Not since the 1930s have investors faced so many challenges. A severe global credit crunch took hold this past calendar year as commodity prices collapsed. The financial sector faced extreme stress as the country's largest savings and loan, its largest insurer, its two largest mortgage providers, its largest brokerage firm and a leading commercial bank all either were the subject of a takeover, government bailout or failure.

Since June 2008, confidence has been shaken in equity and corporate bond markets around the globe, and mutual fund returns of the past year reflect the emotional insecurity that comes with hard times and recession. One encouraging sign is that it appeared to us that the equity market's long process of forming a bottom may have begun in late autumn. Also, in some parts of the fixed-income market, there were tremendous rallies in late 2008. Most occurred in government-supported securities, where the U.S. government either slashed rates or had indicated or purchased securities bonds through the Federal Reserve or the U.S. Treasury. Enclosed is our report on your Waddell & Reed Advisors equity funds' operations for the six-month period ended Dec. 31, 2008. For the same six-month period, the Standard & Poor's 500 Index dropped 22.56 percent.

We believe that today's U.S. government safety nets and financial safeguards - including the Fed, deposit insurance on bank accounts, unemployment insurance, municipal bond default insurance and social security - are likely to help cushion the effects of the economic downturn that our country now faces. However, the scope of the current financial crisis is global, and this is a new phenomenon. It will likely test whether we are becoming one world that can act together for the common good, or one where national trade supremacy, resource hoarding or parochial political interests take precedence. We are encouraged by the new Obama administration's swift steps to build a team that we hope can learn from the many lessons of history and take additional action to revive economic growth and restore investor faith.

As shown in the Economic Snapshot table that accompanies this letter, the U.S. economy at Dec. 31, 2008 is not in as good as shape as it was six months earlier. The unemployment rate is higher. The economy is shrinking. For consumers, the good news is that inflation is much lower and oil prices are less than a third what they were six months ago. Mortgage rates are also lower, and could be headed further down.

We believe that the investing and economic climate will get better in time, although not right away. With perseverance, initiative and ingenuity, we believe the strengths of our nation's character will surface and prosperity will be restored. In this uncertain environment, we believe a very strong effort to manage risk is paramount. With that approach in mind, we will strive to earn your continued confidence.

Economic Snapshot
	12-31-2008		6-30-2008

U.S. unemployment rate		7.20	%		5.50	%
Inflation (U.S. Consumer Price Index)		0.10	%		5.00	%
U.S. GDP		-3.80	%		1.90	%
30 year fixed mortgage rate		5.10	%		6.45	%
Oil price per barrel	$	44.60		$	140.00

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.

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, 2008.

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.

The second line for each share class in 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 five percent 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 five percent hypothetical example with the five percent 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, 2008	Beginning Account Value 6-30-08		Ending Account Value 12-31-08		Annualized Expense Ratio Based on the Six-Month Period			Expenses Paid During Period*

Based on Actual Fund Return⁽¹⁾
Class A	$	1,000	$	713.30		1.33	%	$	5.74
Class B	$	1,000	$	709.90		2.28	%	$	9.83
Class C	$	1,000	$	709.10		2.24	%	$	9.66
Class Y	$	1,000	$	705.50		2.54	%	$	10.92
Based on 5% Return⁽²⁾
Class A	$	1,000	$	1,018.51		1.33	%	$	6.76
Class B	$	1,000	$	1,013.71		2.28	%	$	11.58
Class C	$	1,000	$	1,013.91		2.24	%	$	11.38
Class Y	$	1,000	$	1,012.41		2.54	%	$	12.88

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.

On December 31, 2008, Waddell & Reed Advisors Tax-Managed Equity Fund had net assets totaling $106,187 (in thousands) invested in a diversified portfolio of:

As a shareholder of the Fund, for every $100 you had invested on December 31, 2008,
your fund owned:

Average Annual Total Returns⁽¹⁾
	1-year period ended 12-31-08			5-year period ended 12-31-08			10-year period ended 12-31-08			Since inception of Class⁽²⁾ 12-31-08

Class A
Before Taxes	-38.67		%		0.20	%		––	%		-2.69	%
After Taxes on Distributions		-38.67	%		0.20	%		––	%		-2.69	%
After Taxes on Distributions and Sale of Fund Shares		-25.13	%		0.17	%		––	%		-2.25	%
Class B
Before Taxes		-38.11	%		0.28	%		––	%		-2.93	%
After Taxes on Distributions		-38.11	%		0.28	%		––	%		2.93	%
After Taxes on Distributions and Sale of Fund Shares		-24.77	%		0.24	%		––	%		-2.44	%
Class C
Before Taxes		-35.57	%		0.45	%		––	%		-2.97	%
After Taxes on Distributions		-35.57	%		0.45	%		––	%		-2.97	%
After Taxes on Distributions and Sale of Fund Shares		-23.12	%		0.38	%		––	%		-2.48	%
Class Y⁽³⁾
Before Taxes		-36.21	%		0.94	%		––	%		-2.33	%
After Taxes on Distributions		-36.21	%		0.94	%		––	%		-2.36	%
After Taxes on Distributions and Sale of Fund Shares		-23.54	%		0.81	%		––	%		-1.96	%
Russell 1000 Growth Index⁽⁴⁾		-38.44	%		-3.42	%		––	%		-8.64	%

(1)Data quoted is past performance and is based on deduction on the maximum applicable sales load for each of the periods. Current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please visit www.waddell.com for the Fund's most recent month-end performance. Class A shares carry a maximum front-end sales load of 5.75%. Class B and Class C shares carry a maximum contingent deferred sales charge (CDSC) of five percent and one percent, respectively. (Accordingly, the Class C shares reflect no CDSC since it only applies to Class C shares redeemed within twelve months after purchase.)

(2)3-31-00 for Class A, Class B and Class C shares and 4-19-00 for Class Y shares (the date on which shares were first acquired by shareholders).

The table above shows average annual returns on a before-tax and after-tax basis. Returns Before Taxes shows the actual change in the value of the Fund shares over the periods shown, but does not reflect the impact of taxes on Fund distributions or the sale of Fund shares. The two after-tax returns take into account taxes that may be associated with owning Fund shares. Returns After Taxes on Distributions is the Fund's actual performance, adjusted by the effect of taxes on distributions made by the Fund during the period shown. Returns After Taxes on Distributions and Sale of Fund Shares is further adjusted to reflect the tax impact on any change in the value of Fund shares as if they had been sold on the last day of the period.

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts, or to shares held by non-taxable entities.

The Investments of Tax-Managed Equity Fund
December 31, 2008
(In Thousands) (Unaudited)

COMMON STOCKS	Shares		Value
Aerospace & Defense - 4.40%
Lockheed Martin Corporation		15	$	1,228
Raytheon Company		68		3,450
				4,678
Air Freight & Logistics - 0.80%
Expeditors International of Washington, Inc.		25		845

Biotechnology - 9.68%
Genentech, Inc. (A)		66		5,480
Gilead Sciences, Inc. (A)		94		4,802
				10,282
Casinos & Gaming - 0.75%
International Game Technology		67		796

Communications Equipment - 8.14%
Cisco Systems, Inc. (A)		99		1,612
Nokia Corporation, Series A, ADR	129			2,006
QUALCOMM Incorporated	119			4,246
Research In Motion Limited (A)		19		775
				8,639
Computer Hardware - 3.04%
Apple Inc. (A)		17		1,425
Hewlett-Packard Company		50		1,804
				3,229
Construction & Farm Machinery & Heavy Trucks - 2.70%
Deere & Company		75		2,866

Data Processing & Outsourced Services - 1.89%
Visa Inc., Class A		38		2,004

Diversified Banks - 2.10%
Wells Fargo & Company		76		2,226

Electrical Components & Equipment - 1.35%
Emerson Electric Co.		22		791
First Solar, Inc. (A)		5		648
				1,439
Fertilizers & Agricultural Chemicals - 3.66%
Monsanto Company		55		3,884

Health Care Equipment - 4.28%
Baxter International Inc.		34		1,817
Hologic, Inc. (A)		50		653
Stryker Corporation		19		767
Zimmer Holdings, Inc. (A)		32		1,306
				4,543
Health Care Supplies - 1.80%
Alcon, Inc.		9		767
DENTSPLY International Inc.		41		1,147
				1,914
Home Entertainment Software - 1.17%
Activision Blizzard, Inc. (A)	144			1,244

Home Improvement Retail - 0.93%
Home Depot, Inc. (The)		21		490
Lowe's Companies, Inc.		23		493
				983
Household Products - 1.70%
Colgate-Palmolive Company		26		1,809

Hypermarkets & Super Centers - 1.17%
Costco Wholesale Corporation		24		1,239

Internet Retail - 0.54%
Amazon.com, Inc. (A)		11		574

Internet Software & Services - 1.83%
Google Inc., Class A (A)		6		1,938

Investment Banking & Brokerage - 2.05%
Goldman Sachs Group, Inc. (The)		26		2,173

Life & Health Insurance - 1.72%
Aflac Incorporated		40		1,829

Life Sciences Tools & Services - 0.53%
Thermo Fisher Scientific Inc. (A)		17		562

Oil & Gas Drilling - 1.80%
Transocean Inc. (A)		40		1,909

Oil & Gas Equipment & Services - 3.26%
Schlumberger Limited		67		2,823
Smith International, Inc.		28		639
				3,462
Pharmaceuticals - 2.75%
Abbott Laboratories		55		2,914

Restaurants - 1.32%
YUM! Brands, Inc.		45		1,405

Semiconductors - 3.45%
Broadcom Corporation, Class A (A)		99		1,671
Microchip Technology Incorporated	102			1,996
				3,667
Soft Drinks - 3.19%
Coca-Cola Company (The)		52		2,340
PepsiCo, Inc.		19		1,052
				3,392
Specialized Finance - 2.66%
IntercontinentalExchange, Inc. (A)		34		2,827

Specialty Chemicals - 0.82%
Ecolab Inc.		25		875

Systems Software - 2.43%
Microsoft Corporation	133			2,584

Wireless Telecommunication Service - 1.04%
Crown Castle International Corp. (A)		63		1,108

TOTAL COMMON STOCKS - 78.95%			$	83,839
(Cost: $94,401)

SHORT-TERM SECURITIES	Principal
Commercial Paper
Air Products and Chemicals, Inc.,
0.050%, 1-2-09	$	1,094		1,094
American Honda Finance Corp.,
1.000%, 2-26-09		1,400		1,398
AT&T Inc.,
0.180%, 2-12-09		3,500		3,499
Caterpillar Inc.,
0.160%, 1-26-09		4,000		4,000
Hershey Company (The),
0.200%, 1-8-09		5,000		5,000
ITT Corporation,
2.000%, 1-5-09		3,000		2,999
Walgreen Co.,
0.180%, 1-7-09		4,000		4,000

TOTAL SHORT-TERM SECURITIES - 20.71%			$	21,990
(Cost: $21,990)

TOTAL INVESTMENT SECURITIES - 99.66%			$	105,829
(Cost: $116,391)

CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.34%				358

NET ASSETS - 100.00%			$	106,187

ASSETS
Investment securities - at value: (cost - $116,391)		$	105,829
Receivables:
Fund shares sold			521
Dividends and interest			111
Prepaid and other assets			21

Total assets			106,482

LIABILITIES
Payable to Fund shareholders			236
Accrued distribution and service fees			21
Accrued shareholder servicing			19
Accrued accounting services fee			4
Accrued management fee			2
Due to custodian			1
Other			12

Total liabilities			295

Total net assets		$	106,187

NET ASSETS
$0.001 par value capital stock:
Capital stock		$	13
Additional paid-in capital			126,260
Accumulated loss:
Accumulated net investment loss			(107	)
Accumulated net realized loss on investment transactions			(9,417	)
Net unrealized depreciation in value of investments			(10,562	)

Net assets applicable to outstanding units of capital		$	106,187

Net asset value per share (net assets divided by shares outstanding):
Class A			$8.31
Class B			$7.71
Class C			$7.68
Class Y			$8.12
Capital shares outstanding:
Class A			12,164
Class B			249
Class C			416
Class Y			––	*
Capital shares authorized	1,000,000

INVESTMENT LOSS
Income:
Dividends (net of foreign withholding taxes of $7)	$	461
Interest and amortization		139

Total income		600

Expenses:
Investment management fee		332
Distribution and service fees:
Class A		123
Class B		11
Class C		16
Shareholder servicing:
Class A		81
Class B		4
Class C		5
Accounting services fee		28
Audit fees		13
Legal fees		8
Custodian fees		3
Other		77

Total expenses		701

Net investment loss		(101	)

REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Realized net loss on investments		(2,944	)
Unrealized depreciation in value of investments during the period		(29,789	)

Net loss on investments		(32,733	)

Net decrease in net assets resulting from operations	$	(32,834	)



INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss	$	(101	)	$	(157	)
Realized net gain (loss) on investments		(2,944	)		1,993
Unrealized appreciation (depreciation)		(29,789	)		1,814

Net increase (decrease) in net assets resulting from operations		(32,834	)		3,650

Distributions to shareholders from:
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		26,191			27,500

Total increase (decrease)		(6,643	)		31,150
NET ASSETS
Beginning of period		112,830			81,680

End of period	$	106,187		$	112,830

Accumulated net investment loss	$	(107	)	$	(6	)

	For the six months ended				For the fiscal year ended June 30,
	12-31-08				2008			2007			2006			2005			2004

Net asset value, beginning of period		$	11.65		$	10.99		$	9.32		$	8.74		$	8.27		$	6.94

Income (loss) from investment operations:
Net investment loss			(0.01	)⁽¹⁾		(0.02	)		(0.03	)	(0.04		)	(0.01		)	(0.07		)
Net realized and unrealized gain (loss) on investments			(3.33	)⁽¹⁾		0.68			1.70			0.62			0.49			1.40

Total from investment operations			(3.34	)		0.66			1.67			0.58			0.48			1.33

Less distributions from:
Net investment income			(0.00	)		(0.00	)		(0.00	)	(0.00		)	(0.01		)	(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		)	(0.01		)	(0.00		)

Net asset value, end of period		$	8.31		$	11.65		$	10.99		$	9.32		$	8.74		$	8.27

Total return⁽²⁾		-28.67		%		6.01	%		17.92	%		6.64	%		5.78	%	19.16		%
Net assets, end of period (in millions)			$101			$106			$75			$65			$60			$54
Ratio of expenses to average net assets			1.33	%⁽³⁾		1.24	%		1.31	%		1.32	%		1.34	%		1.40	%
Ratio of net investment loss to average net assets			-0.15	%⁽³⁾		-0.09	%		-0.29	%	-0.44		%	-0.13		%	-0.96		%
Portfolio turnover rate			22	%		27	%		55	%		100	%		66	%		92	%

	For the six months ended				For the fiscal year ended June 30,
	12-31-08				2008			2007			2006			2005			2004

Net asset value, beginning of period		$	10.86		$	10.34		$	8.85		$	8.37		$	7.98		$	6.77

Income (loss) from investment operations:
Net investment loss			(0.05	)⁽¹⁾		(0.11	)⁽¹⁾		(0.11	)⁽¹⁾	(0.16		)	(0.09		)	(0.13		)
Net realized and unrealized gain (loss) on investments			(3.10	)⁽¹⁾		0.63	⁽¹⁾		1.60	⁽¹⁾		0.64			0.48			1.34

Total from investment operations			(3.15	)		0.52			1.49			0.48			0.39			1.21

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		$	7.71		$	10.86		$	10.34		$	8.85		$	8.37		$	7.98

Total return		-29.01		%		5.03	%		16.84	%		5.73	%		4.89	%	17.87		%
Net assets, end of period (in millions)			$2			$3			$4			$4			$4			$4
Ratio of expenses to average net assets			2.28	%⁽²⁾		2.13	%		2.22	%		2.24	%		2.27	%		2.36	%
Ratio of net investment loss to average net assets			-1.12	%⁽²⁾		-1.01	%		-1.20	%	-1.37		%	-1.04		%	-1.91		%
Portfolio turnover rate			22	%		27	%		55	%		100	%		66	%		92	%

	For the six months ended				For the fiscal year ended June 30,
	12-31-08				2008			2007			2006			2005			2004

Net asset value, beginning of period		$	10.83		$	10.30		$	8.83		$	8.35		$	7.97		$	6.76

Income (loss) from investment operations:
Net investment loss			(0.05	)⁽¹⁾		(0.11	)⁽¹⁾		(0.12	)⁽¹⁾	(0.14		)	(0.08		)	(0.12		)
Net realized and unrealized gain (loss) on investments			(3.10	)⁽¹⁾		0.64	⁽¹⁾		1.59	⁽¹⁾		0.62			0.46			1.33

Total from investment operations			(3.15	)		0.53			1.47			0.48			0.38			1.21

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		$	7.68		$	10.83		$	10.30		$	8.83		$	8.35		$	7.97

Total return		-29.09		%		5.15	%		16.65	%		5.75	%		4.77	%	17.90		%
Net assets, end of period (in millions)			$3			$4			$3			$3			$3			$2
Ratio of expenses to average net assets			2.24	%⁽²⁾		2.14	%		2.27	%		2.28	%		2.30	%		2.35	%
Ratio of net investment loss to average net assets			-1.06	%⁽²⁾		-1.00	%		-1.26	%	-1.41		%	-1.09		%	-1.91		%
Portfolio turnover rate			22	%		27	%		55	%		100	%		66	%		92	%

	For the six months ended				For the fiscal year ended June 30,
	12-31-08				2008			2007			2006			2005			2004

Net asset value, beginning of period		$	11.51		$	11.00		$	9.32		$	8.76		$	8.28		$	6.95

Income (loss) from investment operations:
Net investment income (loss)			(0.10	)		(0.12	)		(0.02	)	(0.05		)⁽²⁾		0.01		(0.01		)
Net realized and unrealized gain (loss) on investments			(3.29	)		0.63			1.70			0.61	⁽²⁾		0.50			1.34

Total from investment operations			(3.39	)		0.51			1.68			0.56			0.51			1.33

Less distributions from:
Net investment income			(0.00	)		(0.00	)		(0.00	)	(0.00		)	(0.03		)	(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		)	(0.03		)	(0.00		)

Net asset value, end of period		$	8.12		$	11.51		$	11.00		$	9.32		$	8.76		$	8.28

Total return		-29.45		%		4.64	%		18.03	%		6.39	%		6.11	%	19.14		%
Net assets, end of period (in thousands)			$1			$1			$1			$1			$19			$17
Ratio of expenses to average net assets			2.54	%⁽³⁾		2.11	%		1.24	%		1.30	%		1.14	%		1.24	%
Ratio of net investment income (loss) to average net assets			-2.07	%⁽³⁾		-0.97	%		-0.23	%	-0.60		%		0.09	%	-0.80		%
Portfolio turnover rate			22	%		27	%		55	%		100	%		66	%		92	%

Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. (the Fund) is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. Its investment objective is to provide long-term growth of capital while minimizing taxable gains and income to shareholders.

The Fund offers Class A, Class B, and Class C shares. Class A shares are sold at their offering price, which is normally net asset value plus a front-end sales charge. Class B and Class C shares are sold without a front-end sales charge but may be subject to a contingent deferred sales charge (CDSC). All classes of shares have identical rights and voting privileges with respect to the Fund in general and exclusive voting rights on matters that affect that class alone. Earnings, net assets and net asset value per share may differ due to each class having its own expenses, such as transfer and shareholder servicing agent fees, directly attributable to that class. Class A, B, and C have separate distribution and/or service plans. No such plan has been adopted for Class Y shares. Class B shares will automatically convert to Class A shares 96 months after the date of purchase.

The following is a summary of significant accounting policies consistently followed by the Fund.

Securities Valuation. The Fund calculates the net asset value of its shares as of the close of the New York Stock Exchange (the NYSE), normally 4:00 P.M. Eastern time, on each day the NYSE is open for trading.

Securities traded on U.S. or foreign securities exchanges or included in a national market system are valued at the official closing price at the close of each business day unless otherwise stated below. Over-the-counter securities and listed securities for which no price is readily available are valued at the average of the last bid and asked prices. Security prices are based on quotes that are obtained from an independent pricing service approved by the Board of Directors.

To determine values of fixed-income securities, the independent pricing service takes into consideration such factors as current quotations by broker/dealers, coupon, maturity, quality, type of issue, trading characteristics, and other yield and risk factors it deems relevant in determining valuations. Securities which cannot be valued by the independent pricing service are valued using valuations obtained from dealers that make markets in the securities.

Options and swaps are valued by the independent pricing service unless the price is unavailable, in which case they are valued at the mean between the last bid and asked price. Futures contracts traded on an exchange are generally valued at the settlement price. Mutual funds are valued at the net asset value at the close of each business day.

Short-term securities are valued on the basis of amortized cost (which approximates market value), whereby a portfolio security is valued at its cost initially, and thereafter valued to reflect a constant amortization to maturity of any discount or premium.

Because many foreign markets close before the U.S. markets, events may occur between the close of the foreign market and the close of the U.S. markets that could have a material impact on the valuation of foreign securities. The Fund, under the supervision of the Board of Directors, evaluates the impacts of these events and may adjust the valuation of foreign securities to reflect the fair value as of the close of the U.S. markets.

In addition, all securities for which market values are not readily available or deemed unreliable are appraised at fair value as determined in good faith under the direction of the Board of Directors.

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. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, which are recorded as soon as the Fund is informed of the ex-dividend date.

Foreign Currency Translation. The Fund's accounting records are maintained in U.S. dollars. The values of securities denominated in foreign currencies and amounts related to the purchase and sale of foreign securities and foreign investment income are translated into U.S. dollars as of the close of the NYSE, normally 4:00 P.M. Eastern time, on each day the NYSE is open for trading. Foreign exchange rates are valued primarily using an independent pricing service authorized by the Board of Directors.

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 translation 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.

Repurchase agreements. The Fund may purchase securities subject to repurchase agreements, which are instruments under which the Fund purchases a security and the seller (normally a commercial bank or broker-dealer) agrees, at the time of purchase, that it will repurchase the security at a specified time and price. Repurchase agreements are collateralized by the value of the resold securities which, during the entire period of the agreement, generally remains at least equal to the value of the loan, including accrued interest thereon. The collateral for the repurchase agreement is held by a custodian bank.

Investments with Off-Balance Sheet Risk. The Fund may enter into financial instrument transactions (such as swaps, futures, written options and other derivatives) that may have off-balance sheet market risk. Off-balance sheet market risk exists when the maximum potential loss on a particular financial instrument is greater than the value of such financial instrument, as reflected in the Statement of Assets and Liabilities.

Allocation of Income, Expenses, Gains and Losses. Income, expenses (other than those attributable to a specific class), gains and losses are allocated on a daily basis to each class of shares based upon the relative proportion of net assets represented by such class. Operating expenses directly attributable to a specific class are charged against the operations of that class.

Federal 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. During the current fiscal year, the Fund instituted the provisions of Financial Accounting Standards Board No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). As required by FIN 48, management of the Fund periodically reviews all tax positions to assess that it is more likely than not that the position would be sustained upon examination by the relevant tax authority based on the technical merits of each position. As of December 31, 2008, management believes that under this standard no liability for unrecognized tax positions is required. The Fund is subject to examination by U.S. federal and state authorities for returns filed for years after 2004.

Dividends and Distributions to Shareholders. 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.

Custodian Fees. "Custodian fees" in the Statement of Operations may include interest expense incurred by the Fund on any cash overdrafts of its custodian account during the period. Such cash overdrafts may result from the effects of failed trades in portfolio securities and from cash outflows resulting from unanticipated shareholder redemption activity. The Fund pays interest to its custodian on such cash overdrafts, to the extent they are not offset by positive cash balances maintained by the Fund, at a rate equal to the Federal Funds Rate plus 0.50%. The "Earnings credit" line item, if applicable, represents earnings on cash balances maintained by the Fund during the period. Such interest expense and other custodian fees may be paid with these earnings.

Indemnifications. The Fund's organizational documents provide current and former directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.

Concentration of Risk. The Fund may have a significant investment in international securities. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, investment and repatriation restrictions, and limited and less reliable investor information.

Recent Accounting Pronouncements. In March 2008, FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" (SFAS 161). SFAS 161 amends and expands disclosures about derivative instruments and hedging activities. SFAS 161 requires qualitative disclosures about the objectives and strategies of derivative instruments, quantitative disclosures about the fair value amounts of and gains and losses on derivative instruments, and disclosures of credit-risk-related contingent features in hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The Fund will institute SFAS 161 during the fiscal year ending June 30, 2010 and its potential impact, if any, on the financial statements is currently being assessed by management.

Other. 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.

Management Fees. 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 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.

Accounting Services Fees. The Fund has an Accounting Services Agreement with Waddell & Reed Services Company (WRSCO), an indirect subsidiary of WDR. Under the agreement, WRSCO acts as the agent in providing bookkeeping and accounting services and assistance to the Fund, including maintenance of Fund records, pricing of Fund shares and preparation of certain shareholder reports. For these services, the Fund pays WRSCO a monthly fee of one-twelfth of the annual fee shown in the following table:

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.

Accounting Services Fee

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

From	$	0	to	$	10		$	0
From	$	10	to	$	25		$	11.5
From	$	25	to	$	50		$	23.1
From	$	50	to	$	100		$	35.5
From	$	100	to	$	200		$	48.4
From	$	200	to	$	350		$	63.2
From	$	350	to	$	550		$	82.5
From	$	550	to	$	750		$	96.3
From	$	750	to	$	1,000		$	121.6
	$	1,000 and Over			$	148.5

Administrative 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. This fee may be voluntarily waived until a Fund's net assets are at least $10 million.

Shareholder Servicing. General. Under the Shareholder Servicing Agreement between the Fund and WRSCO, with respect to Class A, Class B and Class C shares, for each shareholder account that was in existence at any time during the prior month the Fund pays a monthly fee of $1.5042. For Class Y shares, the Fund pays a monthly fee equal to one-twelfth of 0.15 of 1% of the average daily net assets of the class for the preceding month. The Fund also reimburses WRSCO for certain out-of-pocket costs for all classes.

Non-networked accounts. Effective September 1, 2006, the Shareholder Servicing Agreement with respect to Class A, Class B and Class C shares was revised so that the Fund pays WRSCO an annual fee (payable monthly) for each account of the Fund that is non-networked and is as shown above; however, WRSCO has agreed to reduce that fee if the number of total shareholders accounts within the Complex (Waddell & Reed Advisors Funds, Waddell & Reed InvestEd Portfolios, Inc., Ivy Funds and Ivy Funds, Inc.) reaches certain levels.

Networked accounts. For certain networked accounts (that is, those 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.

Broker accounts. Certain broker-dealers maintain shareholder accounts with the Fund through an omnibus account and provide transfer agent and other shareholder-related services that would otherwise be provided by WRSCO if the individual accounts that comprise the omnibus account were opened by their beneficial owners directly. The Fund, or WRIMCO (including any affiliate of WRIMCO) or both, may pay such broker-dealers a per account fee for each open account within the omnibus account, or a fixed rate (e.g., 0.35%) fee, based on the average daily net asset value of the omnibus account (or a combination thereof).

Distribution and Service Plan for Class A Shares. 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 average annual net assets. The fee is to be paid to compensate 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.

Distribution and Service Plan for Class B and Class C Shares. Under the Distribution and Service Plan adopted by the Fund for Class B shares and Class C shares, respectively, the Fund may pay W&R a service fee not to exceed 0.25% and a distribution fee not to exceed 0.75% of the Fund's average annual net assets attributable to that class to compensate W&R for its services in connection with the distribution of shares of that class and/or provision of personal services to Class B or Class C shareholders and/or maintenance of shareholder accounts of that class.

Sales Charges. 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 $101. 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 paid to W&R. During the six-month period ended December 31, 2008, W&R received $-*, $1 and $-* 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 $68 and all expenses in connection with the sale of Fund shares, except for registration fees and related expenses.

Compensation to Directors. During the six-month period ended December 31, 2008, the Fund paid Directors' regular compensation of $2, which is included in other expenses.

The Fund has adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No.157, Fair Value Measurements (FAS 157). In accordance with FAS 157, fair value is defined as the price that the Fund would receive upon selling an asset or paying to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The Fund's investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below.

Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)

Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments)

The following table summarizes the valuation of the Fund's investments by the above FAS 157 fair value hierarchy levels as of December 31, 2008.

Purchases of investment securities, other than U.S. government obligations, aggregated $37,166, while proceeds from maturities and sales of investment securities aggregated $18,916.

For Federal income tax purposes, cost of investments owned at December 31, 2008 was $116,429, resulting in net unrealized depreciation of $10,600, of which $5,185 related to appreciated securities and $15,785 related to depreciated securities.

For Federal income tax purposes, the Fund's distributed and undistributed earnings for the fiscal year ended June 30, 2008 and the related net capital losses and post-October activity were as follows:

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 incurred in the eight taxable years succeeding the loss year for Federal income tax purposes. The following shows the totals by year in which the capital loss carryovers will expire if not utilized.

				For the fiscal year ended June 30, 2008

Shares issued from sale of shares:
Class A		4,386			3,453
Class B		70			17
Class C		145			100
Class Y		––			––
Shares issued from reinvestment of dividends and/or capital gains distribution:
Class A		––			––
Class B		––			––
Class C		––			––
Class Y		––			––
Shares redeemed:
Class A		(1,332	)		(1,156	)
Class B		(84	)		(117	)
Class C		(81	)		(46	)
Class Y		––			––

Increase in outstanding capital shares		3,104			2,251


Value issued from sale of shares:
Class A	$	38,140		$	41,829
Class B		537			194
Class C		1,171			1,136
Class Y		––			––
Value issued from reinvestment of dividends and/or capital gains distribution:
Class A		––			––
Class B		––			––
Class C		––			––
Class Y		––			––
Value redeemed:
Class A	(12,197		)	(13,809		)
Class B		(761	)		(1,335	)
Class C		(699	)		(515	)
Class Y		––			––

Increase in outstanding capital	$	26,191		$	27,500

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 Ivy Funds Variable Insurance Portfolios, Inc. (formerly, 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. During the past fiscal period, the Fund was not one of the selected funds to participate in or benefit from the aggregate management fee reduction discussed above. 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.

On December 12, 2008, a special shareholder meeting for the Fund was held to approve a proposed Agreement and Plan of Reorganization and Termination, pursuant to which the Fund would be reorganized into a corresponding series of a newly established Delaware statutory trust, to be named Waddell & Reed Advisors Funds. On January 30, 2009, that reorganization took place.

At its meeting on August 11, 12 and 13, 2008, the Fund's Board of Directors, including all of the Disinterested Directors, considered and approved the continuance of the existing Investment Management Agreement ("Management Agreement") between WRIMCO and the Fund with respect to 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. In addition, the Disinterested Directors engaged an independent fee consultant whose responsibilities included managing the process by which the proposed management fees under the Management Agreement were negotiated with WRIMCO.

Prior to the Board meeting, independent legal counsel sent to WRIMCO a request 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 the continuation of the Management Agreement. Thereafter, independent legal counsel sent to WRIMCO a supplemental request for certain additional information, and WRIMCO provided additional information in response to this request. The Directors also received reports prepared by an independent third party, Lipper Inc. ("Lipper"), relating to the Fund's performance and expenses compared to the performance of the universe of comparable mutual funds selected by Lipper (the "Performance Universe") and to the expenses of a peer group of comparable funds selected by Lipper (the "Peer Group"), respectively. Further, the Directors received a written evaluation from the independent fee consultant, a summary of which is included in this Semiannual Report. At their 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.

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 but not limited to 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 its Performance Universe. 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 its Peer Group. 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 the Fund's total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, five-, and seven-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 and overall expense ratio were lower than the Peer Group median. They considered that the Fund's non-management fee expenses were equal to the Peer Group median on an unadjusted basis and when adjusted for the Fund's average account size. The Directors considered the transfer agency fee reduction that became effective September 1, 2006. 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 were no Similar Funds or Other Accounts.

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 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:

Based on the discussions, considerations and information described generally above, including the evaluation provided by the independent fee consultant, the Board determined that the Fund's Management Agreement is fair and reasonable and that continuance of the Management Agreement is 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 performance of the Fund was satisfactory; it retained confidence in WRIMCO's overall ability to manage the Fund; and the management fee paid to WRIMCO is 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.

The Disinterested Directors of Waddell & Reed Advisors Funds, Ivy Funds Variable Insurance Portfolios, Inc.¹ and Waddell & Reed InvestEd Portfolios, Inc. (the "Funds") have appointed an independent fee consultant. Below is a summary of the written fee evaluation of such consultant for the most recent year.

Pursuant to the Assurance of Discontinuance between Waddell & Reed, Inc., Waddell & Reed Investment Management Company ("WRIMCO") and Waddell & Reed Services Company ("WRSCO") (collectively, "Waddell") and the Office of the New York Attorney General dated July 10, 2006 ("AOD"), the Disinterested Directors of each Fund's Board appointed an Independent Fee Consultant ("IFC") to manage the process by which proposed management fees paid by the Funds to WRIMCO are negotiated. The IFC does not replace the Directors in negotiating management fees and does not substitute his or her judgment for that of the Directors about the reasonableness of the proposed fees.

In the IFC's 2008 written evaluation of the proposed management fees of the Funds ("Report"), the IFC addressed the following six factors:

2. Management fees (including any components thereof) charged by other mutual fund companies for like services

4. Management fees (including any components thereof) charged to institutional and other clients of Waddell for like services

5. Costs to Waddell and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit

The following is a summary of the Report's discussion of the contract renewal process, related materials, and the IFC's findings.

The Report noted that the Boards previously created the Special Compliance & Governance Committee ("Compliance Committee"), which is composed of Disinterested Directors and charged with the responsibility for certain work associated with the contract renewal process.

The Report stated that the contract renewal process includes a number of sequential steps by which the Disinterested Directors go about determining the reasonableness of the proposed management fees for the Funds in the context of their annual consideration of the proposed continuance of the Funds' respective investment management agreements with WRIMCO and the sub-advisory agreements with certain sub-advisors. The Report stated that the IFC participated throughout the contract renewal process.

The Disinterested Directors instructed independent legal counsel to the Disinterested Directors, K&L Gates LLP ("K&L Gates"), to prepare a letter requesting information from WRIMCO needed for the contract renewal process, which was provided. Lipper, Inc. ("Lipper") was asked to provide independently compiled comparative information about the Funds. The Report stated that Lipper selected the peer group with input from WRIMCO to ensure that Lipper understood the investment and distribution intricacies of the Funds and that the IFC observed and concurred in the selection.

The Report noted that the Compliance Committee met with the IFC and K&L Gates to discuss the information provided by WRIMCO and Lipper and to determine whether to request any additional information from WRIMCO prior to the August Disinterested Directors and Board meetings. At the Compliance Committee's direction, K&L Gates sent a supplemental request to WRIMCO for certain additional information, which was provided prior to the Disinterested Directors' August 2008 meetings.

Materials refer to the informational materials that were prepared by Waddell and Lipper in response to the data requested by the Disinterested Directors through the Compliance Committee and K&L Gates. The IFC reviewed the information produced and found it to be responsive to the requests by the Disinterested Directors. He also reviewed certain other materials that he considered relevant.

The IFC used these materials to analyze trends and comparative information about the six factors listed above. The Report noted that, apart from these materials, the Disinterested Directors also received information throughout the year, some of which the IFC reviewed, that was also relevant to the contract renewal process.

In the Report, the IFC commented on the investment performance of the Funds. The performance data for these comparisons were drawn from the Lipper materials. Performance information was based on March 31, 2008 data, and references in the Report to 1-, 3- and 5-year periods referred to the periods ended on March 31, 2008.

The Report stated that the IFC's experience is that fund directors should focus on longer-term performance during the contract renewal process (though they may choose to focus on shorter-term performance for other purposes). Accordingly, the Report concentrated on 3-year performance in comparison to the "performance universe," rather than on the more limited "performance group," because, in the IFC's experience, fund investors are more typically concerned with the objective and style of management than the size of the fund. The Report recommended that the Disinterested Directors focus on a 3-year view of investment performance for the purposes of contract renewal, because it is long enough to reflect most market cycles and short enough to be relevant to the holding period for many mutual fund shareholders.

The Report stated that, overall, the Funds reflect strong and improving performance in the 1-, 3- and 5-year periods. The collective (Advisors Funds, Ivy VIP Funds and InvestEd Portfolios together) 5-year performance has 50% of the Funds in the first two quintiles of their performance universe and 3% in the 5th quintile. The 3-year figures improve to 65% of the Funds in the first two quintiles and 8% in the 5th quintile, and the 1-year figures reflect similar performance with 64% in the first two quintiles and 5% in the 5th quintile. Emphasizing the improvement, the Report noted that the 1-year short-term performance has only 7% of the Funds in the combined 4th and 5th quintiles, a decrease from 18% in the 3-year performance, and 31% in the 5-year performance periods.

Although the IFC found that the Funds have strong performance, it also noted that certain Funds have experienced either continuing or recent challenges. The IFC suggested that the Disinterested Directors request additional information from WRIMCO regarding certain Funds. The Disinterested Directors reviewed the information provided by WRIMCO.

The Report suggested that, if a Fund consistently demonstrates poor performance, higher than average expenses, or a combination of both, it may be appropriate for the Disinterested Directors to consider taking affirmative action. Possible actions cited by the Report include requesting more frequent reports, WRIMCO's providing more research support, WRIMCO's providing more portfolio management capability, seeking an outside sub-advisor, or requesting a voluntary fee waiver. The IFC did not identify any individual Funds that required this attention at this time.

The Report noted that, with respect to services provided by WRIMCO affiliates, WRSCO maintained internal statistics to track shareholder service quality, which showed marked improvement in 2008, and also retained Dalbar, Inc. to provide an independent quality assessment. WRSCO scored either very good or excellent in all categories evaluated by Dalbar.

The Report stated that information for this metric is drawn from the Lipper analysis and is compared with a peer group for each Fund. The Report noted that the majority of Funds have management fees above the median of their peer groups. It concluded that, overall, more Funds have improved their comparative ranking of actual management fees in 2008 than declined.

The Report also noted that, in general, the Funds have higher total expenses than the peer group and that this is often caused by non-management fees. The Report noted that a number of Advisors Funds have smaller average account sizes relative to the general mutual fund industry and commented on the impact of such account sizes on the Funds' non-management expenses. The Report also noted the Disinterested Directors' prior discussions regarding possible means of addressing this impact and their continuing attention to this matter.

The Report noted that economies of scale occur when assets grow and a fund's fixed costs are spread over a larger asset base. The Report also pointed out that fund managers usually share economies of scale by implementing breakpoints, or scale-downs, in the structure of the management fee. As a general rule, fund directors establish breakpoints prospectively at an asset level beyond the current asset level so that shareholders benefit from future asset growth. Lipper provided the Disinterested Directors with a comprehensive listing of breakpoints in the Funds and compared the Funds' and peer groups' effective fees at uniform asset levels.

The IFC found that the Funds, except for Waddell & Reed Advisors Money Market Fund and Ivy VIP Money Market Fund, already have breakpoints in place and that these breakpoints appear adequate in providing economies of scale. However, the IFC suggested that the Disinterested Directors review the current breakpoint structure of certain Funds to determine whether an adjustment might be needed. The Disinterested Directors did so and determined that the current breakpoint structure of the Funds is appropriate.

The Report noted that the Advisors and Ivy VIP Funds have Funds with similar investment styles and therefore anticipated comparable management fees. The Report stated that management fee variances can be explained with the larger average asset size of the Advisors Funds, causing some of the Funds to reach breakpoints and reductions in management fees, or Funds that have remaining waivers. The Report further stated that, although their management fees are comparable, the Advisors Fund total expense ratio is on average higher than the comparable Ivy VIP Fund total expense ratio because of the shareholder service expenses of the Advisors Fund.

The Report noted that WRIMCO manages money for different types of clients besides mutual funds. These include corporate and municipal pension funds and investment pools for wealthy individuals (collectively, "separate accounts"). Several of these separate accounts are managed with the same investment objective and in the same style as some of the Advisors and Ivy VIP Funds. In most cases, the data provided by WRIMCO show that net management fees for the Funds are higher than that of the equivalent separate accounts. WRIMCO has explained these differences by reference to the different type of responsibilities borne by WRIMCO as a mutual fund manager and as a separate account manager. The IFC found these differences reasonable.

The Report pointed out that an important component of the profit margin analysis involves ensuring that advisor's allocation procedures are reasonable and consistent from year to year. WRIMCO uses multiple methodologies for allocation including assets, revenue, time, and square footage. The Report found that the bases of allocation have remained consistent over the past several years and that the allocation methodologies are reasonable.

The Report noted that the disinterested directors of mutual funds are required to assess that the profitability of the advisory contracts to the advisor is not excessive. In connection with the Fund-by-Fund profitability review, WRIMCO provided an analysis of the profitability of each Fund. The IFC did not find the profit margins excessive.

The Report also noted that disinterested directors often review the overall profitability of the investment management company. Lipper provided benchmarks against which to evaluate the overall profitability of Waddell and other public companies in the investment business. The Report found that this analysis places Waddell near the median of Lipper peers.

The Report stated that the IFC monitored the process, reviewed the materials, and reached the following conclusions:

On December 12, 2008, a special shareholder meeting (Meeting) for Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. (Fund) was held at the offices of Waddell & Reed Financial, Inc., 6300 Lamar Avenue, Overland Park, Kansas, 66202. The Meeting was held for the following purpose (and with the following results):

	Michael L. Avery
	For		Against
	5,635,383.242		176,841.369

	Jarold W. Boettcher
	For		Against
	5,629,898.203		182,326.408

	James M. Concannon
	For		Against
	5,635,383.242		176,841.369

	John A. Dillingham
	For		Against
	5,628,058.173		184,166.438

	David P. Gardner
	For		Against
	5,623,299.868		188,924.743

	Joseph Harroz, Jr.
	For		Against
	5,628,482.665		183,741.946

	John F. Hayes
	For		Against
	5,602,018.348		210,206.263

	Robert L. Hechler
	For		Against
	5,627,621.228		184,603.383

	Albert W. Herman
	For		Against
	5,628,826.847		183,397.764

	Henry J. Herrmann
	For		Against
	5,632,403.417		179,821.194

	Glendon E. Johnson, Sr.
	For		Against
	5,617,173.291		195,051.320

	Frank J. Ross, Jr.
	For		Against
	5,631,804.480		180,420.131

	Eleanor B. Schwartz
	For		Against
	5,633,414.772		178,809.839

Proposal 2: To approve for the Fund a proposed Agreement and Plan of Reorganization and Termination, pursuant to which the Fund would be reorganized into a corresponding series of a newly established Delaware statutory trust, to be named Waddell & Reed Advisors Funds.

On January 30, 2009, the Fund was reorganized as a series of Waddell & Reed Advisors Funds, a Delaware statutory trust.

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.

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.

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:

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.

76.60%		Domestic Common Stocks
21.05%		Cash and Cash Equivalents
2.35%		Foreign Common Stocks

Stocks	$	78.95
Information Technology	$	21.95
Health Care	$	19.04
Industrials	$	9.25
Financials	$	8.53
Consumer Staples	$	6.06
Energy	$	5.06
Materials	$	4.48
Consumer Discretionary	$	3.54
Telecommunication Services	$	1.04
Cash and Cash Equivalents	$	21.05

June 30, 2011	$	6,345
June 30, 2012		77

Total carryover	$	6,422

For	Against	Abstain

5,319,143.397	106,105.746	263,148.780

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/Mara D. Herrington
	Mara D. Herrington, Vice President and Secretary

Date:	March 6, 2009


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 6, 2009


By	/s/Joseph W. Kauten
	Joseph W. Kauten, Principal Financial Officer

Date:	March 6, 2009

3		President's Letter
5		Illustration of Fund Expenses
7		Portfolio Highlights
8		Average Annual Total Returns
9		Investments
13		Statement of Assets & Liabilities
14		Statement of Operations
15		Statement of Changes in Net Assets
16		Financial Highlights
20		Notes to Financial Statements
29		Renewal of Investment Management Agreement
36		Shareholder Meeting Results
38		Proxy Voting Information
38		Quarterly Portfolio Schedule Information

			Other Financial Instruments+

Level One - Quoted Prices	$	83,839	$	––
Level Two - Other Significant Observable Inputs		21,990		––
Level Three - Significant Unobservable Inputs		––		––

Total	$	105,829	$	––

+Other financial instruments are derivative instruments not reflected in the schedule of investments, such as options, futures and forward currency contracts. Options are shown at market value above, but only appreciation/depreciation is shown in the Statement of Assets and Liabilities.

Net ordinary income	$	––
Distributed ordinary income		––
Undistributed ordinary income		––

Realized long-term capital gains		––
Distributed long-term capital gains		––
Undistributed long-term capital gains		––

Post-October losses deferred		––