will do so only when required by law. Shareholders may remove directors from
office by vote cast in person or by proxy at a meeting of shareholders. Such a
meeting will be called at the written request of 10% of the outstanding shares
of Security Equity Fund.

CUSTODIANS, TRANSFER AGENT AND DIVIDEND-PAYING AGENT

UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64106, acts as the
custodian for the portfolio securities of that portion of the Fund's assets
managed by the Investment Manager. Security Management Company, LLC acts as the
Fund's transfer and dividend-paying agent.

Banc of America Securities, LLC, 9 West 57th Street, New York, New York 10019,
also acts as custodian for the portfolio securities of that portion of the
Fund's assets managed by Mainstream, including those held by foreign banks and
foreign securities depositories which qualify as eligible foreign custodians
under the rules adopted by the SEC.

INDEPENDENT AUDITORS

The firm of __________, has been selected by the Fund's Board of Directors to
serve as the Fund's independent auditors, and as such, will perform the annual
audit of the Fund's financial statements.

PERFORMANCE INFORMATION

The Fund may, from time to time, include performance information in
advertisements, sales literature or reports to shareholders or prospective
investors. Performance information in advertisements or sales literature may be
expressed as average annual total return or aggregate total return.

Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in the
Fund over periods of 1, 5 and 10 years (up to the life of the Fund), calculated
pursuant to the following formula:

P(1 + T)^n = ERV

(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures will reflect the deduction of the maximum initial sales load of
5.75% in the case of quotations of performance of Class A shares or the
applicable contingent deferred sales charge in the case of quotations of
performance of Class B and Class C shares and a proportional share of Fund
expenses on an annual basis, and assume that all dividends and distributions are
reinvested when paid.

Quotations of aggregate total return will be calculated for any specified period
pursuant to the following formula:

ERV - P
------- = T
P

(where P = a hypothetical initial payment of $1,000, T = the total return, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All total return figures assume that all dividends and
distributions are reinvested when paid. The Fund may, from time to time, include
quotations of aggregate total return that do not reflect deduction of the sales
load. The sales load, if reflected, would reduce the total return.

Quotations of average annual total return and aggregate total return will
reflect only the performance of a hypothetical investment in the Fund during the
particular time period shown. Such quotations for the Fund will vary based on
changes in market conditions and the level of the Fund's expenses, and no
reported performance figure should be considered an indication of performance
which may be expected in the future.

The Fund may also quote after-tax total returns and tax efficiency. After-tax
returns show the Fund's annualized after-tax total returns for the time period
specified. After-tax returns with redemptions show the Fund's annualized
after-tax total return for the time period specified plus the tax effects of
selling your shares of the Fund at the end of the period. To determine these
figures, all income, short-term capital gain distributions, and long-term
capital gain distributions are assumed to have been taxed at the actual
historical federal maximum tax rate. Those maximum tax rates are applied to
distributions prior to reinvestment and the after-tax portion is assumed to have
been reinvested in the Fund. State and local taxes are ignored.

Tax Efficiency is derived by dividing after-tax returns by pretax returns. The
highest possible score would be 100%, which would apply to a Fund that had no
taxable distributions. Because many interrelated factors affect tax efficiency,
it is difficult to predict tax efficiency.

Actual after-tax returns depend on a shareholder's tax situation and may differ
from those advertised by the Fund. After-tax returns reflect past tax effects
and are not predictive of future tax effects.

Quotations of average annual total return (after taxes on distributions) will be
calculated pursuant to the following formula:

P(1+T)^n =ATRD

Where P= hypothetical initial payment of $1,000, T= average annual total return
(after taxes on distributions), n= number of years, ATRD = ending value of a
hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year
periods at the end of the 1-, 5-, or 10-year periods (or fractional portion),
after taxes on fund distributions but not after taxes on redemption.

Quotations of average annual total return (after taxes on distributions and
redemptions) will be calculated pursuant to the following formula:

P(1+T)^n =ATRDR

Where P= hypothetical initial payment of $1,000, T= average annual total return
(after taxes on distributions and redemptions, n= number of years, ATRDR =
ending value of a hypothetical $1,000 payment made at the beginning of the 1-,
5-, or 10- year periods at the end of the 1-, 5-, or 10-year periods (or
fractional portion), after taxes on fund distributions and redemptions.

Quotations of yield, tax-equivalent yield, average annual total return and
aggregate total return will reflect only the performance of a hypothetical
investment during the particular time period shown. Such quotations will vary
based on changes in market conditions and the level of the Fund's expenses, and
no reported performance figure should be considered an indication of performance
which may be expected in the future.

PERMISSIBLE ADVERTISING INFORMATION

From time to time, the Fund may, in addition to any other permissible
information, include the following types of information in advertisements, sales
literature, reports to shareholders and other investor communications
("advertisements"): (1) discussions of general economic or financial principles
(such as the effects of compounding and the benefits of dollar-cost averaging);
(2) discussions about past, current or possible economic, market and political
trends and events; (3) presentations of statistical data to supplement such
discussions; (4) published evaluations by nationally recognized ranking services
and financial or business publications or other media including reprints of, or
selections from, such publications; (5) descriptions and updates concerning the
Fund's strategies, and past or anticipated portfolio investments; (6) analysis
of their investments by industry, country, credit quality and/or other
characteristics; (7) the general biography or work experience of the portfolio
managers of the Fund including information about awards received by the
portfolio managers, mentions of a manager in the media, or announcements of the
portfolio manager's appearance on television or radio programs, or presentations
at conferences or trade shows; (8) portfolio manager commentary or market
updates; (9) investment philosophy and the research methodology underlying stock
selection or the Fund's investment objective; (10) a discussion of the
risk/return continuum relating to different investments; (11) discussions on
general principles of investing such as asset allocation, diversification and
risk tolerance; (12) testimonials describing the experience of persons who have
invested in the Fund; (13) discussions about retirement and investing for
retirement; (14) data concerning the projected cost of a college education in
future years based on current or recent costs of college and an assumed rate of
increase for such costs; (15) information regarding the relative reliance in
recent years on personal savings for retirement income versus reliance on Social
Security benefits and company sponsored retirement plans; and (16) other
information of interest to investors.

Advertisements also may include the Fund's performance, goals, risks and
expenses compared with (a) various indexes so that investors may compare the
Fund's results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (b) other
groups of mutual funds tracked by Lipper Analytical Services Inc., Morningstar
or another independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall performance
or other criteria; (c) the Consumer Price Index (measure for inflation) to
assess the real rate of return from an investment in the Fund; (d) other
statistics such as gross national product or gross domestic product of the
United States or other countries or regions, net import and export figures
derived from governmental publications (e.g., The Survey of Current Business) or
other independent parties (e.g., the Investment Company Institute), to
illustrate investment attributes of the Fund or the general economic, business,
investment, or financial environment in which the Fund operates;(e) various
financial, economic and market statistics developed by brokers, dealers and
other persons to illustrate aspects of the Fund's performance; (f) the sectors
or industries in which the Fund invests compared to relevant indexes or surveys
(e.g., S&P Industry Surveys) in order to evaluate the Fund's historic
performance or current or potential value with respect to the particular
industry or sector; (g) a hypothetical or model portfolio; or (h) other mutual
funds. The Fund also may discuss and compare in advertising the relative
performance of various types of investment instruments including, but not
limited to, certificates of deposit, ordinary interest savings accounts, other
forms of fixed or variable time deposits, qualified retirement plans, stocks,
Treasury securities, and bonds, over various time periods and covering various
holding periods. Such comparisons may compare these investment categories to
each other or to changes in the Consumer Price Index. In addition, the Fund may
quote various measures of volatility and benchmark correlation in advertising
and other materials and may compare these measures to those of indexes, other
funds or types of investments.

The Fund's advertisements may also include rankings or ratings of its transfer
agent, and of the investor services provided by the transfer agent to
shareholders of the Security Funds other than performance rankings of the
Security Funds themselves. Those ratings or rankings of shareholder and investor
services by third parties may include comparisons of their services to those
provided by other mutual fund families selected by the rating or ranking
services. They may be based upon the opinions of the rating or ranking service
itself, using its research or judgment, or based upon surveys of investors,
brokers, shareholders or others.

The Fund, in its advertisements, may refer to pending legislation from time to
time and the possible effect of such legislation on investors, investment
strategy and related matters. This would include any tax proposals and their
effect on marginal tax rates and tax-equivalent yields.

From time to time, advertisements may include general information about the
services and products offered by the Security Funds, Security Distributors,
Inc., and Security Benefit Life Insurance Company and its subsidiaries. For
example, such advertisements may include statistical information about those
entities including, but not limited to, the number of current shareholder
accounts, the amount of assets under management, sales information, the
distribution channels through which the entities' products are available,
marketing efforts and statements about this information by the entities'
officers, directors and employees.

All performance information that the Fund advertises is historical in nature and
is not intended to represent or guarantee future results. The value of the
Fund's shares when redeemed may be more or less than their original cost.
Performance information may be quoted numerically or presented in a table, graph
or other illustration. The Fund's returns and share price are not guaranteed or
insured by the FDIC or any other agency and will fluctuate daily, while bank
depository obligations may be insured by the FDIC and may provide fixed rates of
return.

In connection with a ranking, the Fund may provide additional information, such
as the particular category to which it is related, the number of funds in the
category, the criteria upon which the ranking is based, and the effect of sales
charges, fee waivers and/or expense reimbursements. In assessing comparisons of
performance, you should keep in mind that the composition of the investments in
the reported indexes and averages is not identical to the Fund's portfolios, the
indexes and averages are generally unmanaged, and the items included in the
calculations of the averages may not be identical to the formula used by the
Fund to calculate its figures. For example, unmanaged indexes may assume
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs. In addition, there can be no assurance that
the Fund will continue its performance as compared to these other averages.

RETIREMENT PLANS

Security Financial Resources, Inc., an affiliate of the Investment Manager,
offers tax-qualified retirement plans for individuals (Individual Retirement
Accounts, known as IRAs), several prototype retirement plans for the
self-employed (Keogh plans), pension and profit-sharing plans for corporations,
and custodial account plans for employees of public school systems and
organizations meeting the requirements of Section 501(c)(3) of the Internal
Revenue Code. Actual documents and detailed materials about the plans will be
provided upon request to the Distributor.

Purchases of the Fund's shares under any of these plans are made at the public
offering price next determined after contributions are received by the
Distributor. The Fund's shares owned under any of the plans have full dividend
and redemption privileges. Depending on the terms of the particular plan,
retirement benefits may be paid in a lump sum or in installment payments over a
specified period. There are possible penalties for premature distributions from
such plans.

Security Management Company, LLC is available to act as custodian for the plans
on a fee basis. In 2003, UMB Bank, n.a. began serving as the custodian of the
plans. For IRAs, SIMPLE IRAs, Roth IRAs, Coverdell Education Savings Accounts,
and Simplified Employee Pension (SEP) plans, the service fee for such custodial
services currently is: $10 for annual maintenance of the account. Service fees
for Section 403(b) Retirement Plans are set forth in "403(b) Retirement Plans."
Service fees for other types of plans will vary. These fees will be deducted
from the plan assets. Optional supplemental services are available from Security
Financial Resources, Inc. for additional charges.

Retirement investment programs involve commitments covering future years. It is
important that the investment objectives and structure of the Fund be considered
by the investors for such plans. A brief description of the available
tax-qualified retirement plans is provided below. However the tax rules
applicable to such qualified plans vary according to the type of plan and the
terms and conditions of the plan itself. Therefore, no attempt is made to
provide more than general information about the various types of qualified
plans.

Investors are urged to consult their own attorneys or tax advisers when
considering the establishment and maintenance of any such plans.

INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)

Individual Retirement Account Custodial Agreements are available to provide
investment in shares of the Fund or other funds in the Security Group. An
individual may initiate an IRA through the Underwriter by executing the
custodial agreement and making a minimum initial investment of at least $100. A
$10 annual fee is charged for maintaining the account.

An individual may make a contribution to a traditional IRA each year of up to
the lesser of 100% of earned income under current tax law or the applicable
dollar amount as shown in the table below:

==============================
TAX YEAR AMOUNT
------------------------------
2002-2004 $3,000
2005-2007 $4,000
2008 and thereafter $5,000
==============================

The IRAs described in this paragraph are called "traditional IRAs" to
distinguish them from the "Roth IRAs," which are described below. Spousal IRAs
allow an individual and his or her spouse to contribute up to the maximum to
each of their respective IRAs (up to 100% of joint earned income) so long as a
joint tax return is filed. The maximum amount the higher compensated spouse may
contribute for the year is the lesser of the applicable sum set forth in the
table above or 100% of that spouse's compensation. The maximum the lower
compensated spouse may contribute is the lesser of (i) the applicable sum set
forth in the table above or (ii) 100% of that spouse's compensation plus the
amount by which the higher compensated spouse's compensation exceeds the amount
the higher compensated spouse contributes to his or her IRA. If you are age 50
or over, you may make an additional catch up contribution to your traditional
IRA of $500 during the tax years of 2002-2005, or $1,000 for tax year 2006 or
any tax year thereafter.

Generally if a taxpayer is not covered by an employer-sponsored retirement plan,
the amount the taxpayer may deduct for federal income tax purposes in a year for
contributions to an IRA is the lesser of the applicable sum set forth in the
table above or the taxpayer's compensation for the year. If the taxpayer is
covered by an employer-sponsored retirement plan, the amount of IRA
contributions the taxpayer may deduct in a year may be reduced or eliminated
based on the taxpayer's adjusted gross income for the year. The adjusted gross
income level at which a single taxpayer's deduction for 2002 is affected,
$34,000, will increase annually until the year 2005 as follows: $40,000 for
2003, $45,000 for 2004 and $50,000 for 2005 and thereafter. The adjusted gross
income level at which the deduction for 2002 for a married taxpayer (who does
not file a separate return) is affected, $54,000, will increase annually until
the year 2007 as follows: $60,000 for 2003, $65,000 for 2004, $70,000 for 2005,
$75,000 for 2006 and $80,000 for 2007 and thereafter. If the taxpayer is
married, files a separate tax return, and is covered by a qualified retirement
plan, the taxpayer may not make a deductible contribution to an IRA if the
taxpayer's income exceeds $10,000. If the taxpayer is not covered by an
employer-sponsored retirement plan, but the taxpayer's spouse is, the amount the
taxpayer may deduct for IRA contributions will be phased out if the taxpayer's
adjusted gross income is between $150,000 and $160,000.

Contributions must be made in cash no later than April 15 following the close of
the tax year. No annual contribution is permitted for the year in which the
investor reaches age 70 1/2 or any year thereafter.

In addition to annual contributions, total distributions and certain partial
distributions from certain employer-sponsored retirement plans may be eligible
to be reinvested into a traditional IRA if the reinvestment is made within 60
days of receipt of the distribution by the taxpayer. Such rollover contributions
are not subject to the limitations on annual IRA contributions described above.

ROTH IRAS

Section 408A of the Code permits eligible individuals to establish a Roth IRA.
Contributions to a Roth IRA are not deductible, but withdrawals that meet
certain requirements are not subject to federal income tax. The maximum annual
contribution amount is equal to the lesser of 100% of earned income or the
applicable dollar amount shown in the table below:

==============================
TAX YEAR AMOUNT
------------------------------
2002-2004 $3,000
2005-2007 $4,000
2008 and thereafter $5,000
==============================

However, your ability to contribute to a Roth IRA will be reduced or eliminated
if your adjusted gross income exceeds certain amounts (currently $150,000 for a
married couple filing a joint return and $95,000 for a single taxpayer). The
maximum amount you may contribute will also be reduced by any amounts that you
contribute to a traditional IRA. If you are age 50 or over, you may make an
additional catch up contribution to your Roth IRA of $500 during the tax years
of 2002-2005 or $1,000 if it is during the 2006 tax year or any year thereafter.
In general, Roth IRAs are subject to certain required distribution requirements.
Unlike a traditional IRA, Roth IRAs are not subject to minimum required
distribution rules during the owner's lifetime. Generally, however, the amount
remaining in a Roth IRA must be distributed by the end of the fifth year after
the death of the owner.

The owner of a traditional IRA may convert the traditional IRA into a Roth IRA
under certain circumstances. The conversion of a traditional IRA to a Roth IRA
will subject the amount of the converted traditional IRA to federal income tax.
If a traditional IRA is converted to a Roth IRA, the taxable amount of the
owner's traditional IRA will be considered taxable income for federal income tax
purposes for the year of conversion.

COVERDELL EDUCATION SAVINGS ACCOUNTS

Section 530 of the Code permits eligible individuals to establish a Coverdell
Education Savings Account on behalf of a beneficiary. Contributions to a
Coverdell Education Savings Account are not deductible, but qualified
distributions to the beneficiary are not subject to federal income tax. The
maximum annual contribution amount of $2,000 is phased out if the individual is
single and has an adjusted gross income between $95,000 and $110,000, or if the
individual is married and the couple has a combined adjusted gross income
between $190,000 and $220,000. Coverdell Education Savings Accounts are subject
to certain required distribution requirements. Generally, the amount remaining
in a Coverdell Education Savings Account must be distributed within 30 days
after the beneficiary's 30th birthday or rolled into a new Coverdell Education
Savings Account for another eligible beneficiary.

SIMPLE IRAS

In general, a SIMPLE plan may be established by any employer, including a sole
proprietorship or corporation with 100 or fewer employees, and must be the only
retirement plan maintained by the employer. Under a SIMPLE plan using SIMPLE
IRAs, a SIMPLE IRA is created for each eligible employee which, in general,
includes all employees who received at least $5,000 in compensation during any
two years preceding the year for which eligibility is being determined (i.e.,
the current year) and is reasonably expected to earn at least $5,000 during the
current year. As with SEP-IRAs, SIMPLE IRAs are individual accounts owned by
each eligible employee. Under a SIMPLE IRA plan, eligible employees can elect to
contribute a portion of their salary to their SIMPLE IRA.

The Investment Manager makes available SIMPLE IRAs to provide investment in
shares of the Fund. Contributions to a SIMPLE IRA will include both salary
deferral contributions and employer contributions. Contributions must be made in
cash and cannot exceed the maximum amount allowed under the Internal Revenue
Code. On a pre-tax basis, compensation (through salary deferrals) may be
contributed to a SIMPLE IRA. Elective deferrals are based on a stated percentage
of the employee's compensation, and are limited to the applicable dollar amount
per year as shown in the table below.

=======================================
TAX YEAR DEFERRED AMOUNT
---------------------------------------
2003 $ 8,000
2004 $ 9,000
2005 and thereafter $10,000
=======================================

The $10,000 limit will be adjusted for inflation in $500 increments for tax
years beginning after the 2005 tax year. If you are age 50 or over, catch up
contributions can be made to your SIMPLE IRA in an amount up to the lesser of
(i) your compensation for the tax year, reduced by all of your elective
deferrals that were made to other plans, or (ii) the applicable dollar amount as
shown in the table below:

========================================
ADDITIONAL CATCH
TAX YEAR UP AMOUNT
----------------------------------------
2003 $1,000
2004 $1,500
2005 $2,000
2006 and thereafter $2,500
========================================

The $2,500 limit will be adjusted for inflation in $500 increments for tax years
beginning after the 2006 tax year. Catch-up contributions are only available to
individuals for whom no other elective deferrals may otherwise be made for the
year because of a limit imposed by law or the plan. In addition, employers are
required to make either (1) a dollar-for-dollar matching contribution or (2) a
nonelective contribution to each participant's account each year. In general,
matching contributions must equal up to 3% of compensation, but under certain
circumstances, employers may make lower matching contributions. Instead of the
match, employers may make a nonelective contribution equal to 2% of compensation
(compensation for purposes of any nonelective contribution is limited to
$200,000, as indexed).

PENSION AND PROFIT SHARING PLANS

Prototype corporate pension or profit-sharing plans meeting the requirements of
Internal Revenue Code Section 401(a) are available. Information concerning these
plans may be obtained from the Distributor.

403(B) RETIREMENT PLANS

Employees of public school systems and tax-exempt organizations meeting the
requirements of Internal Revenue Code Section 501(c)(3) may purchase shares of
the Fund or of other funds in the Security Group, which funds currently include
Security Global Fund, Security Social Awareness Fund, Security Mid Cap Value
Fund, Security Small Cap Growth Fund, Security Enhanced Index Fund, Security
International Fund, Security Select 25 Fund, Security Large Cap Growth Fund,
Security Technology Fund, Security Equity Fund, Security Mid Cap Growth Fund,
Security Large Cap Value Fund, Capital Preservation Fund, Diversified Income
Fund and High Yield Fund, under a Section 403(b) Plan. Class A shares may not be
available to custodial accounts of the Investment Manager opened on or after
June 5, 2000. The minimum initial or subsequent investment in a custodial
account under a Section 403(b) Plan is $50. An annual administration fee of $25
is required for each custodial account with a balance less than $25,000 and a $5
withdrawal fee will be charged when any custodial account is closed.

Section 403(b) Plans are subject to numerous restrictions on the amount that may
be contributed, the persons who are eligible to participate, the time when
distributions may commence, and the number and amount of any loans requested.

SIMPLIFIED EMPLOYEE PENSION (SEP) PLANS

A prototype SEP is available for corporations, partnerships or sole proprietors
desiring to adopt such a plan for purchases of IRAs for their employees.
Employers establishing a SEP may contribute a maximum of $40,000 a year to an
IRA for each employee. This maximum is subject to a number of limitations.

FINANCIAL STATEMENTS

The audited financial statement of the Fund are not yet available as the Fund
did not begin operations until [ ] 2003.

APPENDIX A
- --------------------------------------------------------------------------------

DESCRIPTION OF CORPORATE BOND RATINGS

MOODY'S INVESTORS SERVICE, INC. --

Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.

A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

STANDARD & POOR'S CORPORATION --

AAA. Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.

AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.

A. Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.

BBB. Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.

BB, B, CCC, CC. Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.

C. The rating C is reserved for income bonds on which no interest is being paid.

D. Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.

SECURITY EQUITY FUND

FORM N-1A

PART C. OTHER INFORMATION

ITEM 23. EXHIBITS

(a) Articles of Incorporation(8)
(b) Bylaws(2)
(c) Specimen copy of share certificates for Fund's shares of capital stock(4)
(d) (1) Investment Management and Services Agreement
(2) Sub-Advisory Contract - Oppenheimer(1)
(3) Sub-Advisory Contract - RS Investment(8)
(4) Sub-Advisory Contract - Deutsche Asset Management, Inc.(7)
(5) Sub-Advisory Contract - Wellington(3)
(6) Sub-Advisory Contract - Templeton(8)
(7) Sub-Advisory Contract - Mainstream Investment Advisers, LLC
(e) (1) Distribution Agreement(10)
(2) Class B Distribution Agreement(8)
(3) Class C Distribution Agreement(8)
(4) Underwriter-Dealer Agreement(5)
(f) Not applicable
(g) (1) Custodian Agreement - UMB Bank(9)
(2) Custodian Agreement - State Street(10)
(3) Custodian Agreement - Banc of America(11)
(h) Not applicable
(i) Legal Opinion(7)
(j) Consent of Independent Auditors(10)
(k) Not applicable
(l) Not applicable
(m) (1) Class A Distribution Plan(10)
(2) Class B Distribution Plan(8)
(3) Class C Distribution Plan(8)
(4) Brokerage Enhancement Plan(8)
(5) Form of Shareholder Service Agreement(6)
(n) Multiple Class Plan(8)
(o) RESERVED
(p) Code of Ethics
(1) Security Funds, Security Management Company, LLC ("SMC"), and Security
Distributors, Inc.(5)
(2) Sub-Adviser Code of Ethics - Oppenheimer(8)
(3) Sub-Adviser Code of Ethics - RS Investment(8)
(4) Sub-Adviser Code of Ethics - Deutsche Asset Management, Inc.(8)
(5) Sub-Adviser Code of Ethics - Wellington(5)
(6) Sub-Adviser Code of Ethics - Templeton(8)
(7) Sub-Adviser Code of Ethics - Mainstream Investment Advisers, LLC
(q) Power of Attorneys(5)

(1) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 83 to Registration Statement
2-19458 (filed November 13, 1998).

(2) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 86 to Registration Statement
2-19458 (filed November 29, 1999).

(3) Incorporated herein by reference to the Exhibits filed with SBL Fund's
Post-Effective Amendment No. 41 to Registration Statement 2-59353 (filed
May 1, 2000).

(4) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 89 to Registration Statement
2-19458 (filed May 1, 2000).

(5) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 90 to Registration Statement
2-19458 (filed November 20, 2000).

(6) Incorporated herein by reference to the Exhibits filed with Security
Income Fund's Post-Effective Amendment No. 71 to Registration Statement
2-38414 (filed January 11, 2002).

(7) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 92 to Registration Statement
2-19458 (filed January 15, 2002).

(8) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 93 to Registration Statement
2-19458 (filed November 15, 2002).

(9) Incorporated herein by reference to the Exhibits filed with Security
Income Fund's Post-Effective Amendment No. 73 to Registration Statement
2-38414 (filed January 10, 2003).

(10) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 94 to Registration Statement
2-19458 (filed January 14, 2003).

(11) Incorporated herein by reference to Exhibits filed with SBL Fund's
Post-Effective Amendment No. 45 to Registration Statement No. 2-59353
(filed February 14, 2003).

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH FUND

Not applicable.

ITEM 25. INDEMNIFICATION

A policy of insurance covering Security Management Company, LLC, its affiliate
Security Distributors, Inc., and all of the registered investment companies
advised by Security Management Company, LLC insures the Registrant's directors
and officers against liability arising by reason of an alleged breach of duty
caused by any negligent act, error or accidental omission in the scope of their
duties.

Article Tenth of Registrant's Articles of Incorporation provides in relevant
part as follows:

"(5) Each director and officer (and his heirs, executors and administrators)
shall be indemnified by the Corporation against reasonable costs and
expenses incurred by him in connection with any action, suit or proceeding
to which he is made a party by reason of his being or having been a
Director or officer of the Corporation, except in relation to any action,
suit or proceeding in which he has been adjudged liable because of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. In the absence of an
adjudication which expressly absolves the Director or officer of liability
to the Corporation or its stockholders for willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office, or in the event of a settlement, each Director and
officer (and his heirs, executors and administrators) shall be indemnified
by the Corporation against payment made, including reasonable costs and
expenses, provided that such indemnity shall be conditioned upon a written
opinion of independent counsel that the Director or officer has no
liability by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
The indemnity provided herein shall, in the event of settlement of any
such action, suit or proceeding, not exceed the costs and expenses
(including attorneys' fees) which would reasonably have been incurred if
such action, suit or proceeding had been litigated to a final conclusion.
Such a determination by independent counsel and the payment of amounts by
the Corporation on the basis thereof shall not prevent a stockholder from
challenging such indemnification by appropriate legal proceeding on the
grounds that the officer or Director was liable because of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. The foregoing rights and
indemnification shall not be exclusive of any other rights to which the
officers and Directors may be entitled according to law."

Article Sixteenth of Registrant's Articles of Incorporation, as amended December
10, 1987, provides as follows:

"A director shall not be personally liable to the corporation or to its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that this sentence shall not eliminate nor limit the liability of a
director:

A. for any breach of his or her duty of loyalty to the corporation or to its
stockholders;

B. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

C. for an unlawful dividend, stock purchase or redemption under the provisions
of Kansas Statutes Annotated (K.S.A.) 17-6424 and amendments thereto; or

D. for any transaction from which the director derived an improper personal
benefit."

Item Thirty of Registrant's Bylaws, dated February 3, 1995, provides, in
relevant part, as follows:

"Each person who is or was a Director or officer of the Corporation or is or was
serving at the request of the Corporation as a Director or officer of another
corporation (including the heirs, executors, administrators and estate of such
person) shall be indemnified by the Corporation as of right to the full extent
permitted or authorized by the laws of the State of Kansas, as now in effect and
is hereafter amended, against any liability, judgment, fine, amount paid in
settlement, cost and expense (including attorneys' fees) asserted or threatened
against and incurred by such person in his/her capacity as or arising out of
his/her status as a Director or officer of the Corporation or, if serving at the
request of the Corporation, as a Director or officer of another corporation. The
indemnification provided by this bylaw provision shall not be exclusive of any
other rights to which those indemnified may be entitled under the Articles of
Incorporation, under any other bylaw or under any agreement, vote of
stockholders or disinterested directors or otherwise, and shall not limit in any
way any right which the Corporation may have to make different or further
indemnification with respect to the same or different persons or classes of
persons.

No person shall be liable to the Corporation for any loss, damage, liability or
expense suffered by it on account of any action taken or omitted to be taken by
him/her as a Director or officer of the Corporation or of any other corporation
which (s)he serves as a Director or officer at the request of the Corporation,
if such person (a) exercised the same degree of care and skill as a prudent
person would have exercised under the circumstances in the conduct of his/her
own affairs, or (b) took or omitted to take such action in reliance upon advice
of counsel for the Corporation, or for such other corporation, or upon statement
made or information furnished by Directors, officers, employees or agents of the
Corporation, or of such other corporation, which (s)he had no reasonable grounds
to disbelieve.

In the event any provision of this section 30 shall be in violation of the
Investment Company Act of 1940, as amended, or of the rules and regulations
promulgated thereunder, such provisions shall be void to the extent of such
violations."

Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

ITEM 26. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER

Information as to the directors and officers of the Adviser, together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by the directors and officers of the Adviser in
the last two years, is included in its application for registration as an
investment adviser on Form ADV (File No. 801-8008) filed under the Investment
Advisers Act of 1940, as amended ("Advisers Act"), and is incorporated herein by
reference thereto.

Information as to the directors and officers of the sub-advisers, together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by the directors and officers of the sub-advisers
in the last two years, are included in their application for registration as
investment advisers on Forms ADV for OppenheimerFunds, Inc., (File No.
801-8253); RS Investment Management, L.P. (File No. 801-44125); Deutsche Asset
Management, Inc. (formerly, Morgan Grenfell, Inc.) (File No. 801-27291);
Templeton Investment Counsel, LLC (File No. 801-15125); Wellington Management
LLP (File No. 801-15908); Northern Trust Investments, Inc. (File No. 801-33358);
and Mainstream Investment Advisers, LLC (File No. 801-54799).

ITEM 27. PRINCIPAL UNDERWRITERS

(a) Security Mid Cap Growth Fund
Security Income Fund
Security Large Cap Value Fund
Security Municipal Bond Fund
SBL Fund
Variflex Separate Account
SBL Variable Life Insurance Account (Varilife)
SBL Variable Annuity Account VIII
SBL Variable Annuity Account XI (Scarborough Advantage Variable Annuity)
SBL Variable Annuity Account XIV
FSBL Variable Annuity Account A (AdvisorDesigns Variable Annuity)

(b) (1) (2) (3)
NAME AND PRINCIPAL POSITION AND OFFICES POSITION AND OFFICES
BUSINESS ADDRESS* WITH UNDERWRITER WITH REGISTRANT
------------------ -------------------- ------------------
Gregory J. Garvin President and Director None
James R. Schmank Director President and Director
Amy J. Lee Secretary Secretary
Tamara L. Brownfield Treasurer None
Brenda M. Harwood Vice-President and Director Treasurer
Frank Memmo Director None
Richard J. Wells Director None

*One Security Benefit Place, Topeka, Kansas 66636-0001

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

Certain accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the rules promulgated thereunder are maintained by
Security Management Company, LLC, One Security Benefit Place, Topeka, Kansas
66636-0001; Lexington Management Corporation, Park 80 West, Plaza Two, Saddle
Brook, New Jersey 07663; Meridian Investment Management Corporation, 12835 East
Arapahoe Road, Tower II, 7th Floor, Englewood, Colorado, 80112; Strong Capital
Management, Inc., 100 Heritage Reserve, Menomonee Falls, Wisconsin, 53051;
Templeton/Franklin Investment Services, Inc., 777 Mariners Island Boulevard, San
Mateo, California 94404; OppenheimerFunds, Inc., 498 Seventh Avenue, New York,
New York 10018; Wellington Management Company, LLP, 75 State Street, Boston,
Massachusetts 02109; Deutsche Asset Management, Inc., 345 Park Avenue, New York,
New York 10154; Northern Trust Investments, Inc. ("NTI"), 50 LaSalle Street,
Chicago, Illinois 60675; RS Investment Management, L.P., 388 Market Street, San
Francisco, California 94111; and Mainstream Investment Advisers, LLC, 101 West
Spring Street, Suite 401, New Albany, Indiana 47150. Records relating to the
duties of the Registrant's custodian are maintained by UMB Bank, N.A., 928 Grand
Avenue, Kansas City, Missouri 64106; Chase Manhattan Bank, 4 Chase MetroTech
Center, Brooklyn, New York 11245; State Street Bank and Trust Company, 801
Pennsylvania, Kansas City, Missouri 64105; and Banc of America Securities, LLC,
9 West 57th Street, New York, New York 10019.

ITEM 29. MANAGEMENT SERVICES

Not applicable.

ITEM 30. UNDERTAKINGS

Not applicable.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, duly authorized, in the City of
Topeka, and State of Kansas on the 9th day of June, 2003.

John D. Cleland SECURITY EQUITY FUND
Chairman of the Board and Director (The Fund)

James R. Schmank By: JAMES R. SCHMANK
President and Director -------------------------------------
James R. Schmank, President and as
Donald A. Chubb, Jr. Attorney-In-Fact for the Officers and
Director Directors Whose Names Appear Opposite

Penny A. Lumpkin BRENDA M. HARWOOD
Director -------------------------------------
Brenda M. Harwood, Treasurer
Mark L. Morris, Jr. (Principal Financial Officer)
Director

Maynard Oliverius
Director

EX-99.D1 3 ef-investment.htm INVESTMENT MANAGEMENT AND SERVICES AGREEMENT Investment Management and Services Agreement

                  INVESTMENT MANAGEMENT AND SERVICES AGREEMENT

This  Agreement,  made and  entered  into this 27th day of  January,  2000,  and
amended and restated  effective as of the 1st day of May,  2002,  by and between
SECURITY  EQUITY  FUND,  a Kansas  corporation  (hereinafter  referred to as the
"Fund"),  and  SECURITY  MANAGEMENT  COMPANY,  LLC, a Kansas  limited  liability
company (hereinafter referred to as "SMC");

WITNESSETH:

WHEREAS, the Fund is engaged in business as an open-end,  management  investment
company registered under the Investment Company Act of 1940 ("1940 Act"); and

WHEREAS,  SMC is willing to provide  investment  research  and  advice,  general
administrative,  fund  accounting,  transfer  agency,  and  dividend  disbursing
services to the Fund on the terms and  conditions  hereinafter  set forth and to
arrange for the  provision  of all other  services  (except  for those  services
specifically  excluded  in  this  Agreement)  required  by the  Fund,  including
custodial, legal, auditing and printing;

NOW,  THEREFORE,  in  consideration  of the premises and mutual  agreements made
herein, the parties agree as follows:

 1.  EMPLOYMENT  OF SMC.  The Fund hereby  employs SMC to (a) act as  investment
     adviser  to the Fund with  respect to the  investment  of its assets and to
     supervise  and arrange for the purchase of  securities  of the Fund and the
     sales of securities  held in the portfolio of the Fund,  subject  always to
     the  supervision of the Board of Directors of the Fund (or a duly appointed
     committee thereof), during the period and upon and subject to the terms and
     conditions   described   herein;   (b)  provide   the  Fund  with   general
     administrative,  fund accounting,  transfer agency, and dividend disbursing
     services  described and set forth in Schedule A attached  hereto and made a
     part of this Agreement by reference;  and (c) arrange for, and monitor, the
     provision to the Fund of all other services required by the Fund, including
     but not limited to  services of  independent  accountants,  legal  counsel,
     custodial services and printing. SMC may, in accordance with all applicable
     legal  requirements,  engage the  services  of other  persons or  entities,
     regardless  of any  affiliation  with SMC, to provide  services to the Fund
     under  this  Agreement.  The Fund  shall  bear the  expense  of such  other
     services  and all other  expenses  of the  Fund.  SMC  agrees  to  maintain
     sufficient  trained  personnel  and  equipment  and supplies to perform its
     responsibilities  under this  Agreement and in conformity  with the current
     Prospectus of the Fund and such other  reasonable  standards of performance
     as the Fund may from time to time specify and shall use reasonable  care in
     selecting and  monitoring the  performance  of third  parties,  who perform
     services for the Fund.  SMC shall not  guarantee  the  performance  of such
     persons.

     SMC hereby  accepts  such  employment  and agrees to perform  the  services
     required by this Agreement for the compensation herein provided.

 2.  ALLOCATION OF EXPENSES AND CHARGES.

     (a)  EXPENSES OF SMC.  SMC shall pay all  expenses in  connection  with the
          performance of its services under this  Agreement,  except as provided
          otherwise herein.

     (b)  EXPENSES  OF THE FUND.  Anything  in this  Agreement  to the  contrary
          notwithstanding,  the Fund shall pay or reimburse  SMC for the payment
          of the following  described expenses of the Fund whether or not billed
          to the Fund, SMC or any related entity:

            (i)  brokerage fees and commissions;

           (ii)  taxes;

          (iii)  interest expenses;

           (iv)  any  extraordinary  expenses approved by the Board of Directors
                 of the Fund; and

            (v)  distribution fees paid under the Fund's Class A, Class B, Class
                 C and Class S Distribution Plans;

          and, in addition to those expenses set forth above, the Fund shall pay
          all of its  expenses  whether  or not  billed to the Fund,  SMC or any
          related entity, including, but not limited to the following:  Board of
          Directors' fees; legal,  auditing and accounting  expenses;  insurance
          premiums;  broker's  commissions;  taxes and governmental fees and any
          membership dues; fees of custodian;  expenses of obtaining  quotations
          on the Fund's  portfolio  securities and pricing of the Fund's shares;
          costs and expenses in connection  with the  registration of the Fund's
          capital stock under the  Securities Act of 1933 and  qualification  of
          the Fund's  capital  stock under the Blue Sky laws of the states where
          such stock is  offered;  costs and  expenses  in  connection  with the
          registration of the Fund under the 1940 Act and all periodic and other
          reports  required  thereunder;  expenses of  preparing,  printing  and
          distributing reports,  proxy statements,  prospectuses,  statements of
          additional  information,  notices and  distributions  to stockholders;
          costs of stockholder and other  meetings;  and expenses of maintaining
          the Fund's corporate existence.

     (c)  EXPENSE  CAP.  For each of the  Fund's  full  fiscal  years  that this
          Agreement  remains in force,  SMC agrees that if total annual expenses
          of each Series of the Fund  identified  below,  exclusive of interest,
          taxes, extraordinary expenses (such as litigation), brokerage fees and
          commissions,  and 12b-1  fees paid  under a Fund's  Class A,  Class B,
          Class  C or  Class  S  Distribution  Plans,  but  inclusive  of  SMC's
          compensation,  exceeds the amount set forth below (the "Expense Cap"),
          SMC shall  contribute  to such Series such funds or waive such portion
          of its fee,  adjusted  monthly,  as may be required to insure that the
          total annual  expenses of the Series shall not exceed the Expense Cap.
          If this  Agreement  shall be effective for only a portion of a Series'
          fiscal year,  then the maximum  annual  expenses shall be prorated for
          such portion.

                                   EXPENSE CAP

            International Series, Class A, B, C and S shares - 2.25%
            Enhanced Index Series, Class A, B, C and S shares - 1.75%
            Select 25 Series, Class A, B, C and S shares - 1.75%

 3.  COMPENSATION OF SMC.

     (a)  As compensation for the investment advisory services to be rendered by
          SMC to Global Series,  Social Awareness Series,  Mid Cap Value Series,
          Small Cap  Growth  Series,  Large Cap  Growth  Series  and  Technology
          Series, for each of the years this Agreement is in effect, each of the
          foregoing  Series  shall pay SMC an  annual  fee equal to 1.00% of its
          respective  average  daily net  assets.  Such fee shall be  calculated
          daily and payable monthly. As compensation for the investment advisory
          services to be rendered by SMC to International Series for each of the
          years this Agreement is in effect, the International  Series shall pay
          SMC an annual fee equal to 1.10% of its average daily net assets. Such
          fee shall be calculated daily and payable monthly. As compensation for
          the  investment  advisory  services  to be  rendered  by SMC to Equity
          Series,  Total  Return  Series,  Enhanced  Index  Series and Select 25
          Series for each of the years this Agreement is in effect,  each of the
          foregoing  Series  shall pay SMC an  annual  fee equal to 0.75% of its
          respective  average  daily net  assets.  Such fee shall be  calculated
          daily and payable  monthly.  As  compensation  for the  administrative
          services to be rendered by SMC to Global, International and Technology
          Series, each of the foregoing Series shall pay SMC an annual fee equal
          to 0.045% of its average  daily net assets,  plus the greater of 0.10%
          of its  average  daily net  assets  or  $60,000.  Such  fees  shall be
          calculated  daily  and  payable  monthly.   As  compensation  for  the
          administrative  services  to be  rendered  by SMC to each of the other
          Series of the Fund, each such Series shall pay SMC an annual fee equal
          to  0.09%  of its  average  daily  net  assets.  Such  fees  shall  be
          calculated  daily and  payable  monthly.  If this  Agreement  shall be
          effective for only a portion of a year,  then SMC's  compensation  for
          said year shall be prorated  for such  portion.  For  purposes of this
          Section  3,  the  value  of the net  assets  of each  Series  shall be
          computed  in the same  manner  at the end of the  business  day as the
          value  of  such  net  assets  is  computed  in  connection   with  the
          determination of the net asset value of the Fund's shares as described
          in the Fund's prospectus.

          For  transfer  agency  services  provided by SMC to each Series of the
          Fund, each Series shall pay a Maintenance Fee of $8.00 per account,  a
          Transaction  Fee of $1.00 per  transaction  per account and a Dividend
          Fee of $1.00 per dividend per account.  For the purpose of calculating
          the  Maintenance,  Transaction  and Dividend  Fees  applicable to each
          Series, SMC may count as a shareholder  account each person that holds
          a  beneficial  interest  in an  omnibus  account  maintained  on SMC's
          transfer agency system by a third-party administrator,  broker/dealer,
          bank,  insurance company or other entity;  provided that SMC is paying
          such third-party administrator, broker/dealer, bank, insurance company
          or other entity sub-administrative, sub-accounting and/or sub-transfer
          agency fees for keeping individual  shareholder  records in connection
          with an investment in the Fund.

     (b)  For each of the Fund's fiscal years this  Agreement  remains in force,
          SMC agrees  that if total  annual  expenses of any Series of the Fund,
          exclusive  of  interest  and taxes,  extraordinary  expenses  (such as
          litigation) and distribution fees paid under the Fund's Class A, Class
          B, Class C and Class S  Distribution  Plans,  but  inclusive  of SMC's
          compensation,   exceed  any  expense   limitation   imposed  by  state
          securities  law or  regulation  in any  state in which  shares of such
          Series of the Fund are then  qualified for sale,  as such  regulations
          may be amended from time to time,  SMC will  contribute to such Series
          such funds or waive such portion of its fee, adjusted monthly,  as may
          be requisite to insure that such annual  expenses  will not exceed any
          such  limitation.  If this  Agreement  shall be  effective  for only a
          portion of any Series' fiscal year,  then the maximum annual  expenses
          shall be prorated for such  portion.  Brokerage  fees and  commissions
          incurred in connection  with the purchase or sale of any securities by
          a Series shall not be deemed to be expenses within the meaning of this
          paragraph (b).

 4.  INVESTMENT ADVISORY DUTIES.

     (a)  INVESTMENT   ADVICE.   SMC  shall  regularly  provide  the  Fund  with
          investment research,  advice and supervision,  continuously furnish an
          investment program,  recommend which securities shall be purchased and
          sold  and  what  portion  of the  assets  of the  Fund  shall  be held
          uninvested  and  arrange  for the  purchase  of  securities  and other
          investments  for  the  Fund  and  the  sale of  securities  and  other
          investments  held in the portfolio of the Fund. All investment  advice
          furnished  by SMC to the Fund under this  Section 4 shall at all times
          conform to any  requirements  imposed by the  provisions of the Fund's
          Articles of  Incorporation  and Bylaws,  the 1940 Act, the  Investment
          Advisors  Act of  1940  and  the  rules  and  regulations  promulgated
          thereunder,  and other applicable  provisions of law, and the terms of
          the  registration  statements of the Fund under the  Securities Act of
          1933 ("1933  Act")  and/or the 1940 Act, as may be  applicable  at the
          time,  all as from time to time  amended.  SMC shall advise and assist
          the  officers or other  agents of the Fund in taking such steps as are
          necessary or  appropriate  to carry out the  decisions of the Board of
          Directors of the Fund (and any duly appointed  committee thereof) with
          regard to the foregoing  matters and the general account of the Fund's
          business.

     (b)  SUBADVISERS.  Subject  to the  provisions  of the  1940  Act  and  any
          applicable  exemptions  thereto,  SMC is  authorized,  but is under no
          obligation,  to enter into sub-advisory  agreements (the "Sub-Advisory
          Agreements")  with one or more  subadvisers  (each a "Subadviser")  to
          provide  investment  advisory services to any series of the Fund. Each
          Subadviser shall have investment discretion with respect to the assets
          of the series assigned to that Subadviser by SMC.  Consistent with the
          provisions of the 1940 Act and any applicable  exemption thereto,  SMC
          may  enter  into   Sub-Advisory   Agreements  or  amend   Sub-Advisory
          Agreements  without the approval of the  shareholders  of the affected
          series.

     (c)  PORTFOLIO TRANSACTIONS AND BROKERAGE.

            (i)  Transactions in portfolio  securities shall be effected by SMC,
                 through brokers or otherwise (including affiliated brokers), in
                 the manner  permitted  in this  Section 4 and in such manner as
                 SMC shall  deem to be in the best  interests  of the Fund after
                 consideration is given to all relevant factors.

           (ii)  In  reaching  a judgment  relative  to the  qualification  of a
                 broker  to  obtain   the  best   execution   of  a   particular
                 transaction, SMC may take into account all relevant factors and
                 circumstances, including the size of any contemporaneous market
                 in such  securities;  the  importance  to the Fund of speed and
                 efficiency of execution;  whether the particular transaction is
                 part of a larger intended  change of portfolio  position in the
                 same  securities;  the execution  capabilities  required by the
                 circumstances  of  the  particular  transaction;   the  capital
                 required by the  transaction;  the overall capital  strength of
                 the broker;  the broker's apparent  knowledge of or familiarity
                 with sources from or to whom such  securities  may be purchased
                 or  sold;   as  well  as  the   efficiency,   reliability   and
                 confidentiality with which the broker has handled the execution
                 of prior similar transactions.

          (iii)  Subject  to  any   statements   concerning  the  allocation  of
                 brokerage  contained in the Fund's  Prospectus  or Statement of
                 Additional  Information,   SMC  is  authorized  to  direct  the
                 execution of portfolio transactions for the Fund to brokers who
                 furnish investment  information or research service to the SMC.
                 Such  allocations  shall be in such amounts and  proportions as
                 SMC may determine.  If the  transaction is directed to a broker
                 providing   brokerage   and  research   services  to  SMC,  the
                 commission  paid for such  transaction  may be in excess of the
                 commission another broker would have charged for effecting that
                 transaction,  if SMC shall have  determined  in good faith that
                 the  commission  is  reasonable in relation to the value of the
                 brokerage and research  services  provided,  viewed in terms of
                 either   that    particular    transaction   or   the   overall
                 responsibilities  of SMC with  respect  to all  accounts  as to
                 which it now or hereafter exercises investment discretion.  For
                 purposes  of the  immediately  preceding  sentence,  "providing
                 brokerage  and  research   services"  shall  have  the  meaning
                 generally  given  such  terms or similar  terms  under  Section
                 28(e)(3) of the Securities Exchange Act of 1934, as amended.

           (iv)  In  the  selection  of  a  broker  for  the  execution  of  any
                 transaction not subject to fixed  commission  rates,  SMC shall
                 have no duty or obligation to seek advance  competitive bidding
                 for  the  most  favorable  negotiated  commission  rate  to  be
                 applicable to such transaction,  or to select any broker solely
                 on the basis of its purported or "posted" commission rates.

            (v)  In connection with  transactions on markets other than national
                 or regional securities  exchanges,  the Fund will deal directly
                 with the selling  principal or market maker  without  incurring
                 charges for the services of a broker on its behalf  unless,  in
                 the best  judgment of SMC,  better  price or  execution  can be
                 obtained by utilizing the services of a broker.

     (d)  LIMITATION  OF LIABILITY  OF SMC WITH RESPECT TO RENDERING  INVESTMENT
          ADVISORY  SERVICES.  So long as SMC shall give the Fund the benefit of
          its best judgment and effort in rendering investment advisory services
          hereunder,  SMC shall  not be liable  for any  errors of  judgment  or
          mistake of law, or for any loss sustained by reason of the adoption of
          any  investment  policy  or the  purchase,  sale or  retention  of any
          security  on its  recommendation  shall  have been  based upon its own
          investigation and research or upon  investigation and research made by
          any other  individual,  firm or  corporation,  if such  recommendation
          shall have been made and such other  individual,  firm or  corporation
          shall  have been  selected  with due care and in good  faith.  Nothing
          herein contained shall,  however,  be construed to protect SMC against
          any  liability  to the Fund or its  shareholders  by reason of willful
          misfeasance,  bad faith or gross  negligence in the performance of its
          duties or by reason of its reckless  disregard of its  obligations and
          duties  under this  Section 4. As used in this  Section 4, "SMC" shall
          include  directors,  officers  and  employees  of SMC,  as well as SMC
          itself.

 5.  ADMINISTRATIVE AND TRANSFER AGENCY SERVICES.

     (a)  RESPONSIBILITIES  OF SMC.  SMC  will  provide  the Fund  with  general
          administrative,   fund  accounting,   transfer  agency,  and  dividend
          disbursing  services  described  and set forth in  Schedule A attached
          hereto and made a part of this  Agreement by reference.  SMC agrees to
          maintain  sufficient  trained  personnel and equipment and supplies to
          perform such services in conformity with the current Prospectus of the
          Fund and such other  reasonable  standards of  performance as the Fund
          may from time to time specify,  and otherwise perform such services in
          an accurate, timely, and efficient manner.

     (b)  INSURANCE. The Fund and SMC agree to procure and maintain,  separately
          or as joint  insureds with  themselves,  their  directors,  employees,
          agents and others,  and other investment  companies for which SMC acts
          as  investment  adviser and  transfer  agent,  a policy or policies of
          insurance  against  loss arising  from  breaches of trust,  errors and
          omissions,  and a fidelity bond meeting the  requirements  of the 1940
          Act, in the amounts  and with such  deductibles  as may be agreed upon
          from time to time. SMC shall be solely  responsible for the payment of
          premiums due for such policies.

     (c)  REGISTRATION AND COMPLIANCE.

            (i)  SMC  represents  that as of the  date of this  Agreement  it is
                 registered as a transfer agent with the Securities and Exchange
                 Commission ("SEC") pursuant to Subsection 17A of the Securities
                 and  Exchange  Act  of  1934  and  the  rules  and  regulations
                 thereunder, and agrees to maintain said registration and comply
                 with all of the requirements of said Act, rules and regulations
                 so long as this Agreement remains in force.

           (ii)  The Fund represents that it is a management  investment company
                 registered with the SEC in accordance with the 1940 Act and the
                 rules and  regulations  thereunder,  and authorized to sell its
                 shares  pursuant  to said  Act,  the 1933 Act and the rules and
                 regulations thereunder.

     (d)  LIABILITY AND INDEMNIFICATION WITH RESPECT TO RENDERING ADMINISTRATIVE
          AND  TRANSFER  AGENCY  SERVICES.  SMC shall be liable  for any  actual
          losses,  claims, damages or expenses (including any reasonable counsel
          fees  and   expenses)   resulting   from  SMC's  bad  faith,   willful
          misfeasance,   reckless  disregard  of  its  obligations  and  duties,
          negligence or failure to properly perform any of its  responsibilities
          or duties  under this  Section 5. SMC shall not be liable and shall be
          indemnified  and held harmless by the Fund,  for any claim,  demand or
          action brought against it arising out of or in connection with:

            (i)  The bad faith, willful  misfeasance,  reckless disregard of its
                 duties or  negligence by the Board of Directors of the Fund, or
                 SMC's  acting upon any  instructions  properly  executed or and
                 authorized by the Board of Directors of the Fund;

           (ii)  SMC acting in reliance upon advice given by independent counsel
                 retained by the Board of Directors of the Fund.

          In the  event  that  SMC  requests  the Fund to  indemnify  or hold it
          harmless hereunder,  SMC shall use its best efforts to inform the Fund
          of the relevant facts concerning the matter in question. SMC shall use
          reasonable  care to identify and promptly  notify the Fund  concerning
          any matter which presents,  or appears likely to present,  a claim for
          indemnification against the Fund.

          The Fund shall have the  election of  defending  SMC against any claim
          which may be the subject of  indemnification  hereunder.  In the event
          the Fund so elects, it will so notify SMC and thereupon the Fund shall
          take over defenses of the claim,  and if so requested by the Fund, SMC
          shall incur no further legal or other claims related thereto for which
          it would be entitled to indemnity  hereunder provided,  however,  that
          nothing herein contained shall prevent SMC from retaining,  at its own
          expense,  counsel to defend any claim.  Except  with the Fund's  prior
          consent,  SMC  shall  in no  event  confess  any  claim  or  make  any
          compromise  in any matter in which the Fund will be asked to indemnify
          or hold SMC harmless hereunder.

          PUNITIVE  DAMAGES.  SMC shall not be liable to the Fund,  or any third
          party,  for punitive,  exemplary,  indirect,  special or consequential
          damages  (even  if SMC has been  advised  of the  possibility  of such
          damage) arising from its  obligations and the services  provided under
          this Section 5, including but not limited to loss of profits,  loss of
          use of the shareholder accounting system, cost of capital and expenses
          of substitute facilities, programs or services.

          FORCE   MAJEURE.   Anything  in  this   Section  5  to  the   contrary
          notwithstanding,  SMC  shall  not  be  liable  for  delays  or  errors
          occurring by reason of circumstances beyond its control, including but
          not  limited  to  acts  of  civil  or  military  authority,   national
          emergencies,  work stoppages,  fire, flood,  catastrophe,  earthquake,
          acts of God,  insurrection,  war, riot,  failure of  communication  or
          interruption.

     (e)  DELEGATION OF DUTIES. SMC may, at its discretion,  delegate, assign or
          subcontract any of the duties,  responsibilities and services governed
          by this agreement, to an affiliated company,  whether or not by formal
          written  agreement,   or  to  any  third  party,  provided  that  such
          arrangement  with a third  party  has been  approved  by the  Board of
          Directors  of  the  Fund.   SMC  shall,   however,   retain   ultimate
          responsibility  to  the  Fund  and  shall  implement  such  reasonable
          procedures   as  may  be  necessary  for  assuring  that  any  duties,
          responsibilities  or services so assigned,  subcontracted or delegated
          are  performed in  conformity  with the terms and  conditions  of this
          Agreement.

 6.  OTHER  ACTIVITIES NOT  RESTRICTED.  Nothing in this Agreement shall prevent
     SMC or any officer thereof from acting as investment adviser, administrator
     or transfer agent for any other person,  firm or corporation,  nor shall it
     in any  way  limit  or  restrict  SMC or  any of its  directors,  officers,
     stockholders or employees from buying,  selling,  or trading any securities
     for their own  accounts or for the  accounts of others for whom they may be
     acting;  provided,  however,  that SMC  expressly  represents  that it will
     undertake no  activities  which,  in its  judgment,  will conflict with the
     performance of its obligations to the Fund under this  Agreement.  The Fund
     acknowledges  that  SMC  acts  as  investment  adviser,  administrator  and
     transfer agent to other investment companies,  and it expressly consents to
     SMC  acting as such;  provided,  however,  that if in the  opinion  of SMC,
     particular securities are consistent with the investment objectives of, and
     desirable  purchases  or sales  for the  portfolios  of one or more of such
     other investment companies or series of such companies at approximately the
     same time, such purchases or sales will be made on a proportionate basis if
     feasible, and if not feasible, then on a rotating or other equitable basis.

 7.  AMENDMENT.  This  Agreement and the schedules  forming a part hereof may be
     amended at any time, without  shareholder  approval to the extent permitted
     by applicable law, by a writing signed by each of the parties  hereto.  Any
     change  in  the  Fund's  registration  statements  or  other  documents  of
     compliance or in the forms relating to any plan, program or service offered
     by its current Prospectus which would require a change in SMC's obligations
     hereunder  shall  be  subject  to  SMC's  approval,   which  shall  not  be
     unreasonably withheld.

 8.  DURATION  AND  TERMINATION  OF  AGREEMENT.   This  Agreement  shall  become
     effective on May 1, 2002,  provided that on or before that date it has been
     approved by the holders of a majority of the outstanding  voting securities
     of each series of the Fund.  This  Agreement  shall continue in force until
     May 1,  2004,  and  for  successive  12-month  periods  thereafter,  unless
     terminated,  provided each such  continuance  is  specifically  approved at
     least  annually  by (a) the  vote of a  majority  of the  entire  Board  of
     Directors of the Fund,  and the vote of a majority of the  directors of the
     Fund who are not parties to this  Agreement or interested  persons (as such
     terms are defined in the Investment  Company Act of 1940) of any such party
     cast in person at a meeting of such  directors  called  for the  purpose of
     voting upon such approval,  or (b) by the vote of the holders of a majority
     of the outstanding voting securities of each series of the Fund (as defined
     in the 1940 Act). In the event a majority of the outstanding  shares of one
     series vote for continuance of the Agreement, it will be continued for that
     series even though the  Agreement  is not  approved by either a majority of
     the outstanding  shares of any other series or by a majority of outstanding
     shares of the Fund.

     Upon this Agreement becoming effective,  any previous Agreement between the
     Fund and SMC  providing  for  investment  advisory,  administrative  and/or
     transfer agency  services shall  concurrently  terminate,  except that such
     termination  shall not affect any fees accrued and  guarantees  of expenses
     with respect to any period prior to termination.

     This  Agreement  may be terminated at any time as to any series of the Fund
     without payment of any penalty,  by the Fund upon the vote of a majority of
     the Fund's Board of Directors or, by a majority of the  outstanding  voting
     securities of the applicable series of the Fund, or by SMC, in each case on
     sixty (60) days' written notice to the other party.  This  Agreement  shall
     automatically  terminate  in the event of its  assignment  (as such term is
     defined in the 1940 Act).

 9.  SEVERABILITY. If any clause or provision of this Agreement is determined to
     be illegal, invalid or unenforceable under present or future laws effective
     during the term hereof,  then such clause or provision  shall be considered
     severed herefrom and the remainder of this Agreement shall continue in full
     force and effect.

10.  APPLICABLE  LAW.  This  Agreement  shall be  subject  to and  construed  in
     accordance with the laws of the State of Kansas.

IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be duly
executed by their respective  officers thereto duly authorized on the day, month
and year first above written.

                                                SECURITY EQUITY FUND

                                                By       JAMES R. SCHMANK
                                                   -----------------------------
                                                         James R. Schmank

                                                Title:  President

ATTEST:

AMY J. LEE
- -----------------------------
Amy J. Lee
Secretary

                                                SECURITY MANAGEMENT COMPANY, LLC

                                                By       JAMES R. SCHMANK
                                                   -----------------------------
                                                         James R. Schmank

                                                Title:  President

ATTEST:

AMY J. LEE
- -----------------------------
Amy J. Lee
Secretary

                                   SCHEDULE A
                  INVESTMENT MANAGEMENT AND SERVICES AGREEMENT

        SCHEDULE OF ADMINISTRATIVE AND FUND ACCOUNTING FACILITIES AND SERVICES


Security  Management  Company,  LLC  agrees to  provide  the Fund the  following
administrative facilities and services.

 1.  FUND AND PORTFOLIO ACCOUNTING

     a.  Maintain Fund General Ledger and Journal.
     b.  Prepare and record disbursements for direct Fund expenses.
     c.  Prepare daily money transfers.
     d.  Reconcile all Fund bank and custodian accounts.
     e.  Assist Fund independent auditors as appropriate.
     f.  Prepare daily projection of available cash balances.
     g.  Record trading  activity for purposes of  determining  net asset values
         and daily dividend.
     h.  Prepare daily portfolio evaluation report to value portfolio securities
         and determine daily accrued income.
     i.  Determine the daily net asset value per share.
     j.  Determine the daily, monthly, quarterly,  semiannual or annual dividend
         per share.
     k.  Prepare monthly, quarterly, semiannual and annual financial statements.
     l.  Provide  financial  information  for  reports  to  the  Securities  and
         Exchange  Commission in compliance  with the provisions of the 1940 Act
         and the Securities Act of 1933,  the Internal  Revenue  Service and any
         other regulatory agencies as required.
     m.  Provide financial, yield, net asset value, etc. information to NASD and
         other survey and statistical agencies as instructed by the Fund.
     n.  Report to the Audit Committee of the Board of Directors.

 2.  LEGAL

     a.  Provide  registration and other  administrative  services  necessary to
         qualify  the  shares  of the  Fund  for  sale  in  those  jurisdictions
         determined from time to time by the Fund's Board of Directors (commonly
         known as "Blue Sky Registration").
     b.  Provide  registration  with and reports to the  Securities and Exchange
         Commission  in compliance  with the  provisions of the 1940 Act and the
         Securities Act of 1933.
     c.  Prepare  and  review  Fund   Prospectus  and  Statement  of  Additional
         Information.
     d.  Prepare  proxy  statements  and  oversee  proxy  tabulation  for annual
         meetings.
     e.  Prepare Board materials and maintain minutes of the Board meetings.
     f.  Draft,  review and  maintain  contractual  agreements  between Fund and
         Investment Adviser, Custodian, Distributor and Transfer Agent.
     g.  Oversee   printing   of  proxy   statements,   financial   reports   to
         shareholders, prospectuses and Statements of Additional Information.
     h.  Provide legal advice and oversight regarding shareholder  transactions,
         administrative services, compliance with contractual agreements and the
         provisions of the 1940 Act and the Securities Act of 1933.

           SCHEDULE OF SHARE TRANSFER AND DIVIDEND DISBURSING SERVICES

Security  Management  Company,  LLC  agrees to  provide  the Fund the  following
transfer agency and dividend disbursing services.

 1.  Maintain shareholder accounts, including processing of new accounts.

 2.  Post address  changes and perform other file  maintenance  for  shareholder
     accounts.

 3.  Post all transactions to the shareholder file, including:

     a.  Direct purchases;
     b.  Wire order purchases;
     c.  Direct redemptions;
     d.  Wire order redemptions;
     e.  Draft redemptions;
     f.  Direct exchanges;
     g.  Transfers;
     h.  Certificate issuances; and
     i.  Certificate deposits.

 4.  Monitor fiduciary processing, insuring accuracy and deduction of fees.

 5.  Prepare daily  reconciliations of shareholder  processing to money movement
     instructions.

 6.  Handle bounced check  collections.  Immediately  liquidate shares purchased
     and  return  to  the  shareholder   the  check  and   confirmation  of  the
     transaction.

 7.  Issue all checks and stop and replace lost checks.

 8.  Draft clearing services.

     a.  Maintain signature cards and appropriate corporate resolutions.
     b.  Compare the  signature on the check to the  signatures on the signature
         card for the purpose of paying the face amount of the check only.
     c.  Receive  checks  presented  for  payment  and  liquidate  shares  after
         verifying account balance.
     d.  Order checks in quantity specified by the Fund for the shareholder.

 9.  Mail confirmations,  checks and/or certificates  resulting from transaction
     requests to shareholders.

10.  Perform all of the Fund's other mailings, including:

     a.  Dividend and capital gain distributions;
     b.  Semiannual and annual reports;
     c.  1099/year-end shareholder reporting;
     d.  Systematic withdrawal plan payments; and
     e.  Daily confirmations.

11.  Answer  all  service-related  telephone  inquiries  from  shareholders  and
     others, including:

     a.  General and policy inquiries (research and resolve problems);
     b.  Fund yield inquiries;
     c.  Shareholder  processing  requests  and account  maintenance  changes by
         telephone as described above;
     d.  Pending requests to correspondence;
     e.  On-line statistical performance of unit; and
     f.  Reports on telephone activity.

12.  Respond to written inquiries (research and resolve problems), including:

     a.  Initiate   shareholder   account    reconciliation    proceeding   when
         appropriate;
     b.  Notify shareholder of bounced investment checks;
     c.  Respond to financial institutions regarding verification of deposit;
     d.  Initiate proceedings regarding lost certificates;
     e.  Respond to complaints and log activities; and
     f.  Correspondence control.

13.  Maintain  and  retrieve all  required  past  history for  shareholders  and
     provide research capabilities as follows:

     a.  Monitor daily all processing activity to verify back-up documentation;
     b.  Provide exception reports;
     c.  Provide microfilming services; and
     d.  Provide storage, retrieval and archive services.

14.  Prepare materials for annual meetings.

     a.  Address and mail annual proxy and related material.
     b.  Prepare and submit to Fund an affidavit of mailing.
     c.  Furnish  certified  list of  shareholders  (hard copy or microfilm) and
         inspectors of elections.

15.  Report and remit as necessary for state escheatment requirements.


Approved: Fund   JAMES R. SCHMANK              SMC   JAMES R. SCHMANK
                 ---------------------------         ---------------------------
                 James R. Schmank                    James R. Schmank

                                  AMENDMENT TO
                  INVESTMENT MANAGEMENT AND SERVICES AGREEMENT


WHEREAS,  Security Equity Fund (the "Fund") and Security Management Company, LLC
("SMC,  LLC") are parties to an  Agreement,  made and entered  into  January 27,
2000,  and amended and restated  effective as of May 1, 2002 (the  "Agreement"),
under which SMC, LLC agrees to provide investment  research and advice,  general
administrative,   fund  accounting,  transfer  agency  and  dividend  disbursing
services to the Fund in return for the compensation specified in the Agreement;

WHEREAS,  on November 8, 2002, the Board of Directors of the Fund authorized the
Fund  to  offer  its  common  stock  in a new  series  designated  as the  Alpha
Opportunity Series, in addition to its presently offered series of common stock,
with each series  representing  separate  interests  in a separate  portfolio of
securities and other assets; and

WHEREAS,  on  November  8,  2002,  the Board of  Directors  of the Fund  further
authorized  the Fund to offer  shares of the Alpha  Opportunity  Series in three
classes, designated as Class A shares, Class B shares, and Class C shares; and

WHEREAS,  on May 2,  2003,  the  Board of  Directors  of the Fund  approved  the
amendment of the  Agreement to provide  that SMC, LLC would  provide  investment
advisory and business  management  services to each class of common stock of the
Alpha  Opportunity  Series of the Fund  under the  terms and  conditions  of the
Agreement;

NOW, THEREFORE,  IT IS BY THE PARTIES HERETO AGREED that the Agreement is hereby
amended  effective  June 1, 2003,  to provide  that SMC,  LLC shall  provide all
investment advisory services, general administrative,  fund accounting, transfer
agency and dividend  disbursing  services to the Alpha Opportunity Series of the
Fund pursuant to the terms set forth in the Agreement, as follows:

Section 3 shall be deleted  in its  entirety  and the  following  new  Section 3
inserted in lieu thereof:

 3.  COMPENSATION OF SMC, LLC.

     (a)  As compensation for the investment advisory services to be rendered by
          SMC, LLC to Global  Series,  Social  Awareness  Series,  Mid Cap Value
          Series,   Small  Cap  Growth  Series,  Large  Cap  Growth  Series  and
          Technology  Series, for each of the years this Agreement is in effect,
          each of the foregoing Series shall pay SMC, LLC an annual fee equal to
          1.00% of its  respective  average daily net assets.  Such fee shall be
          calculated  daily  and  payable  monthly.   As  compensation  for  the
          investment   advisory   services  to  be  rendered  by  SMC,   LLC  to
          International  Series  for  each of the  years  this  Agreement  is in
          effect,  the  International  Series  shall pay SMC,  LLC an annual fee
          equal to 1.10% of its  average  daily  net  assets.  Such fee shall be
          calculated  daily  and  payable  monthly.   As  compensation  for  the
          investment  advisory  services to be  rendered  by SMC,  LLC to Equity
          Series,  Enhanced  Index  Series  and Select 25 Series for each of the
          years this Agreement is in effect,  each of the foregoing Series shall
          pay SMC,  LLC an annual fee equal to 0.75% of its  respective  average
          daily net  assets.  Such fee  shall be  calculated  daily and  payable
          monthly.  As compensation for the investment  advisory  services to be
          rendered by SMC, LLC to Alpha  Opportunity  Series,  Alpha Opportunity
          Series shall pay SMC, LLC a fee as  described in  paragraphs  3(c) and
          3(d) below.  As  compensation  for the  administrative  services to be
          rendered by SMC, LLC to Global,  International and Technology  Series,
          each of the foregoing Series shall pay SMC, LLC an annual fee equal to
          0.045% of its average  daily net assets,  plus the greater of 0.10% of
          its  average  daily net  assets  or  $60,000.00.  Such  fees  shall be
          calculated  daily  and  payable  monthly.   As  compensation  for  the
          administrative   services  to  be  rendered  by  SMC,   LLC  to  Alpha
          Opportunity Series, the Alpha Opportunity Series shall pay SMC, LLC an
          annual fee equal to 0.145% of its average daily net assets.  Such fees
          shall be calculated daily and payable monthly. As compensation for the
          administrative  services  to be  rendered  by SMC,  LLC to each of the
          other  Series of the  Fund,  each such  Series  shall pay SMC,  LLC an
          annual fee equal to 0.09% of its average  daily net assets.  Such fees
          shall be calculated daily and payable monthly. If this Agreement shall
          be  effective  for  only  a  portion  of  a  year,   then  SMC,  LLC's
          compensation  for said year shall be prorated  for such  portion.  For
          purposes of this Section 3, the value of the net assets of each Series
          shall be computed in the same manner at the end of the business day as
          the  value of such net  assets  is  computed  in  connection  with the
          determination of the net asset value of the Fund's shares as described
          in the Fund's prospectus.

          For transfer  agency  services  provided by SMC, LCC to each Series of
          the  Fund,  each  Series  shall  pay a  Maintenance  fee of $8.00  per
          account,  a Transaction Fee of $1.00 per transaction per account and a
          Dividend Fee of $1.00 per  dividend  per  account.  For the purpose of
          calculating the Maintenance,  Transaction and Dividend Fees applicable
          to each  Series,  SMC,  LLC may count as a  shareholder  account  each
          person  that  holds  a  beneficial  interest  in  an  omnibus  account
          maintained  on SMC,  LLC's  transfer  agency  system by a  third-party
          administrator, broker/dealer, bank, insurance company or other entity;
          provided  that SMC,  LLC is  paying  such  third-party  administrator,
          broker/dealer,    bank,    insurance    company   or   other    entity
          sub-administrative, sub-accounting and/or sub-transfer agency fees for
          keeping   individual   shareholder   records  in  connection  with  an
          investment in the Fund.

     (b)  For each of the Fund's fiscal years this  Agreement  remains in force,
          SMC,  LLC agrees  that if total  annual  expenses of any Series of the
          Fund, exclusive of interest and taxes, extraordinary expenses (such as
          litigation) and distribution fees paid under the Fund's Class A, Class
          B and  Class  C  Distribution  Plans,  but  inclusive  of  SMC,  LLC's
          compensation,   exceed  any  expense   limitation   imposed  by  state
          securities  law or  regulation  in any  state in which  shares of such
          Series of the Fund are then  qualified for sale,  as such  regulations
          may be amended  from time to time,  SMC, LLC will  contribute  to such
          Series such funds or waive such portion of its fee,  adjusted monthly,
          as may be  requisite  to insure  that such  annual  expenses  will not
          exceed any such  limitation.  If this Agreement shall be effective for
          only a portion of any Series'  fiscal  year,  then the maximum  annual
          expenses  shall be  prorated  for  such  portion.  Brokerage  fees and
          commissions  incurred in  connection  with the purchase or sale of any
          securities  by a Series shall not be deemed to be expenses  within the
          meaning of this paragraph (b).

     (c)  BASE FEE. As compensation for the investment  advisory  services to be
          rendered by SMC, LLC to Alpha Opportunity Series, the Series shall pay
          SMC, LLC at the end of each calendar month, an advisory fee (the "Base
          Fee") equal to 2.00%,  on an annual  basis,  of the Alpha  Opportunity
          Series' average daily net assets. The Base Fee shall be computed daily
          and paid  monthly.  If SMC, LLC shall serve for less than the whole of
          any calendar  month,  the Base Fee shall be  calculated  on a pro rata
          basis for the portion of the month for which it has served as adviser.
          During the first 12 months of  operations,  the fee will be charged at
          the Base Fee of 2.00% without any adjustment as discussed in paragraph
          (d) below.

     (d)  BASE FEE  ADJUSTMENT.  Beginning in the 13th month of operations,  the
          Base Fee of 2.00% will be  adjusted  upward or  downward  on a monthly
          basis  based  upon  the  performance  of the  Series  relative  to the
          performance of the S&P 500 Index (the "Index"). The maximum or minimum
          adjustment  is 0.75%  annually.  Therefore,  the  maximum  annual  fee
          payable to SMC,  LLC shall be 2.75% of the Series'  average  daily net
          assets,  and the  minimum  annual  fee  shall be 1.25% of the  Series'
          average daily net assets.  The pro rata adjustment  upward or downward
          will be determined based upon the performance of the Class A shares of
          the  Series in excess of, or below,  that of the Index.  The amount of
          any  upward  adjustment  in the  Base  Fee  shall  be  equal  to 0.75%
          multiplied  by the ratio of the number of  percentage  points by which
          the  performance of the Series exceeds the performance of the Index as
          compared to 15 percentage points.  For example,  if the performance of
          the Series  was 6.6% and that of the Index was 0%, the ratio  would be
          6.6 to 15, or 44%, times 0.75%, for an upward adjustment of 0.33%. The
          amount  of any  downward  adjustment  in the Base Fee will be equal to
          0.75%  multiplied by the ratio of the number of  percentage  points by
          which the  performance  of the Series is less than the  performance of
          the Index as compared to 15  percentage  points.  For example,  if the
          performance  of the Series was  --10.0%  and that of the Index was 0%,
          the ratio would be 10 to 15, or 66.66%,  times  0.75%,  for a downward
          adjustment of 0.50%.

          In determining the Base Fee adjustment,  if any, applicable during any
          month, SMC, LLC will compare the investment performance of the Class A
          shares of the Alpha  Opportunity  Series for the  twelve-month  period
          ending on the last day of the prior month (the  "Performance  Period")
          to the investment  record of the Index during the Performance  Period.
          The investment  performance of the Series will be determined by adding
          together  (i) the  change  in the net  asset  value  of Class A shares
          during the Performance  Period,  (ii) the value of cash  distributions
          made by the  Series to holders of its Class A shares to the end of the
          Performance Period, and (iii) the value of capital gains per share, if
          any, paid on undistributed realized long-term gains accumulated to the
          end of the Performance  Period,  and will be expressed as a percentage
          of the  net  asset  value  per  share  of the  Class A  shares  at the
          beginning of the Performance Period. The investment performance of the
          Index  will be  determined  by adding  together  (i) the change in the
          level of the Index during the Performance  Period, and (ii) the value,
          computed  consistently with the Index, of cash  distributions  made by
          companies whose securities  comprise the Index  accumulated to the end
          of the  Performance  Period,  and will be expressed as a percentage of
          the Index at the beginning of the Performance Period.

          After it determines any Base Fee  adjustment,  SMC, LLC will determine
          the dollar amount of additional  fees or fee  reductions to be accrued
          for each day of a month by multiplying  the Base Fee adjustment by the
          average daily net assets of the Class A shares of each Fund during the
          Performance Period and dividing that number by the number of months in
          the Performance  Period and then dividing that amount by the number of
          days in the current month. The Base Fee, as adjusted, is accrued daily
          and paid  monthly  and shall be  prorated  in any month for which this
          Agreement is not in effect for the entire month.

IN WITNESS  WHEREOF,  the parties  hereto have  executed  this  Amendment to the
Investment Management and Services Agreement this ___ day of May, 2003.

                                              SECURITY EQUITY FUND

                                              By:
                                                  ------------------------------
                                                  James R. Schmank, President

ATTEST:

By:
    ------------------------------
    Amy J. Lee, Secretary

                                              SECURITY MANAGEMENT COMPANY, LLC

                                              By:
                                                  ------------------------------
                                                  James R. Schmank, President

ATTEST:

By:
    ------------------------------
    Amy J. Lee, Secretary

EX-99.D6 4 subadv-mainstream.htm MAINSTREAM SUB-ADVISORY CONTRACT Mainstream Sub-Advisory Agreement

                             SUB-ADVISORY AGREEMENT


   THIS  AGREEMENT  is made and entered  into as of this 1st day of July,  2003,
between  SECURITY  MANAGEMENT  COMPANY,  LLC (the  "Adviser"),  a Kansas limited
liability  company,  registered  under the  Investment  Advisers Act of 1940, as
amended (the "Investment Advisers Act") and MAINSTREAM INVESTMENT ADVISERS,  LLC
(the "Subadviser"),  a Kentucky limited liability company,  registered under the
Investment Advisers Act.

                                   WITNESSETH:

   WHEREAS,  SBL Fund and Security Equity Fund,  Kansas  corporations,  are each
registered  with the Securities and Exchange  Commission (the  "Commission")  as
open-end  management  investment  companies under the Investment  Company Act of
1940, as amended (the "Investment Company Act");

   WHEREAS,  SBL Fund is  authorized  to issue  shares of  Series Z, a  separate
series of SBL Fund,  and Security  Equity Fund is  authorized to issue shares of
Alpha  Opportunity  Series,  a separate series of Security Equity Fund (Series Z
and Alpha Opportunity Series are referred to herein individually as a "Fund" and
collectively as the "Funds");

   WHEREAS,  each of the Funds has,  pursuant to an Advisory  Agreement with the
Adviser (the  "Advisory  Agreement"),  retained the Adviser to act as investment
adviser for and to manage its assets;

   WHEREAS,  the Advisory  Agreements  permit the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the Investment Company Act;

   WHEREAS, the Adviser desires to retain the Subadviser as subadviser to act as
investment  adviser  for and to manage a portion of each  Fund's  assets and the
Subadviser desires to render such services; and

   WHEREAS,  the  Adviser  shall  have  the sole  discretion  to  determine  the
percentage of each Fund's assets to be managed by the Subadviser.

   NOW, THEREFORE,  the Adviser and the Subadviser do mutually agree and promise
as follows:

   1.  APPOINTMENT AS  SUBADVISER.  The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage assets of the Funds,  subject to the
supervision of the Adviser, the Board of Directors of such Fund and the terms of
this  Agreement,  and the  Subadviser  hereby accepts such  employment.  In such
capacity,  the Subadviser  shall be responsible  for the Investments (as defined
herein) of the Funds;  provided  that the  Adviser  reserves  the  authority  to
review, modify or reject Subadviser's investment recommendations with respect to
the management of the Funds' Investments.

   2. DUTIES OF SUBADVISER.

      (a)  INVESTMENTS.  Subject to the instructions of the Adviser from time to
   time,  the  Subadviser is hereby  authorized  and directed and hereby agrees,
   subject to the stated  investment  policies and  restrictions of each Fund as
   set forth in the Fund's prospectus and statement of additional information as
   currently  in  effect  and as  supplemented  or  amended  from  time  to time
   (collectively referred to hereinafter as the "Prospectus") to purchase,  hold
   and sell investments for the account of the Fund (hereinafter  "Investments")
   and to monitor on a continuous  basis the  performance  of such  Investments.
   "Investments" when referred to in this Agreement shall mean those investments
   included  in the  portion  of each  Fund's  total  assets  that  Adviser  has
   allocated to Subadviser for management.  The Adviser has agreed that it shall
   increase  or  decrease  the total  assets  allocated  to the  Subadviser  for
   management solely as of the first business day of each calendar month, unless
   otherwise  mutually agreed to by the parties.  Subject to the instructions of
   the Adviser from time to time,  the  Subadviser  may contract with or consult
   with such banks,  other securities firms,  brokers or other parties,  without
   additional  expense  to the  Adviser,  as it may deem  appropriate  regarding
   investment  advice,  research and statistical  data,  clerical  assistance or
   otherwise.

      (b) BROKERAGE. The Subadviser is authorized, subject to the supervision of
   the Adviser and the  respective  Fund's Board of Directors,  to establish and
   maintain  accounts  on behalf of each Fund  with,  and place  orders  for the
   purchase and sale of each Fund's  Investments with or through,  such persons,
   brokers or dealers as Subadviser may select which may include,  to the extent
   permitted by the Adviser or the respective Fund's Board of Directors, brokers
   or dealers affiliated with the Subadviser. The Subadviser is also authorized,
   subject to the supervision of the Adviser and the respective  Fund's Board of
   Directors  to  negotiate  commissions  to be paid on such  transactions.  The
   Subadviser shall make sales, exchanges,  commitments,  contracts, investments
   or reinvestments, or take any action which it deems necessary or desirable in
   connection  with the  Investments,  in  accordance  with its own judgment and
   discretion.   Specifically,  the  Subadviser  shall  have  the  authority  to
   purchase, sell, sell short, transfer, deal in or otherwise invest in publicly
   traded common stocks,  convertible bonds, convertible preferred stocks, stock
   warrants and rights.  The Subadviser agrees that in placing such orders for a
   Fund it shall attempt to obtain best execution, provided that, the Subadviser
   may,  on behalf of such Fund,  pay  brokerage  commissions  to a broker  that
   provides  brokerage and research  services to the Subadviser in excess of the
   amount  another  broker would have  charged for  effecting  the  transaction,
   provided  (i) the  Subadviser  determines  in good  faith  that the amount is
   reasonable in relation to the value of the  brokerage  and research  services
   provided by the executing broker in terms of the particular transaction or in
   terms of the Subadviser's overall  responsibilities with respect to such Fund
   and the accounts as to which the Subadviser exercises investment  discretion,
   (ii) such payment is made in compliance  with Section 28(e) of the Securities
   Exchange  Act of  1934,  as  amended,  and  any  other  applicable  laws  and
   regulations,   and  (iii)  in  the  opinion  of  the  Subadviser,  the  total
   commissions  paid by such Fund will be reasonable in relation to the benefits
   to the  Fund  over  the  long  term.  In  reaching  such  determination,  the
   Subadviser  will not be  required  to place or  attempt  to place a  specific
   dollar value on the  brokerage  and/or  research  services  provided or being
   provided by such broker.  It is recognized that the services provided by such
   brokers may be useful to the Subadviser in connection  with the  Subadviser's
   services  to other  clients.  On  occasions  when the  Subadviser  deems  the
   purchase  or sale of a security  to be in the best  interests  of the Fund as
   well as other  clients  of the  Subadviser,  the  Subadviser,  to the  extent
   permitted  by  applicable  laws and  regulations,  may, but shall be under no
   obligation  to,  aggregate the securities to be sold or purchased in order to
   obtain the most favorable price or lower brokerage  commissions and efficient
   execution.  In such event,  allocation of securities so sold or purchased, as
   well  as the  expenses  incurred  in the  transaction,  shall  be made by the
   Subadviser in the manner the  Subadviser  considers to be the most  equitable
   and consistent  with its fiduciary  obligations to the Fund or Funds involved
   and to such other clients. The Subadviser shall report on such allocations at
   the request of the Adviser,  or the  respective  Fund's  Board of  Directors,
   providing such information as the number of aggregated trades to which a Fund
   was a party, the broker(s) to whom such trades were directed and the basis of
   the allocation for the aggregated trades. Subject to the foregoing provisions
   of this  Subsection 2(b) and at the direction of the Adviser or the Fund, the
   Subadviser  may also  consider  sales of the Funds' shares as a factor in the
   selection of brokers or dealers for a Fund's portfolio transactions.

      (c) SECURITIES  TRANSACTIONS.  The Subadviser and any affiliated person of
   the Subadviser  shall not purchase  securities or other  instruments  from or
   sell securities or other  instruments to a Fund  ("Principal  Transactions");
   PROVIDED, HOWEVER, the Subadviser may enter into a Principal Transaction with
   a Fund if (i) the  transaction  is  permissible  under  applicable  laws  and
   regulations,  including,  without limitation, the Investment Advisers Act and
   the rules and regulations promulgated thereunder, and (ii) the transaction or
   category  of  transactions  receives  the  express  written  approval  of the
   Adviser.

          The Subadviser  agrees to observe and comply in all material  respects
   with Rule 17j-1 under the Investment  Company Act and its Code of Ethics,  as
   the same may be amended from time to time. The  Subadviser  agrees to provide
   the Adviser with a copy of such Code of Ethics.

      (d) BOOKS AND RECORDS. The Subadviser shall maintain all books and records
   required  to be  maintained  pursuant to the  Investment  Company Act and the
   rules  and  regulations   promulgated   thereunder  solely  with  respect  to
   transactions made by it on behalf of the Funds including, without limitation,
   the books and records  required by  Subsections  (b)(1),  (5), (6), (7), (9),
   (10) and (11) and Subsection  (f) of Rule 31a-1 under the Investment  Company
   Act and shall timely furnish to the Adviser all  information  relating to the
   Subadviser's  services  hereunder  needed by the  Adviser  to keep such other
   books and records of the Funds  required  by Rule 31a-1 under the  Investment
   Company Act. The  Subadviser  shall also  preserve all such books and records
   for the periods  prescribed  in part (e) of Rule 31a-2  under the  Investment
   Company  Act,  and agrees that such books and records  shall  remain the sole
   property of the respective  Fund and shall be immediately  surrendered to the
   appropriate Fund upon request.  The Subadviser  further agrees that all books
   and records  maintained  hereunder  shall be made available to the respective
   Fund or the Adviser at any time upon reasonable request and notice during any
   business day.

      (e) INFORMATION CONCERNING  INVESTMENTS AND SUBADVISER.  From time to time
   as the Adviser or a Fund may reasonably request, the Subadviser shall furnish
   the requesting  party reports on transactions and reports on Investments held
   in the Fund  portfolios,  all in such detail as the Adviser or the applicable
   Fund may reasonably  request.  From time to time as the Adviser or a Fund may
   reasonably  request,  the  Subadviser  will make  available  its officers and
   employees  to meet  with  the  Board  of  Directors  of a Fund at the  Fund's
   principal  place of business on due notice to review the  Investments  of the
   Fund.

          The Subadviser  shall also provide such  information as is customarily
   provided by a subadviser  and as may be required for each Fund or the Adviser
   to comply with their respective obligations under applicable laws, including,
   without  limitation,  the  Internal  Revenue  Code of 1986,  as amended  (the
   "Code"),  the  Investment  Company  Act,  the  Investment  Advisers  Act, the
   Securities  Act of 1933,  as  amended  (the  "Securities  Act") and any state
   securities laws, and any rule or regulation thereunder.

          During the term of this  Agreement,  the Adviser agrees to furnish the
   Subadviser  at  its  principal  office  all  registration  statements,  proxy
   statements,  reports to  stockholders,  sales  literature or other  materials
   prepared for  distribution  to  stockholders of each Fund, or the public that
   refer to the Subadviser for Subadviser's review and approval.  The Subadviser
   shall be deemed to have  approved all such  materials  unless the  Subadviser
   reasonably  objects by giving  notice to the  Adviser in writing  within five
   business days (or such other period as may be mutually  agreed) after receipt
   thereof. The Subadviser's right to object to such materials is limited to the
   portions of such  materials  that  expressly  relate to the  Subadviser,  its
   services  and its  clients.  The  Adviser  agrees to use its best  efforts to
   ensure that  materials  prepared by its employees or agents or its affiliates
   that refer to the  Subadviser or its clients in any way are  consistent  with
   those materials  previously  approved by the Subadviser as referenced in this
   paragraph.  Sales  literature  may be furnished to the  Sub-Adviser  by first
   class or overnight mail, facsimile transmission equipment or hand delivery.

      (f)  CUSTODY  ARRANGEMENTS.  The  Subadviser  shall  provide  each  Fund's
   custodian (the "Custodian"),  on each business day,  information  relating to
   all transactions made by it on behalf of the Funds.

      (g)  COMPLIANCE  WITH  APPLICABLE  LAWS AND  GOVERNING  DOCUMENTS.  In all
   matters relating to the performance of this Agreement, the Subadviser and its
   members,  officers,  partners,  employees and interested persons shall act in
   conformity   in  all  material   respects   with  each  Fund's   Articles  of
   Incorporation,  By-Laws, and currently effective  registration  statement and
   with  the  written  instructions  and  directions  of each  Fund's  Board  of
   Directors and the Adviser,  after receipt of such documents from the relevant
   Fund, and shall comply in all material  respects with the requirements of the
   Investment  Company Act, the Investment  Advisers Act, the Commodity Exchange
   Act (the "CEA"),  the rules thereunder,  and all other applicable federal and
   state laws and regulations.

          In carrying out its obligations  under this Agreement,  the Subadviser
   shall,  solely with regard to those  matters  within its control and based on
   information  available  to it (i)  invest  the  assets  of the Fund in such a
   manner that each Fund complies with Section  851(b)(2) and Section  851(b)(3)
   of Subchapter M of the Code (or any successor provision), and (ii) invest the
   assets of Series Z of SBL Fund in such a manner that  Series Z complies  with
   the  diversification  provisions  of  Section  817(h)  of the  Code  (or  any
   successor  provision) and the regulations  issued thereunder  relating to the
   diversification   requirements  for  variable  insurance  contracts  and  any
   prospective  amendments or other  modifications to Section 817 or regulations
   thereunder.  Subadviser  shall notify the Adviser  immediately  upon having a
   reasonable  basis  for  believing  that a Fund has  ceased  to  qualify  as a
   Regulated  Investment Company under Subchapter M of the Internal Revenue Code
   (or any successor or similar provision) or Series Z has ceased to comply with
   Section 817(h) and, with respect to Section 817(h), shall take all reasonable
   steps to adequately diversify Series Z so as to achieve compliance within the
   grace period afforded by Regulation 1.817-5.

          The Adviser has  furnished the  Subadviser  with copies of each of the
   following  documents and will furnish the Subadviser at its principal  office
   all future  amendments and supplements to such documents,  if any, as soon as
   practicable  after such  documents  become  available:  (i) the  Articles  of
   Incorporation  of each Fund, (ii) the By-Laws of each Fund, (iii) each Fund's
   registration  statement  under the Investment  Company Act and the Securities
   Act, as filed with the Commission,  and (iv) any written  instructions of the
   respective  Fund's Board of Directors and the Adviser.  The Subadviser  shall
   not be held  responsible  for compliance  with any document  described  above
   unless and until such document has been received by the Subadviser.

      (h) VOTING OF PROXIES. The Subadviser shall direct the Custodian as to how
   to vote such proxies as may be necessary or advisable in connection  with any
   matters submitted to a vote of shareholders of Investments held by a Fund.

   3. INDEPENDENT  CONTRACTOR.  In the performance of its duties hereunder,  the
Subadviser  is and  shall be an  independent  contractor  and  unless  otherwise
expressly  provided  herein or otherwise  authorized  in writing,  shall have no
authority to act for or  represent  the Funds or Adviser in any way or otherwise
be deemed an agent of the Funds or Adviser.

   4.  COMPENSATION.  The Adviser  shall pay to the  Subadviser  an Advisory Fee
computed  in  accordance  with  Schedule A attached  hereto,  which fee shall be
payable as provided  therein.  The parties hereby disclaim any obligation on the
part of the Funds or their  shareholders  to pay any portion of the Advisory Fee
payable by the Adviser to the Subadviser.

   5.  EXPENSES.  The  Subadviser  shall  bear all  expenses  incurred  by it in
connection with its services under this Agreement and shall,  from time to time,
at its sole expense employ or associate  itself with such persons as it believes
to be particularly fitted to assist it in the execution of its duties hereunder.
However,  the  Subadviser  shall not assign or  delegate  any of its  investment
management  duties  under this  Agreement  without the  written  approval of the
Adviser and the respective Fund's Board of Directors.

   6.  REPRESENTATIONS AND WARRANTIES OF SUBADVISER.  The Subadviser  represents
and warrants to the Adviser as follows:

      (a) The  Subadviser  is  registered  as an  investment  adviser  under the
   Investment Advisers Act;

      (b) The Subadviser shall  immediately  notify the Adviser of the existence
   or occurrence of any event that would  disqualify the Subadviser from serving
   as an investment adviser of an investment company pursuant to Section 9(a) of
   the Investment Company Act;

      (c) The Subadviser is fully  authorized  under all applicable law to serve
   as Subadviser to the Funds and to perform the services  described  under this
   Agreement;

      (d) The  Subadviser  is a limited  liability  company duly  organized  and
   validly  existing  under the laws of the State of Kentucky  with the power to
   own and  possess  its  assets  and carry on its  business  as it is now being
   conducted;

      (e) The  execution,  delivery and  performance  by the  Subadviser of this
   Agreement are within the Subadviser's powers and have been duly authorized by
   all  necessary  action of the members,  and no action by or in respect of, or
   filing with,  any  governmental  body,  agency or official is required on the
   part of the  Subadviser for the  execution,  delivery and  performance by the
   Subadviser of this Agreement, and the execution,  delivery and performance by
   the  Subadviser of this  Agreement do not  contravene or constitute a default
   under (i) any  provision of  applicable  law,  rule or  regulation,  (ii) the
   Subadviser's  governing  instruments,  or  (iii)  any  agreement,   judgment,
   injunction, order, decree or other instrument binding upon the Subadviser;

      (f) This Agreement is a valid and binding agreement of the Subadviser; and

      (g) The Form ADV of the Subadviser  previously  provided to the Adviser is
   accurate and complete in all  material  respects,  and does not omit to state
   any material fact necessary in order to make the statements made, in light of
   the circumstances under which they were made, not misleading.

   7. NON-EXCLUSIVITY.  The services of the Subadviser with respect to the Funds
are not deemed to be exclusive,  and the  Subadviser  and its officers  shall be
free to render  investment  advisory  and  administrative  or other  services to
others and to engage in other activities.  Nothing in this Agreement shall limit
or restrict the Subadviser or any of its officers, managers, members, employees,
affiliates or agents from buying,  selling or trading in any  securities for its
or their own account or accounts, except as set forth in Subsection 2(c) herein.
The  Adviser  acknowledges  that  the  Subadviser  and its  officers,  managers,
members,  employees,  affiliates or agents and its other clients may at any time
have, acquire,  increase,  decrease or dispose of positions in investments which
are at the same time being  acquired or  disposed of for the Funds.  The Adviser
agrees that the  Subadviser  may give advice and take action with respect to any
of its other  clients which may differ from advice given or the timing or nature
of action  taken with  respect to the Funds,  so long as it is the  Subadviser's
policy, to the extent  practical,  to allocate  investment  opportunities to the
Funds  over a period of time on a fair and  equitable  basis  relative  to other
clients.

   8.  REPRESENTATIONS  AND  WARRANTIES OF ADVISER.  The Adviser  represents and
warrants to the Subadviser as follows:

      (a)  The  Adviser  is  registered  as  an  investment  adviser  under  the
   Investment Advisers Act;

      (b) The  Adviser  has filed a notice of  exemption  pursuant  to Rule 4.14
   under the CEA with the Commodity Futures Trading  Commission (the "CFTC") and
   the National Futures Association;

      (c) The Adviser is a limited  liability company duly organized and validly
   existing  under  the laws of the  State of  Kansas  with the power to own and
   possess its assets and carry on its business as it is now being conducted;

      (d)  The  execution,  delivery  and  performance  by the  Adviser  of this
   Agreement  are within the Adviser's  powers and have been duly  authorized by
   all  necessary  action  on the part of its  members,  and no  action by or in
   respect of, or filing  with,  any  governmental  body,  agency or official is
   required  on  the  part  of the  Adviser  for  the  execution,  delivery  and
   performance by the Adviser of this Agreement, and the execution, delivery and
   performance  by the Adviser of this Agreement do not contravene or constitute
   a default under (i) any provision of applicable law, rule or regulation, (ii)
   the  Adviser's  governing  instruments,  or (iii)  any  agreement,  judgment,
   injunction, order, decree or other instrument binding upon the Adviser;

      (e) This Agreement is a valid and binding agreement of the Adviser; and

      (f) The Adviser  acknowledges  that it received a copy of the Subadviser's
   Form ADV at least 48 hours prior to the execution of this Agreement.

   9. SURVIVAL OF REPRESENTATIONS  AND WARRANTIES;  DUTY TO UPDATE  INFORMATION.
All  representations  and  warranties  made by the  Subadviser  and the  Adviser
pursuant  to  Sections 6 and 8 hereof  shall  survive  for the  duration of this
Agreement  and the parties  hereto shall  promptly  notify each other in writing
upon becoming aware that any of the foregoing representations and warranties are
no longer true.

   10. DUTY OF CARE AND INDEMNIFICATION.

      (a) LIABILITY.  In the absence of willful misfeasance,  bad faith or gross
   negligence on the part of the  Subadviser or a material  breach of its duties
   hereunder,  the  Subadviser  shall not be  subject  to any  liability  to the
   Adviser,  to either Fund, or any of either Fund's  shareholders,  and, in the
   absence of willful misfeasance,  bad faith or gross negligence on the part of
   the Adviser or a material breach of its duties  hereunder,  the Adviser shall
   not be subject to any liability to the Subadviser, for any act or omission in
   the case of, or  connected  with,  rendering  services  hereunder  or for any
   losses that may be sustained in the purchase, holding or sale of Investments;
   PROVIDED,  HOWEVER,  that nothing  herein  shall  relieve the Adviser and the
   Subadviser from any of their  respective  obligations  under  applicable law,
   including,  without limitation, the federal and state securities laws and the
   CEA

      (b)  INDEMNIFICATION.  The Subadviser  shall indemnify the Adviser and the
   Funds,  and their  respective  officers and directors,  for any liability and
   expenses, including reasonable attorneys' fees, which may be sustained by the
   Adviser, or the Funds, as a result of the Subadviser's  willful  misfeasance,
   bad faith, or gross  negligence,  material breach of its duties  hereunder or
   material  violation of applicable law,  including,  without  limitation,  the
   federal and state securities laws or the CEA. The Adviser shall indemnify the
   Subadviser  and its officers and  partners,  for any  liability and expenses,
   including  reasonable  attorneys' fees, which may be sustained as a result of
   the  Adviser's,  or the  Funds'  willful  misfeasance,  bad  faith,  or gross
   negligence,  material breach of its duties hereunder or material violation of
   applicable  law,  including,   without  limitation,  the  federal  and  state
   securities laws or the CEA.

   12. DURATION AND TERMINATION.

      (a) DURATION.  This Agreement  shall become  effective upon the date first
   above  written,  provided  that this  Agreement  shall not take  effect  with
   respect  to the  Funds,  unless it has  first  been  approved  by a vote of a
   majority  of those  directors  of SBL  Fund  and  Security  Equity  Fund,  as
   applicable,  who are not parties to this  Agreement or interested  persons of
   any such party,  cast in person at a meeting called for the purpose of voting
   on such approval. This Agreement shall continue in effect for a period of two
   years from the date hereof,  subject  thereafter to being  continued in force
   and  effect  from year to year  with  respect  to each  Fund if  specifically
   approved  each year by the Board of  Directors  of the  applicable  Fund.  In
   addition to the  foregoing,  each renewal of this  Agreement  with respect to
   each Fund must be approved by the vote of a majority of the applicable Fund's
   directors who are not parties to this Agreement or interested  persons of any
   such party,  cast in person at a meeting  called for the purpose of voting on
   such approval. Prior to voting on the renewal of this Agreement, the Board of
   Directors of the applicable Fund may request and evaluate, and the Subadviser
   shall furnish,  such information as reasonably may be necessary to enable the
   Fund's Board of Directors to evaluate the terms of this Agreement.

      (b)  TERMINATION.  Notwithstanding  whatever may be provided herein to the
   contrary,  this Agreement may be terminated at any time,  without  payment of
   any penalty:

          (i) By vote of a majority of the Board of Directors of the  applicable
      Fund, or by vote of a majority of the outstanding voting securities of the
      applicable  Fund, or by the Adviser,  in each case,  upon sixty (60) days'
      written notice to the Subadviser;

          (ii) By the Adviser  upon  material  breach by the  Subadviser  of any
      representation or warranty contained in Section 6 hereof,  which shall not
      have been cured  within  twenty (20) days of the  Subadviser's  receipt of
      written notice of such breach;

          (iii) By the Adviser immediately upon written notice to the Subadviser
      if the Subadviser  becomes unable to discharge its duties and  obligations
      under this Agreement; or

          (iv) By the  Subadviser  upon sixty (60) days'  written  notice to the
      Adviser and the applicable Fund.

          This  Agreement  shall not be assigned (as such term is defined in the
   Investment  Company  Act)  without the prior  written  consent of the parties
   hereto.  This Agreement  shall  terminate  automatically  in the event of its
   assignment  without  such  consent or upon the  termination  of the  Advisory
   Agreement.

   13. DUTIES OF THE ADVISER.  The Adviser shall continue to have responsibility
for all services to be provided to the Funds pursuant to the Advisory  Agreement
and shall oversee and review the  Subadviser's  performance  of its duties under
this Agreement.

   14. AMENDMENT.  This Agreement may be amended in writing by mutual consent of
the parties;  provided that the terms of each such  amendment  with respect to a
Fund shall be approved by the Board of Directors of the applicable  Fund or by a
vote of a majority of the outstanding voting securities of the applicable Fund.

   15.  NOTICE.  Any notice  that is required to be given by the parties to each
other  under the terms of this  Agreement  shall be in  writing,  delivered,  or
mailed   postpaid  to  the  other  party,   or  transmitted  by  facsimile  with
acknowledgment  of  receipt,  to the  parties  at  the  following  addresses  or
facsimile  numbers,  which may from time to time be  changed  by the  parties by
notice to the other party:

      (a) If to the Subadviser:

          Mainstream Investment Advisers, LLC
          101 W. Spring Street
          Fourth Floor
          New Albany, IN 47150
          Attention: Diane J. Hulls, Director
          Facsimile: (812) 981-7069

      (b) If to the Adviser:

          Security Management Company, LLC
          One Security Benefit Place
          Topeka, Kansas 66636-0001
          Attention: James R. Schmank, President
          Facsimile: (785) 438-3080

      (c) If to SBL Fund:

          SBL Fund
          One Security Benefit Place
          Topeka, Kansas 66636-0001
          Attention:  Amy J. Lee, Secretary
          Facsimile:  (785) 438-3080

      (d) If to Security Equity Fund:

          Security Equity Fund
          One Security Benefit Place
          Topeka, Kansas 66636-0001
          Attention:  Amy J. Lee, Secretary
          Facsimile:  (785) 438-3080

   16.  GOVERNING LAW;  JURISDICTION.  This  Agreement  shall be governed by and
construed in accordance with the internal laws of the State of Kansas.

   17. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
all of which shall together constitute one and the same instrument.

   18.  CAPTIONS.  The captions herein are included for convenience of reference
only and shall be ignored in the construction or interpretation hereof.

   19.  SEVERABILITY.  If any provision of this Agreement  shall be held or made
invalid by a court  decision or  applicable  law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.

   20. DEFINITIONS.  As used herein, "business day" means any customary business
day in the United  States on which the New York Stock  Exchange is open. As used
herein,   "investment   company,"   "affiliated  person,"  "interested  person,"
"assignment,"  "broker," and "dealer"  shall all have such meaning as such terms
have in the  Investment  Company Act. The term  "investment  adviser" shall have
such meaning as such term has in the Investment  Advisers Act and the Investment
Company  Act,  and in the  event  of a  conflict  between  such  Acts,  the most
expansive  definition  shall  control.  In  addition,  where  the  effect  of  a
requirement  of  the  Investment  Advisers  Act or the  Investment  Company  Act
reflected in any provision of this Agreement is relaxed by a rule, regulation or
order of the  Commission,  whether  of  special  or  general  application,  such
provision shall be deemed to incorporate the effect of such rule,  regulation or
order.

   IN WITNESS  WHEREOF,  the parties  hereto have executed this Agreement on the
day and year first written above.

MAINSTREAM INVESTMENT ADVISERS, LLC

By:
        --------------------------------
Name:
Title:


Attest:
        --------------------------------
Name:
Title:


SECURITY MANAGEMENT COMPANY, LLC

By:
        --------------------------------
Name:   James R. Schmank
Title:  President


Attest:
        --------------------------------
Name:   Amy J. Lee
Title:  Secretary

                                   SCHEDULE A

                             INVESTMENT ADVISORY FEE


   1. BASE FEE. The Adviser shall pay the Subadviser at the end of each calendar
month,  an advisory fee (the "Base Fee") equal to 2.50%,  on an annual basis, of
that portion of each Fund's net assets that Adviser has  allocated to Subadviser
for management ("Subadviser Assets"). The Base Fee shall be determined as of the
last  day of each  calendar  month  based  upon  the  average  of the  value  of
Subadviser Assets as of the close of business on the first business day, and the
close of  business on the last  business  day, of each  calendar  month.  If the
Subadviser  shall serve for less than the whole of any calendar month,  the Base
Fee shall be  calculated  on a pro rata  basis for the  portion of the month for
which it has served as Subadviser.  The value of the Subadviser  Assets shall be
determined by  valuations  made in accordance  with each Fund's  procedures  for
calculating its net assets as described in each Fund's current prospectus and/or
Statement of Additional  Information.  During the first 12 months of operations,
the  management  fee  will be  charged  at the Base  Fee of  2.50%  without  any
adjustment as discussed in Section 2 below.

   2. BASE FEE ADJUSTMENT.  Beginning in the 13th month of operations,  the Base
Fee of 2.50% will be adjusted  upward or downward on a monthly  basis based upon
the performance of the Subadviser  Assets relative to the performance of the S&P
500 Index (the "Index").  The maximum or minimum  adjustment is 1.50%  annually.
Therefore,  the maximum annual fee payable to the  Subadviser  shall be 4.00% of
Subadviser  Assets,  and the  minimum  annual  fee shall be 1.00% of  Subadviser
Assets. The pro rata adjustment upward or downward will be determined based upon
the  performance  of the Subadviser  Assets in excess of, or below,  that of the
Index.  The  amount of any upward  adjustment  in the Base Fee shall be equal to
1.50%  multiplied by the ratio of the number of  percentage  points by which the
performance  of the Subadviser  Assets  exceeds the  performance of the Index as
compared  to 30  percentage  points.  For  example,  if the  performance  of the
Subadviser  Assets was 6.6% above that of the S&P 500 Index,  the ratio would be
6.6 to 30, or 22%, times 1.50%, for an upward adjustment of 0.33%. The amount of
any downward adjustment in the Base Fee will be equal to 1.50% multiplied by the
ratio of the  number  of  percentage  points  by which  the  performance  of the
Subadviser  Assets is less than the  performance  of the Index as compared to 30
percentage points. For example,  if the performance of the Subadviser Assets was
10.0%  below that of the S&P 500 Index,  the ratio would be 10 to 30, or 33.33%,
times 1.50%, for a downward adjustment of 0.50%.

   In determining the Base Fee adjustment,  if any, applicable during any month,
the Adviser will compare the investment performance of the Subadviser Assets for
the  twelve-month  period  ending  on  the  last  day of the  prior  month  (the
"Performance  Period")  to  the  investment  record  of  the  Index  during  the
Performance Period. The investment  performance of the Subadviser Assets will be
determined for each month in the Performance Period by subtracting (i) the value
of the  Subadviser  Assets as of the first  business day of the  calendar  month
(including any amounts  allocated to the Subadviser Assets as of that date) from
(ii) the  value of the  Subadviser  Assets  as of the last  business  day of the
calendar  month,  expressed as a percentage of (iii) the value of the Subadviser
Assets as of the first business day of the calendar month (including any amounts
allocated to the Subadviser Assets as of that date). The investment  performance
for the  Performance  Period shall be the  annualized  product of the investment
performance for each month in the Performance Period. The investment performance
of the Index will be determined  by adding  together (i) the change in the level
of the  Index  during  the  Performance  Period,  and (ii) the  value,  computed
consistently  with the Index,  of cash  distributions  made by  companies  whose
securities  comprise the Index accumulated to the end of the Performance Period,
and will be  expressed  as a  percentage  of the Index at the  beginning  of the
Performance Period.

   After it determines any Base Fee  adjustment,  the Adviser will determine the
dollar amount of additional  fees or fee  reductions to be accrued each month by
multiplying the Base Fee adjustment by the average  Subadviser Assets during the
Performance  Period  and  dividing  that  number by the  number of months in the
Performance Period. The average Subadviser Assets will be the average of (i) the
value of the  Subadviser  Assets as of the first  business day of each  calendar
month  (including  any amounts  allocated  to the  Subadviser  Assets as of that
date),  and (ii) the value of the Subadviser  Assets as of the last business day
of each calendar  month (not  including  any  rebalancing),  in the  Performance
Period.  The Base Fee, as  adjusted,  is accrued  and paid  monthly and shall be
prorated in any month for which this  Agreement  is not in effect for the entire
month.

   3.  VALUATION.  For  purposes  of  calculating  the  compensation  to be paid
hereunder,  the value of the  Subadviser  Assets  shall be  computed in the same
manner at the end of each  business day as the value of the Funds' net assets is
computed in  connection  with the  determination  of the net asset value of Fund
shares  as  described  in  the  then  current  registration  statement  for  the
applicable Fund.  Adviser shall provide Subadviser within three business days of
each calendar month end such information as Adviser used to value the Subadviser
Assets as of the first and last business day of that calendar month. The parties
agree to review the valuation  process on or before August 15, 2003 to determine
whether  there is any  material  difference  in the  valuation of the Fund's net
assets as  determined by Adviser from that  determined  by Banc of America,  the
Funds' custodian. In the event that there is a material difference,  the parties
agree to promptly  renegotiate the basis for valuation of the Subadviser  Assets
for purposes of calculating the compensation to be paid hereunder.

   4. PAYMENT OF FEES. All fees due Subadviser  shall be remitted by the Adviser
within thirty (30) days after the applicable calendar month end and/or Valuation
Period.

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