N-CSRS 1 tm-mainpart.htm TM -- MAIN PART
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 

FORM N-CSR
 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
 

Investment Company Act file number 811-9789

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

Waddell & Reed Advisors Tax-Managed Equity Fund, Inc.

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

(Exact name of registrant as specified in charter)
 
 
 

6300 Lamar Avenue, Overland Park, Kansas 66202

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

(Address of principal executive offices) (Zip code)
 
 
 

Kristen A. Richards

6300 Lamar Avenue

Overland Park, Kansas 66202

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

(Name and address of agent for service)
 

Registrant's telephone number, including area code: 913-236-2000

 

Date of fiscal year end: June 30

 

Date of reporting period: December 31, 2006







ITEM 1. REPORTS TO STOCKHOLDERS.



Semiannual Report
December 31, 2006



Waddell & Reed Advisors Tax-Managed Equity Fund



         CONTENTS

3
 
President's Letter
5
 
Illustration of Fund Expenses
7
 
Portfolio Highlights
8
 
Investments
11
 
Statement of Assets and Liabilities
12
 
Statement of Operations
13
 
Statement of Changes in Net Assets
14
 
Financial Highlights
18
 
Notes to Financial Statements
25
 
Report of Independent Registered Public Accounting Firm
26
 
Renewal of Investment Management Agreement
29
 
Proxy Voting Information
30
 
Quarterly Portfolio Schedule Information


This report is submitted for the general information of the shareholders of Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. It is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. prospectus and current Fund performance information.




President's Letter
      December 31, 2006


DEAR SHAREHOLDER:

More than half of the first decade of the 21st century is now history. We feel times are better than most realize, and we are pleased to report that stock markets around the globe generally provided excellent returns since June 30. Bond markets also provided solid returns. Concerns regarding inflation, energy prices, housing weakness and negative geopolitical developments all failed to prove problematic.

Enclosed is our report on your Fund's operations for the six months ended December 31, 2006. Over the period, the S&P 500 Index advanced 11.7 percent, led by an 18.4 percent rise in telecommunications stocks. Energy stocks were volatile as the price of oil fell sharply this past summer, but still finished the six-month period with a gain of 6.7 percent.


Good news overpowered investor anxiety

There was much fear and anxiety in global stock and bond markets in early summer as gasoline prices spiked. Doubts persisted about the strength of U.S. corporate earnings and the Federal Reserve Board's new chairman's policy intentions. However, by early autumn, negative investor sentiment dissipated and energy prices receded. Investors benefited from a significant amount of good news, including:

  • the Federal Reserve stopped raising short-term interest rates
  • oil prices dropped more than $20 a barrel
  • corporate profits growth remained strong
  • global merger and acquisition activity became brisk and
  • geopolitical issues lessened somewhat.

Over the longer term, we think the cost of energy is on an upward path. We feel there's just too much long-term global demand relative to known reserves, especially in rapidly growing countries such as China and India. Also, our appetite for hydrocarbons in the U.S. remains voracious. Global weather patterns were calmer in 2006, but we feel there are still long-term risks to oil and gas supplies from the wrath of both nature and political extremism.

Beginning with this report period, we have added a new Economic Snapshot chart that highlights some selected U.S. economic indicators. As you can see, there's much to be thankful for, as well as a strong case for optimism about the future. Compared to six months earlier, a smaller percentage of people in the U.S. are unemployed. Oil prices and overall inflation are lower. The cost of financing a home is lower and overall economic growth is healthy.

Economic Snapshot
 
 
12/31/06
6/30/06
U.S. unemployment rate
4.50
%
4.60
%
Inflation (U.S. Consumer Price Index)
2.50
%
4.30
%
U.S. GDP
3.50
%
3.50
%
30-year fixed mortgage rate
6.16
%
6.78
%
Oil price per barrel
$61.05
 
$73.93
 

Sources: Bloomberg, U.S. Department of Labor

The U.S. Consumer Price Index is the government's measure of the change in the retail cost of goods and services. Gross domestic product measures year-over-year changes in the output of goods and services. Mortgage rates shown reflect the average rate on a conventional loan with a 60-day lender commitment. Oil prices reflect the market price of West Texas intermediate grade crude.

We believe the potential for continued global economic growth is just as good. Since 2002, profits for companies in the S&P 500 are up significantly more than are S&P 500 share prices. Stock valuations generally appear reasonable in our opinion, especially given low current U.S. interest rate levels. We see a solid path ahead for diversified investors in 2007. As always, we believe that maintaining a well-rounded portfolio remains an important component of securing your long-term financial future.


Our seven decades of expertise

In 2007, we mark our organization's 70th anniversary. Born during a U.S. recession, we launched our first Waddell & Reed Advisors fund three years later. With nearly 900 employees at our expanding Kansas City area home office, and a network of financial advisors nationwide, we have deep resources focused on helping you achieve your long-term financial goals. As investment managers, we are committed to offering you a financial planning philosophy that emphasizes participation in positive markets as well as an effort to manage against risk. In an effort to accomplish this, we have a research culture focused on fundamental excellence.

Thank you for your continued confidence in us as long-term stewards of your investments.

Respectfully,

Henry J. Herrmann, CFA
President

The opinions expressed in this letter are those of the President of the Fund, and are current only through the end of the period of the report, as stated on the cover. The President's views are subject to change at any time, based on market and other conditions, and no forecasts can be guaranteed.




Illustration of Fund Expenses

TAX-MANAGED EQUITY FUND


As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, redemption fees and exchange fees; and (2) ongoing costs, including management fees, distribution and service fees, and other Fund expenses. The following table is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six-month period ended December 31, 2006.

Actual Expenses

The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $7,500 account value divided by $1,000 = 7.5), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. There may be additional fees charged to holders of certain accounts that are not included in the expenses shown in the table. These fees apply to Individual Retirement Accounts (IRAs), IRA Rollovers, Roth IRAs, Conversion Roth IRAs, Simplified Employee Pension (SEP), Simple IRAs, Tax-Sheltered Accounts (TSAs), Keogh Plans, Owner Only 401(k) (Exclusive K) Plans and Final Pay Plans. As of the close of the six months covered by the table, a customer is charged an annual fee of $15 within each plan type. This fee is waived for IRA Rollovers and Conversion Roth IRAs if the customer owns another type of IRA. Coverdell Education Savings Account plans are charged an annual fee of $10 per customer. You should consider the additional fees that were charged to your Fund account over the six-month period when you estimate the total ongoing expenses paid over the period and the impact of these fees on your ending account value as such additional expenses are not reflected in the information provided in the expense table. Additional fees have the effect of reducing investment returns.

Hypothetical Example for Comparison Purposes

The second line for each share class of the following table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees or exchange fees. Therefore, the second line of each share class in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

Fund Expenses
For the Six Months Ended
      December 31, 2006
Beginning
Account
Value
6-30-06

Ending
Account
Value
12-31-06
Annualized
Expense Ratio
Based on the
Six-Month
Period
Expenses
Paid
During
Period*
Based on Actual Fund Return(1)
  
      Class A
$
1,000
 
$
1,093.40
   
1.33
%
$
7.01
 
      Class B  
1,000
   
1,088.10
   
2.24
   
11.80
 
      Class C  
1,000
   
1,086.10
   
2.36
   
12.41
 
      Class Y  
1,000
   
1,093.40
   
1.20
   
6.28
 
Based on 5% Return(2)
                       
      Class A
$
1,000
 
$
1,018.51
   
1.33
%
$
6.76
 
      Class B  
1,000
   
1,013.92
   
2.24
   
11.38
 
      Class C  
1,000
   
1,013.31
   
2.36
   
11.98
 
      Class Y  
1,000
   
1,019.17
   
1.20
   
6.06
 

*Fund expenses for each share class are equal to the Fund's annualized expense ratio for each share class (provided in the table), multiplied by the average account value over the period, multiplied by 184 days in the six-month period ended December 31, 2006, and divided by 365.

(1)This section uses the Fund's actual total return and actual Fund expenses. It is a guide to the actual expenses paid by the Fund in the period. The "Ending Account Value" shown is computed using the Fund's actual return and the "Expenses Paid During Period" column shows the dollar amount that would have been paid by an investor who started with $1,000 in the Fund. A shareholder may use the information here, together with the dollar amount invested, to estimate the expenses that were paid over the period. For every thousand dollars a shareholder has invested, the expenses are listed in the fourth column.

(2)This section uses a hypothetical 5% annual return and actual Fund expenses. It helps to compare the Fund's ongoing costs with other mutual funds. A shareholder can compare the Fund's ongoing costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

The above illustration is based on ongoing costs only and does not include any transactional costs, such as sales loads, redemption fees or exchange fees.


SHAREHOLDER SUMMARY OF TAX-MANAGED EQUITY FUND


Portfolio Highlights

On December 31, 2006, Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. had net assets totaling $77,650,475 invested in a diversified portfolio of:

88.87%
  Domestic Common Stocks
9.09%
  Foreign Common Stocks
2.04%
  Cash and Cash Equivalents


As a shareholder of the Fund, for every $100 you had invested on December 31, 2006, your Fund owned:
Technology Stocks
 
$
34.40
 
Health Care Stocks
 
$
17.66
 
Financial Services Stocks
 
$
8.88
Business Equipment and Services Stocks
 
$
6.40
 
Consumer Nondurables Stocks
 
$
5.68
 
Miscellaneous Stocks
 
$
4.68
 
Consumer Durables Stocks
 
$
4.64
 
Energy Stocks
 
$
4.37
 
Capital Goods Stocks
 
$
3.90
 
Multi-Industry Stocks
 
$
3.72
 
Raw Materials Stocks
 
$
3.63
 
Cash and Cash Equivalents
 
$
2.04
 








The Investments of Tax-Managed Equity Fund
 
      December 31, 2006
               
COMMON STOCKS  
 


Shares
   
Value
 
                 
Aircraft - 5.09%                
Boeing Company (The)
   
17,600
   
$
1,563,584
 
Lockheed Martin Corporation
   
17,500
     
1,611,225
 
Raytheon Company
   
14,700
     
776,160
 
           

3,950,969
 
Beverages - 1.55%                
PepsiCo, Inc.  
   
19,200
   

1,200,960
 
                 
Business Equipment and Services - 1.24%                
CheckFree Corporation*
   
24,000
   

963,480
 
                 
Capital Equipment - 2.67%                
Deere & Company
   
21,800
   

2,072,526
 
                 
Chemicals - Petroleum and Inorganic - 3.63%                
Monsanto Company
   
53,600
   

2,815,608
 
                 
Communications Equipment - 10.67%                
Cisco Systems, Inc.*
   
98,900
     
2,699,476
 
Juniper Networks, Inc.*
   
69,200
     
1,309,956
 
Marvell Technology Group Ltd.*
 
114,600
     
2,197,455
 
QUALCOMM Incorporated
   
55,100
     
2,081,402
 
           

8,288,289
 
Computers - Micro - 2.73%                
Apple Computer, Inc.*
   
25,000
   

2,119,750
 
                 
Computers - Peripherals - 11.71%                
Adobe Systems Incorporated*
   
64,900
     
2,666,417
 
Electronic Arts Inc.*
   
41,600
     
2,094,352
 
Microsoft Corporation
   
65,700
     
1,961,474
 
SAP Aktiengesellschaft, ADR
   
21,700
     
1,152,270
 
Symantec Corporation*
   
58,500
     
1,217,677
 
           

9,092,190
 
Consumer Electronics - 4.64%                
Harman International Industries, Incorporated
   
13,400
     
1,338,794
 
Research In Motion Limited*
   
17,700
     
2,263,034
 
           

3,601,828
 
Defense - 2.43%                
General Dynamics Corporation
   
25,400
   

1,888,490
 
                 
Electrical Equipment - 1.23%                
Emerson Electric Co.  
   
21,600
   

951,912
 
                 
Electronic Components - 1.77%                
Broadcom Corporation, Class A*
   
42,500
   

1,372,750
 
                 
Health Care - Drugs - 7.39%                
Abbott Laboratories
   
20,500
     
998,555
 
Genentech, Inc.*
   
29,100
     
2,360,883
 
Gilead Sciences, Inc.*
   
24,700
     
1,602,906
 
Schering-Plough Corporation
   
33,000
     
780,120
 
           

5,742,464
 
Health Care - General - 4.81%                
DENTSPLY International Inc.  
   
40,600
     
1,212,519
 
Da Vita Inc.*
   
26,400
     
1,501,632
 
Zimmer Holdings, Inc.*
   
13,000
     
1,018,940
 
           

3,733,091
 
Hospital Supply and Management - 5.46%                
Medtronic, Inc.  
   
34,800
     
1,862,148
 
Stryker Corporation
   
19,200
     
1,058,112
 
UnitedHealth Group Incorporated
   
24,500
     
1,316,385
 
           

4,236,645
 
Hotels and Gaming - 1.59%                
International Game Technology
   
26,800
   

1,238,160
 
                 
Household - General Products - 4.13%                
Colgate-Palmolive Company
   
26,400
     
1,722,336
 
Procter & Gamble Company (The)
   
23,100
     
1,484,637
 
           

3,206,973
 
Insurance - Life - 1.97%                
Aflac Incorporated
   
33,300
   

1,531,800
 
                 
Multiple Industry - 3.72%                
General Electric Company
   
47,000
     
1,748,870
 
Las Vegas Sands, Inc.*
   
12,700
     
1,136,396
 
           

2,885,266
 
Petroleum - Services - 4.37%                
Schlumberger Limited
   
30,300
     
1,913,748
 
Transocean Inc.*
   
18,300
     
1,480,287
 
           

3,394,035
 
Restaurants - 0.77%                
YUM! Brands, Inc.  
   
10,200
   

599,760
 
                 
Retail - Food Stores - 1.00%                
Whole Foods Market, Inc.  
   
16,600
   

778,540
 
                 
Security and Commodity Brokers - 6.91%                
Chicago Mercantile Exchange Holdings Inc.  
   
4,600
   
2,344,850
 
Goldman Sachs Group, Inc. (The)
   
7,900
     
1,574,865
 
UBS AG
   
23,900
     
1,441,887
 
           

5,361,602
 
Timesharing and Software - 5.16%                
Google Inc., Class A*
   
6,100
     
2,807,433
 
Paychex, Inc.  
   
30,400
     
1,201,256
 
           

4,008,689
 
Trucking and Shipping - 1.32%                
Expeditors International of Washington, Inc.  
   
25,400
   

1,028,192
 
                 
TOTAL COMMON STOCKS - 97.96%          
$
76,063,969
  
(Cost: $63,879,933)
               
                 
SHORT-TERM SECURITIES - 2.27%  
Principal
Amount in
Thousands
       
                 
Finance Companies                
Caterpillar Financial Services Corp.,
               
      5.25%, 1-3-07  
$
1,764
   
$
1,763,486
 
(Cost: $1,763,486)
               
                 
TOTAL INVESTMENT SECURITIES - 100.23%          
$
77,827,455
  
(Cost: $65,643,419)
               
                 
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.23%)      
(176,980
)
                 
NET ASSETS - 100.00%          
$
77,650,475
  
                 

Notes to Schedule of Investments

Certain acronyms may be used within the body of the Fund's holdings. The definitions of these acronyms are as follows: ADR - American Depositary Receipts; CMO - Collateralized Mortgage Obligation; GDR - Global Depositary Receipts and REMIC - Real Estate Mortgage Investment Conduit.

*No dividends were paid during the preceding 12 months.

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

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









Statement of Assets and Liabilities
      TAX-MANAGED EQUITY FUND
      December 31, 2006
      (In Thousands, Except for Per Share Amounts)
ASSETS  
      Investment securities - at value (cost - $65,643) (Notes 1 and 3)  
$
77,827
 
      Cash    
1
 
      Receivables:        
           Dividends and interest    
52
 
           Fund shares sold    
43
 
      Prepaid and other assets    
17
 
   
 
           Total assets    
77,940
 
   
 
LIABILITIES        
      Payable to Fund shareholders    
238
 
      Accrued service fee (Note 2)    
15
 
      Accrued shareholder servicing (Note 2)    
15
 
      Accrued accounting services fee (Note 2)    
4
 
      Accrued management fee (Note 2)    
4
 
      Accrued distribution fee (Note 2)    
1
 
      Other    
13
 
   
 
           Total liabilities    
290
 
   
 
                Total net assets  
$
77,650
 
   
 
NET ASSETS        
      $0.001 par value capital stock:        
           Capital stock  
$
8
 
           Additional paid-in capital    
74,872
 
      Accumulated undistributed income (loss):        
           Accumulated undistributed net investment loss    
(153
)
           Accumulated undistributed net realized loss on
                investment transactions		    
(9,261
)
           Net unrealized appreciation in value of investments    
12,184
 
   
 
                Net assets applicable to outstanding units of capital  
$
77,650
 
   
 
Net asset value per share (net assets divided by shares outstanding):
       
      Class A  
$10.19
 
      Class B  
$ 9.63
 
      Class C  
$ 9.59
 
      Class Y  
$10.19
 
Capital shares outstanding:
       
      Class A    
6,944
 
      Class B    
384
 
      Class C    
334
 
      Class Y    
–
*
Capital shares authorized
1,000,000
 

*Not shown due to rounding.

See Notes to Financial Statements.




Statement of Operations
      TAX-MANAGED EQUITY FUND
      For the Six Months Ended December 31, 2006
      (In Thousands)
INVESTMENT LOSS        
      Income (Note 1B):        
           Dividends (net of foreign withholding taxes of $ -*)  
$
264
 
           Interest and amortization    
105
 
   
 
                Total income    
369
 
   
 
      Expenses (Note 2):        
           Investment management fee    
238
 
           Service fee:        
                Class A    
82
 
                Class B    
5
 
                Class C    
4
 
           Shareholder servicing:        
                Class A    
53
 
                Class B    
6
 
                Class C    
6
 
                Class Y    
–
*
           Distribution fee:        
                Class A    
1
 
                Class B    
14
 
                Class C    
11
 
           Accounting services fee    
23
 
           Audit fees    
15
 
           Legal fees    
3
 
           Custodian fees    
2
 
           Other    
56
 
   
 
                Total expenses    
519
 
   
 
                     Net investment loss    
(150
)
   
 
REALIZED AND UNREALIZED GAIN        
ON INVESTMENTS (NOTES 1 AND 3)        
      Realized net gain on securities    
1,050
 
      Realized net gain on written options    
68
 
   
 
           Realized net gain on investments    
1,118
 
           Unrealized appreciation in value of investments during the period    
5,410
 
   
 
                Net gain on investments    
6,528
 
   
 
                     Net increase in net assets resulting from operations  
$
6,378
 
   
 

*Not shown due to rounding.

See Notes to Financial Statements.




Statement of Changes in Net Assets
      TAX-MANAGED EQUITY FUND
      (In Thousands)

 
For the six
months ended
December 31,
 
For the fiscal
year ended
June 30,
 
2006
 
2006
INCREASE IN NET ASSETS                
      Operations:                
           Net investment loss  
$
(150
)
 
$
(388
)
           Realized net gain on investments    
1,118
     
11,067
 
           Unrealized appreciation (depreciation)    
5,410
     
(6,338
)
   
 
                Net increase in net assets resulting
                      from operations		    
6,378
     
4,341
 
   
 
      Distributions to shareholders from (Note 1E): (1)                
           Net investment income:                
                Class A    
(–
)
   
(–
)
                Class B    
(–
)
   
(–
)
                Class C    
(–
)
   
(–
)
                Class Y    
(–
)
   
(–
)
           Realized gains on investment transactions:                
                Class A    
(–
)
   
(–
)
                Class B    
(–
)
   
(–
)
                Class C    
(–
)
   
(–
)
                Class Y    
(–
)
   
(–
)
   
 
     
(–
)
   
(–
)
   
 
      Capital share transactions (Note 5)    
(730
)
   
469
 
   
 
           Total increase    
5,648
     
4,810
 
NET ASSETS                
      Beginning of period    
72,002
     
67,192
 
   
 
      End of period  
$
77,650
   
$
72,002
 
   
 
           Undistributed net investment loss  
$
(153
)
 
$
(3
)
   
 

(1)See "Financial Highlights" on pages 14 - 17.

See Notes to Financial Statements.




Financial Highlights
      TAX-MANAGED EQUITY FUND
      Class A Shares
      For a Share of Capital Stock Outstanding Throughout Each Period:
 
For the
six months
ended
  
For the fiscal year ended June 30,
 
 
12-31-06
 
2006
  
2005
  
2004
  
2003
  
2002
  
 
Net asset value,
      beginning of period
  
$
9.32
   
$
8.74
 
$
8.27
 
$
6.94
 
$
6.60
 
$
8.24
 
   
 
Income (loss) from
      investment operations:
                                        
      Net investment loss    
(0.02
)
 
(0.04
)
(0.01
)
(0.07
)
(0.04
)
(0.05
)
      Net realized and unrealized
            gain (loss) on investments		    
0.89
     
0.62
   
0.49
   
1.40
   
0.38
 
(1.58
)
   
 
Total from investment operations
   
0.87
     
0.58
   
0.48
   
1.33
   
0.34
 
(1.63
)
   
 
Less distributions from:
                                       
      Net investment income  
(0.00
)
 
(0.00
)
(0.01
)
(0.00
)
(0.00
)
(0.01
)
      Capital gains  
(0.00
)
 
(0.00
)
(0.00
)
(0.00
)
(0.00
)
(0.00
)
   
 
Total distributions
 
(0.00
)
 
(0.00
)
(0.01
)
(0.00
)
(0.00
)
(0.01
)
   
 
Net asset value, end of period
  
$
10.19
   
$
9.32
 
$
8.74
 
$
8.27
 
$
6.94
 
$
6.60
 
   
 
Total return (1)
   
9.34
%
   
6.64
%
 
5.78
%
19.16
%
 
5.15
%
-19.83
%
Net assets, end of period
      (in millions)
    
$71
     
$65
   
$60
   
$54
   
$34
   
$35
 
Ratio of expenses
      to average net assets
    
1.33
%(2)
 
1.32
%
 
1.34
%
 
1.40
%
 
1.49
%
 
1.39
%
Ratio of net investment loss
      to average net assets
    
-0.32
%(2)
-0.44
%
-0.13
%
-0.96
%
-0.70
%
-0.70
%
Portfolio turnover rate
   
31
%
   
100
%
 
66
%
 
92
%
 
105
%
 
113
%

(1)Total return calculated without taking into account the sales load deducted on an initial purchase.
(2)Annualized.

See Notes to Financial Statements.




Financial Highlights
      TAX-MANAGED EQUITY FUND
      Class B Shares
      For a Share of Capital Stock Outstanding Throughout Each Period:
 
For the
six months
ended
  
For the fiscal year ended June 30,
 
 
12-31-06
 
2006
  
2005
  
2004
  
2003
  
2002
  
 
Net asset value,
      beginning of period
  
$
8.85
   
$
8.37
 
$
7.98
 
$
6.77
 
$
6.49
 
$
8.17
 
   
 
Income (loss) from
      investment operations:
                                        
      Net investment loss  
(0.06
)(1)
(0.16
)
(0.09
)
(0.13
)
(0.11
)
(0.11
)
      Net realized and unrealized
            gain (loss) on investments		    
0.84
(1)
   
0.64
   
0.48
   
1.34
   
0.39
 
(1.57
)
   
 
Total from investment operations
   
0.78
     
0.48
   
0.39
   
1.21
   
0.28
 
(1.68
)
   
 
Less distributions from:
                                       
      Net investment income  
(0.00
)
 
(0.00
)
(0.00
)
(0.00
)
(0.00
)
(0.00
)
      Capital gains  
(0.00
)
 
(0.00
)
(0.00
)
(0.00
)
(0.00
)
(0.00
)
   
 
Total distributions
 
(0.00
)
 
(0.00
)
(0.00
)
(0.00
)
(0.00
)
(0.00
)
   
 
Net asset value, end of period
  
$
9.63
   
$
8.85
 
$
8.37
 
$
7.98
 
$
6.77
 
$
6.49
 
   
 
Total return
   
8.81
%
   
5.73
%
 
4.89
%
17.87
%
 
4.31
%
-20.56
%
Net assets, end of period
      (in millions)
    
$4
     
$4
   
$4
   
$4
   
$3
   
$4
 
Ratio of expenses
      to average net assets
    
2.24
%(2)
 
2.24
%
 
2.27
%
 
2.36
%
 
2.43
%
 
2.26
%
Ratio of net investment loss
      to average net assets
  
-1.23
%(2)
-1.37
%
-1.04
%
-1.91
%
-1.64
%
-1.58
%
Portfolio turnover rate
   
31
%
   
100
%
 
66
%
 
92
%
 
105
%
 
113
%

(1)Based on average weekly shares outstanding.
(2)Annualized.

See Notes to Financial Statements.




Financial Highlights
      TAX-MANAGED EQUITY FUND
      Class C Shares
      For a Share of Capital Stock Outstanding Throughout Each Period:
 
For the
six months
ended
  
For the fiscal year ended June 30,
 
 
12-31-06
 
2006
  
2005
  
2004
  
2003
  
2002
  
 
Net asset value,
      beginning of period
  
$
8.83
   
$
8.35
 
$
7.97
 
$
6.76
 
$
6.49
 
$
8.17
 
   
 
Income (loss) from
      investment operations:
                                        
      Net investment loss  
(0.06
)(1)
(0.14
)
(0.08
)
(0.12
)
(0.08
)
(0.12
)
      Net realized and unrealized
            gain (loss) on investments		    
0.82
(1)
   
0.62
   
0.46
   
1.33
   
0.35
 
(1.56
)
   
 
Total from investment operations
   
0.76
     
0.48
   
0.38
   
1.21
   
0.27
 
(1.68
)
   
 
Less distributions from:
                                       
      Net investment income  
(0.00
)
 
(0.00
)
(0.00
)
(0.00
)
(0.00
)
(0.00
)
      Capital gains  
(0.00
)
 
(0.00
)
(0.00
)
(0.00
)
(0.00
)
(0.00
)
   
 
Total distributions
 
(0.00
)
 
(0.00
)
(0.00
)
(0.00
)
(0.00
)
(0.00
)
   
 
Net asset value, end of period
  
$
9.59
   
$
8.83
 
$
8.35
 
$
7.97
 
$
6.76
 
$
6.49
 
   
 
Total return
   
8.61
%
   
5.75
%
 
4.77
%
17.90
%
 
4.16
%
-20.56
%
Net assets, end of period
      (in millions)
    
$3
     
$3
   
$3
   
$2
   
$2
   
$2
 
Ratio of expenses
      to average net assets
    
2.36
%(2)
 
2.28
%
 
2.30
%
 
2.35
%
 
2.49
%
 
2.31
%
Ratio of net investment loss
      to average net assets
  
-1.36
%(2)
-1.41
%
-1.09
%
-1.91
%
-1.71
%
-1.63
%
Portfolio turnover rate
   
31
%
   
100
%
 
66
%
 
92
%
 
105
%
 
113
%

(1)Based on average weekly shares outstanding.
(2)Annualized.

See Notes to Financial Statements.




Financial Highlights
      TAX-MANAGED EQUITY FUND
      Class Y Shares (1)
      For a Share of Capital Stock Outstanding Throughout Each Period:
 
For the
six months
ended
  
For the fiscal year ended June 30,
 
 
12-31-06
 
2006
  
2005
  
2004
  
2003
  
2002
  
 
Net asset value,
      beginning of period
  
$
9.32
   
$
8.76
 
$
8.28
 
$
6.95
 
$
6.60
 
$
8.24
 
   
 
Income (loss) from
      investment operations:
                                        
      Net investment income (loss)    
(0.01
)
 
(0.05
)(2)
 
0.01
 
(0.01
)
(0.02
)
(0.13
)
      Net realized and unrealized
            gain (loss) on investments		    
0.88
     
0.61
(2)
 
0.50
   
1.34
   
0.37
 
(1.49
)
   
 
Total from investment operations
   
0.87
     
0.56
   
0.51
   
1.33
   
0.35
 
(1.62
)
   
 
Less distributions from:
                                       
      Net investment income    
(0.00
)
 
(0.00
)
(0.03
)
(0.00
)
(0.00
)
(0.02
)
      Capital gains    
(0.00
)
 
(0.00
)
(0.00
)
(0.00
)
(0.00
)
(0.00
)
   
 
Total distributions
   
(0.00
)
 
(0.00
)
(0.03
)
(0.00
)
(0.00
)
(0.02
)
   
 
Net asset value, end of period
  
$
10.19
   
$
9.32
 
$
8.76
 
$
8.28
 
$
6.95
 
$
6.60
 
   
 
Total return
   
9.34
%
   
6.39
%
 
6.11
%
19.14
%
 
5.30
%
-19.71
%
Net assets, end of period
      (in thousands)
    
$1
     
$1
   
$19
   
$17
   
$6
   
$5
 
Ratio of expenses
      to average net assets
    
1.20
%(3)
 
1.30
%
 
1.14
%
 
1.24
%
 
1.40
%
 
1.21
%
Ratio of net investment income
      (loss) to average net assets
    
-0.16
%(3)
-0.60
%
 
0.09
%
-0.80
%
-0.64
%
-0.54
%
Portfolio turnover rate
   
31
%
   
100
%
 
66
%
 
92
%
 
105
%
 
113
%

(1)Class Y shares are closed to investments.
(2)Based on average weekly shares outstanding.
(3)Annualized.

See Notes to Financial Statements.










Notes to Financial Statements
      December 31, 2006

NOTE 1 - Significant Accounting Policies

Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. (the Fund) is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. Its investment objective is to seek long-term growth of capital while minimizing taxable gains and income to shareholders. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America.

      A. Security valuation - Each stock and convertible bond is valued at the latest sale price thereof on each business day of the fiscal period as reported by the principal securities exchange on which the issue is traded or, if no sale is reported for a stock, the average of the latest bid and asked prices. Bonds, other than convertible bonds, are valued using a pricing system provided by a pricing service or dealer in bonds. Convertible bonds are valued using this pricing system only on days when there is no sale reported. Stocks which are traded over-the-counter are priced using the Nasdaq Stock Market, which provides information on bid and asked prices quoted by major dealers in such stocks. Restricted securities and securities for which quotations are not readily available or are deemed not to be reliable because of significant events or circumstances identified between the closing of their principal markets and the closing of the New York Stock Exchange are valued at fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Board of Directors. Management's valuation committee makes fair value determinations for the Fund, subject to the supervision of the Board of Directors. Short-term debt securities, purchased with less than 60 days to maturity, are valued at amortized cost, which approximates market value.

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

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

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

      E. Dividends and distributions - Dividends and distributions to shareholders are recorded by the Fund on the business day following record date. Net investment income dividends and capital gains distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are due to differing treatments for items such as deferral of wash sales and post-October losses, foreign currency transactions, net operating losses and expiring capital loss carryovers.

      F. Recently issued accounting standards - In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes the minimum recognition threshold a tax position must meet in connection with accounting for uncertainties in income tax positions taken or expected to be taken by an entity, including mutual funds, in a tax return before being measured and recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Fund will adopt FIN 48 during 2007 and its potential impact on the Fund's financial statements, if any, is currently being assessed by management. In September 2006, FASB issued Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements." SFAS No. 157 defines  fair value for purposes of financial statement presentation, establishes a hierarchy for  measuring fair value in generally accepted accounting principles and expands  financial statement disclosures about fair value measurements that are relevant  to mutual funds. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.   The Fund will adopt SFAS No. 157 during  2008 and its potential impact, if any, on the Fund's financial statements is currently being assessed by management.

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

NOTE 2 - Investment Management and Payments to Affiliated Persons

Waddell & Reed Investment Management Company (WRIMCO), a wholly owned subsidiary of Waddell & Reed, Inc. (W&R), serves as the Fund's investment manager. The Fund pays a fee for investment management services. The fee is computed and paid daily based on the net asset value at the close of business. The fee is payable by the Fund at the annual rates of: 0.65% of net assets up to $1 billion, 0.60% of net assets over $1 billion and up to $2 billion, 0.55% of net assets over $2 billion and up to $3 billion, and 0.50% of net assets over $3 billion.

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

Accounting Services Fee
 
Average Net Asset Level
(in millions)
   
Annual Fee Rate
for Each Level
 
 
From
$
0
to
$
10
    
$
0
    
 
From
$
10
to
$
25
    
$
11,500
    
 
From
$
25
to
$
50
    
$
23,100
    
 
From
$
50
to
$
100
    
$
35,500
    
 
From
$
100
to
$
200
    
$
48,400
    
 
From
$
200
to
$
350
    
$
63,200
    
 
From
$
350
to
$
550
    
$
82,500
    
 
From
$
550
to
$
750
    
$
96,300
    
 
From
$
750
to
$
1,000
    
$
121,600
    
   
$
1,000 and Over
  
$
148,500
    

In addition, for each class of shares in excess of one, the Fund pays WRSCO a monthly per-class fee equal to 2.5% of the monthly accounting services base fee.

The Fund also pays monthly a fee at the annual rate of 0.01% or one basis point for the first $1 billion of net assets with no fee charged for net assets in excess of $1 billion.

Through August 31, 2006, for Class A, Class B and Class C shares, the Fund paid WRSCO a per account charge for shareholder servicing for each shareholder account which was in existence at any time during the prior month. The monthly fee was $1.5042 for each shareholder account which was in existence at any time during the prior month. Effective September 1, 2006, the Shareholder Servicing Agreement with respect to Class A, Class B and Class C shares has been revised so that the Fund pays WRSCO a monthly per account charge for shareholder servicing for each shareholder account which is non-networked and which was in existence at any time during the prior month as shown above; however, WRSCO has agreed to reduce that fee if the number of total shareholder accounts within the Complex (Waddell & Reed Advisors Funds, Waddell & Reed InvestEd Portfolios, Inc., Ivy Funds and Ivy Funds, Inc.) reaches certain levels. For certain networked accounts (that is, those shareholder accounts whose Fund shares are purchased through certain financial intermediaries) WRSCO has agreed to reduce its per account fees charged to the Fund to $0.50 per month per shareholder account. Additional fees may be paid by the Fund to those intermediaries. For Class Y shares, the Fund pays WRSCO a monthly fee equal to one-twelfth of 0.15 of 1% of the average daily net assets of Class Y of the Fund for the preceding month. The Fund also reimburses W&R and WRSCO for certain out-of-pocket costs for all classes.

As principal underwriter for the Fund's shares, W&R received gross sales commissions for Class A shares (which are not an expense of the Fund) of $59,503. A contingent deferred sales charge (CDSC) may be assessed against a shareholder's redemption amount of Class A, Class B and Class C shares and is paid to W&R. During the six-month period ended December 31, 2006, W&R received $1,202, $1,167 and $65 in CDSC for Class A, Class B and Class C shares, respectively. With respect to Class A, Class B and Class C shares, W&R paid sales commissions of $44,318 and all expenses in connection with the sale of Fund shares, except for registration fees and related expenses.

Under a Distribution and Service Plan for Class A shares adopted by the Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund may pay a distribution and/or service fee to W&R in an amount not to exceed 0.25% of the Fund's Class A average annual net assets. The fee is to be paid to reimburse W&R for amounts it expends in connection with the distribution of the Class A shares and/or provision of personal services to Fund shareholders and/ or maintenance of shareholder accounts.

Under the Distribution and Service Plan adopted by the Fund for Class B and Class C shares, respectively, the Fund may pay W&R a service fee of up to 0.25%, on an annual basis, of the average daily net assets of the class to compensate W&R for providing services to shareholders of that class and/or maintaining shareholder accounts for that class and a distribution fee of up to 0.75%, on an annual basis, of the average daily net assets of the class to compensate W&R for distributing the shares of that class.

The Fund paid Directors' regular compensation of $1,364, which is included in other expenses.

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

NOTE 3 - Investment Securities Transactions

Purchases of investment securities, other than U.S. government obligations and short-term securities, aggregated $25,333,852, while proceeds from maturities and sales aggregated $21,689,773. Purchases of short-term securities aggregated $301,170,810, while proceeds from maturities and sales aggregated $305,884,500. No U.S. government obligations were purchased or sold during the six-month period ended December 31, 2006.

For Federal income tax purposes, cost of investments owned at December 31, 2006 was $65,714,093, resulting in net unrealized appreciation of $12,113,362, of which $12,854,548 related to appreciated securities and $741,186 related to depreciated securities.

NOTE 4 - Federal Income Tax Matters

For Federal income tax purposes, the Fund's distributed and undistributed earnings and profit for the fiscal year ended June 30, 2006 and the related capital loss carryover and post-October activity were as follows:

Net ordinary income
 
$
–
Distributed ordinary income
   
–
Undistributed ordinary income
   
–
       
Realized long-term capital gains
   
–
Distributed long-term capital gains
   
–
Undistributed long-term capital gains
   
–
       
Capital loss carryover
   
–
       
Post-October losses deferred
   
–

Internal Revenue Code regulations permit the Fund to defer into its next fiscal year net capital losses or net long-term capital losses incurred between each November 1 and the end of its fiscal year (post-October losses).

Capital loss carryovers are available to offset future realized capital gain net income for Federal income tax purposes. The following shows the totals by year in which the capital loss carryovers will expire if not utilized.

June 30, 2010
 
$
2,104,696
June 30, 2011
   
8,151,013
June 30, 2012
   
77,635
Total carryover
 
$
10,333,344



NOTE 5 - Multiclass Operations

The Fund currently offers three classes of shares, Class A, Class B and Class C, each of which have equal rights as to assets and voting privileges. Class Y shares, which are not subject to a sales charge on purchases, are not subject to a Rule 12b-1 Distribution and Service Plan and are subject to a separate shareholder servicing fee structure, were closed to new and additional investments. A comprehensive discussion of the terms under which shares of each class (except Class Y) are offered is contained in the Prospectus and the Statement of Additional Information for the Fund.

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

Transactions in capital stock are summarized below. Amounts are in thousands.

 
For the six
months ended
December 31,
 
For the fiscal
year ended
June 30,
 
2006
 
2006
Shares issued from sale of shares:
                 
      Class A  
    
724
       
1,219
 
      Class B  
    
6
       
20
 
      Class C  
    
59
       
75
 
      Class Y  
    
–
       
–
*
Shares issued from reinvestment of dividend
      and/or capital gains distribution:
                  
      Class A  
    
–
       
–
 
      Class B  
    
–
       
–
 
      Class C  
    
–
       
–
 
      Class Y  
    
–
       
–
 
Shares redeemed:
                 
      Class A  
    
(789
)
     
(1,109
)
      Class B  
    
(60
)
     
(76
)
      Class C  
    
(39
)
     
(88
)
      Class Y  
    
(–
)      
(2
)
Increase (decrease) in outstanding capital shares
   
(99
)      
39
 
                   
Value issued from sale of shares:
                 
      Class A  
  
$
7,169
     
$
11,517
 
      Class B  
    
51
       
178
 
      Class C  
    
561
       
676
 
      Class Y  
    
–
       
–
*
Value issued from reinvestment of dividend
      and/or capital gains distribution:
                  
      Class A  
    
–
       
–
 
      Class B  
    
–
       
–
 
      Class C  
    
–
       
–
 
      Class Y  
    
–
       
–
 
Value redeemed:
                 
      Class A  
  
(7,618
)
   
(10,409
)
      Class B  
    
(540
)
     
(682
)
      Class C  
    
(353
)
     
(792
)
      Class Y  
    
(-
)      
(19
)
Increase (decrease) in outstanding capital
 
$
(730
)    
$
469
 
*Not shown due to rounding.
                 
 

NOTE 6 - Options

Options purchased by the Fund are accounted for in the same manner as marketable portfolio securities. The cost of portfolio securities acquired through the exercise of call options is increased by the premium paid to purchase the call. The proceeds from securities sold through the exercise of put options are decreased by the premium paid to purchase the put.

When the Fund writes (sells) an option, an amount equal to the premium received by the Fund is recorded as a liability. The amount of the liability is subsequently adjusted to reflect the current market value of the option written. The current market value of an option is the last sales price on the principal exchange on which the option is traded or, in the absence of transactions, the mean between the bid and asked prices or a value supplied by a broker-dealer. When an option expires on its stipulated expiration date or the Fund enters into a closing purchase transaction, the Fund realizes a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the call option was sold) and the liability related to such option is extinguished. When a written call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Fund has realized a gain or loss. For the Fund, when a written put option is exercised, the cost basis of the securities purchased by the Fund is reduced by the amount of the premium received.

Transactions in written call options were as follows:

 
Number of
Contracts
  
Premium
Received
Outstanding at June 30, 2006
   
–
     
$
–
 
Options written
   
500
       
67,248
 
Options terminated in closing purchase transactions
   
(–
)
     
(–
)
Options exercised
   
(–
)
     
(–
)
Options expired
 
(500
 )    
(67,248
)
Outstanding at December 31, 2006
   
–
     
$
–
 



NOTE 7 - Regulatory and Litigation Matters

On July 24, 2006, WRIMCO, W&R and WRSCO (collectively, Waddell & Reed) reached a settlement with each of the SEC, the New York Attorney General (NYAG) and the Securities Commissioner of the State of Kansas to resolve proceedings brought by each regulator in connection with its investigation of frequent trading and market timing in certain Waddell & Reed Advisors Funds.

Under the terms of the SEC's cease-and desist order (SEC Order), pursuant to which Waddell & Reed neither admitted nor denied any of the findings contained therein, among other provisions Waddell & Reed has agreed to: pay $40 million in disgorgement and $10 million in civil money penalties; cease and desist from violations of the antifraud provisions and certain other provisions of the federal securities laws; maintain certain compliance and ethics oversight structures; retain an independent consultant to periodically review Waddell & Reed's supervisory, compliance, control and other policies and procedures; and retain an independent distribution consultant (described below). According to the SEC Order, the SEC found that some market timers made profits in some of the Waddell & Reed Advisors Funds, and that this may have caused some dilution in those Funds. Also, the SEC found that Waddell & Reed failed to make certain disclosures to the Waddell & Reed Advisors Funds' Boards of Directors and shareholders regarding the market timing activity and Waddell & Reed's acceptance of service fees from some market timers.

The Assurance of Discontinuance with the NYAG (NYAG Settlement), pursuant to which Waddell & Reed neither admitted nor denied any of the findings contained therein, among its conditions requires that Waddell & Reed: reduce the aggregate investment management fees paid by certain of the Waddell & Reed Advisors Funds and certain of the W&R Target Funds, Inc. (the Funds) by $5 million per year for five years, for a projected total of $25 million in investment management fee reductions; bear the costs of an independent fee consultant to be retained by the Funds to review and consult regarding the Funds' investment management fee arrangements; and make additional investment management fee-related disclosures to Fund shareholders. The NYAG Settlement also effectively requires that the Funds implement certain governance measures designed to maintain the independence of the Funds' Boards of Directors and appoint an independent compliance consultant responsible for monitoring the Funds' and WRIMCO's compliance with applicable laws.

The consent order issued by the Securities Commissioner of the State of Kansas (Kansas Order), pursuant to which Waddell & Reed neither admitted nor denied any of the findings contained therein, requires Waddell & Reed to pay a fine of $2 million to the Office of the Commissioner.

The SEC Order further requires that the $50 million in settlement amounts described above will be distributed in accordance with a distribution plan developed by an independent distribution consultant, in consultation with Waddell & Reed, and that is agreed to by the SEC staff and the Funds' Disinterested Directors. The SEC Order requires that the independent distribution consultant develop a methodology and distribution plan pursuant to which Fund shareholders shall receive their proportionate share of losses, if any, suffered by the Funds due to market timing. Therefore, it is not currently possible to specify which particular Fund shareholders or groups of Fund shareholders will receive distributions of those settlement monies or in what proportion and amounts.

The foregoing is only a summary of the SEC Order, NYAG Settlement and Kansas Order. A copy of the SEC Order is available on the SEC's website at www.sec.gov. A copy of the SEC Order, NYAG Settlement and Kansas Order is available as part of the Waddell & Reed Financial, Inc. Form 8-K as filed on July 24, 2006.

In addition, pursuant to the terms of agreement in the dismissal of separate litigation, Waddell & Reed has also agreed to extend the reduction in the aggregate investment management fees paid by the Funds, as described above, for an additional five years.



Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders,
Waddell & Reed Advisors Tax-Managed Equity Fund, Inc.:

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. (the "Fund"), as of December 31, 2006, and the related statement of operations for the six-month period then ended, the statements of changes in net assets for the six-month period then ended and the year ended June 30, 2006, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2006, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. as of December 31, 2006, the results of its operations for the six-month period then ended, the changes in its net assets for the six-month period then ended and the year ended June 30, 2006, and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP
Kansas City, Missouri
February 15, 2007








Renewal of Investment Management Agreement for Waddell & Reed Advisors Tax-Managed Equity Fund, Inc.

At their meeting on August 28, 29 and 30, 2006, the Directors, including all of the Disinterested Directors, considered and approved the renewal of the existing Investment Management Agreement ("Management Agreement") between WRIMCO and the Fund. The Disinterested Directors were assisted in their review by independent legal counsel and met with such counsel separately from representatives of WRIMCO. The Disinterested Directors also received and considered a memorandum from their independent legal counsel regarding the Disinterested Directors' responsibilities in evaluating the Management Agreement. This memorandum explained the regulatory requirements pertaining to the Disinterested Directors' evaluation of the Management Agreement.

Prior to the Board meeting, independent legal counsel sent to WRIMCO a request ("Request Letter") for information to be provided to the Directors in connection with their consideration of the continuance of the Management Agreement. WRIMCO provided materials to the Directors that included responses to the Request Letter and other information WRIMCO believed was useful in evaluating continuation of the Management Agreement. The Directors also received reports prepared by an independent consultant, Lipper Inc., relating to the Fund's performance and expenses compared to the performance and expenses of a peer group of comparable funds. At the meeting, the Directors received a presentation from representatives of WRIMCO regarding services provided by it and its affiliates (collectively, "W&R") to the Fund. In addition, during the course of the year, WRIMCO had provided information relevant to the Directors' consideration of the continuance of the Management Agreement.

Nature, Extent and Quality of Services Provided to the Fund

The Directors considered the nature, extent and quality of the services provided to the Fund pursuant to the Management Agreement and also the overall fairness of the Management Agreement.

The Directors considered WRIMCO's research and portfolio management capabilities and that W&R also provides oversight of day-to-day fund operations, including fund accounting and administration and assistance in meeting legal and regulatory requirements. The Directors also considered WRIMCO's practices regarding the selection and compensation of brokers and dealers that execute portfolio transactions for the Fund, those brokers' and dealers' provision of brokerage and research services to WRIMCO, and the benefits derived by the other funds in the Advisors Fund Complex and by other clients of WRIMCO from such services. The Directors also considered the favorable history, reputation, qualification and background of WRIMCO and W&R's extensive administrative, accounting and compliance infrastructure.

Fund Performance, Management Fee and Expense Ratio

The Directors considered the Fund's performance, both on an absolute basis and in relation to the performance of a peer group of comparable mutual funds, as selected by Lipper. The Fund's performance was also compared to relevant market indices and to a Lipper index, as applicable.

The Directors considered the management fees and total expenses of the Fund and also considered the Fund's management fees and total expenses in relation to the management fees and total expenses, respectively, of a peer group of comparable mutual funds. The Directors' review also included consideration of the Fund's management fees at various asset levels, which reflected breakpoints in the management fee structure, and average account size information. In addition, the Directors considered the investment management fees, if any, paid to WRIMCO (or its affiliate) by other mutual funds managed by WRIMCO (or its affiliate) with a similar investment objective and similar investment policies and strategies as the Fund ("Similar Funds"). The Directors also considered the subadvisory fees, if any, paid to WRIMCO (or its affiliate) by other mutual funds advised by WRIMCO (or its affiliate), as well as the management fees, if any, paid by other client accounts managed by WRIMCO (or its affiliate), with a similar investment objective and similar investment policies and strategies as the Fund ("Other Accounts").

The Directors considered that Waddell & Reed Advisors Tax-Managed Equity Fund's total return performance was higher than the peer group median and the Lipper index for the one-, three-, and five-year periods.

The Directors considered the range and average of the management fees and expense ratios of the peer group. They considered that the Fund's management fee was lower than the peer group median and that the overall expense ratio was equal to the peer group median on an unadjusted basis and that, when adjusted for the Fund's larger average account size, the Fund's overall expense ratio was higher than the peer group median. They also considered that, with the breakpoints in the fee schedule, the Fund's effective management fees at various asset levels were lower than the asset-weighted average for its peer group.

The Directors also considered that there was a Similar Fund that had an advisory fee schedule that was the same as the Fund's advisory fee schedule and that there were no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Fund. The Directors considered the relevance of the fee information provided for the Similar Fund to evaluate the appropriateness and reasonableness of the Fund's management fee.

Profitability and Economies of Scale

The Directors also considered that the Fund's management fee structure includes breakpoints that provide for a reduction of payments to reflect anticipated economies of scale. In concluding that the benefits accruing to WRIMCO and its affiliates by virtue of their relationship to the Fund were reasonable in comparison with the costs of providing the investment management services and the benefits accruing to the Fund, the Directors considered specific data as to WRIMCO's profit or loss with respect to the Fund for a recent period. The Directors also considered WRIMCO's methodology for determining this data. In addition, the Directors considered the soft dollar arrangements with respect to the Fund's portfolio transactions.

In determining whether to approve the proposed continuance of the Management Agreement, the Directors considered the best interests of the Fund and the overall fairness of the proposed Management Agreement. The Directors considered the following factors to be of primary importance to their approval of the continuance of the Fund's Management Agreement, without any one factor being dispositive:

  • the performance of the Fund compared with the average performance of a peer group of comparable funds and with relevant indices;
  • the Fund's investment management fees and total expenses compared with the management fees and total expenses of a peer group of comparable funds;
  • the existence or appropriateness of breakpoints in the Fund's management fees;
  • the cost/profitability to WRIMCO and any actual or anticipated economies of scale in relation to the services it provides to the Fund;
  • the other benefits that accrue to WRIMCO as a result of its relationship to the Fund; and
  • the favorable history, reputation, qualification and background of WRIMCO as well as the qualifications of its personnel.

Based on the discussions, considerations and information described generally above, the Board determined that the Fund's Management Agreement is fair and reasonable and that continuance of the Management Agreement was in the best interests of the Fund. In reaching these determinations, the Board concluded that: the nature, extent and quality of the services provided by WRIMCO for the Fund are adequate and appropriate; the Fund's performance was satisfactory; it retained confidence in WRIMCO's overall ability to manage the Fund; and the management fee paid to WRIMCO was reasonable in light of comparative management fee information, the breakpoints in the proposed management fee for the Fund, the services provided by WRIMCO, the costs of the services provided, and the profits realized and other benefits likely to be derived by WRIMCO from its relationship with the Fund.


Proxy Voting Information

Proxy Voting Guidelines

A description of the policies and procedures Waddell & Reed Advisors Group of Mutual Funds uses to determine how to vote proxies relating to portfolio securities is available (i) without charge, upon request, by calling 1.888.WADDELL and (ii) on the Securities and Exchange Commission's (SEC) website at www.sec.gov.

Proxy Voting Records

Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on Form N-PX through Waddell & Reed's website at www.waddell.com and on the SEC's website at www.sec.gov.


Quarterly Portfolio Schedule Information

A complete schedule of portfolio holdings for the first and third quarters of each fiscal year will be filed with the Securities and Exchange Commission (SEC) on the Fund's Form N-Q. This form may be obtained in the following ways:

  • On the SEC's website at www.sec.gov.
  • For review and copy at the SEC's Public Reference Room in Washington, DC. Information on the operations of the Public Reference Room may be obtained by calling 1.800.SEC.0330.
  • On Waddell & Reed's website at www.waddell.com


The Waddell & Reed Advisors Funds Family

Global/International Funds      
Waddell & Reed Advisors Global Bond Fund
Waddell & Reed Advisors International Growth Fund

Domestic Equity Funds      
Waddell & Reed Advisors Accumulative Fund
Waddell & Reed Advisors Core Investment Fund
Waddell & Reed Advisors Dividend Income Fund
Waddell & Reed Advisors New Concepts Fund
Waddell & Reed Advisors Small Cap Fund
Waddell & Reed Advisors Tax-Managed Equity Fund
Waddell & Reed Advisors Value Fund
Waddell & Reed Advisors Vanguard Fund

Fixed Income Funds      
Waddell & Reed Advisors Bond Fund
Waddell & Reed Advisors Government Securities Fund
Waddell & Reed Advisors High Income Fund
Waddell & Reed Advisors Limited-Term Bond Fund
Waddell & Reed Advisors Municipal Bond Fund
Waddell & Reed Advisors Municipal High Income Fund

Money Market Funds      
Waddell & Reed Advisors Cash Management

Specialty Funds      
Waddell & Reed Advisors Asset Strategy Fund
Waddell & Reed Advisors Continental Income Fund
Waddell & Reed Advisors Energy Fund
Waddell & Reed Advisors Retirement Shares
Waddell & Reed Advisors Science and Technology Fund

1.888.WADDELL
Visit us online at www.waddell.com

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus containing this and other information for the Waddell & Reed Advisors Funds, call your financial advisor or visit us online at www.waddell.com. Please read the prospectus carefully before investing.



NUR1019SA (12-06)


ITEM 2. CODE OF ETHICS

Required in annual report only.

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT

Required in annual report only.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Required in annual report only.

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS

Not applicable.

ITEM 6. SCHEDULE OF INVESTMENTS

See Item 1 Shareholder Report.

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END

MANAGEMENT INVESTMENT COMPANIES

Not applicable.

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANIES AND AFFILIATED PURCHASERS

Not applicable.

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant's board of directors.

ITEM 11. CONTROLS AND PROCEDURES.

(a)

The Registrant's Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, based on their evaluation of the Registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, have concluded that such controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) are effective and adequately designed to ensure that information required to be disclosed by the Registrant in its reports that it files or submits is accumulated and communicated to the Registrant's management, including the Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
   

(b)

There were no significant changes in the registrant's internal controls over financial reporting that occurred over the registrant's last fiscal half-year that has affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

 

ITEM 12. EXHIBITS.

(a)(2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)).

Attached hereto as Exhibit 99.CERT.

(b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)).

Attached hereto as Exhibit 99.906CERT.







SIGNATURES
 
 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

Waddell & Reed Advisors Tax-Managed Equity Fund, Inc.

(Registrant)

 
 

By     /s/Kristen A. Richards

         Kristen A. Richards, Vice President and Assistant Secretary
 

Date: March 9, 2007
 
 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 

By     /s/Henry J. Herrmann

         Henry J. Herrmann, Principal Executive Officer
 

Date: March 9, 2007
 
 

By     /s/Theodore W. Howard

         Theodore W. Howard, Principal Financial Officer
 

Date: March 9, 2007