EX-17.(C)(V) 14 wrf-exh17c_v.htm W&R MM FUND ANNUAL REPORT (3/31/02) Exhibit 17(c)(v) W&R Funds Asset Strategy Fund Core Equity Fund High Income Fund International Growth Fund Large Cap Growth Fund Limited-Term Bond Fund Mid Cap Growth Fund Money Market Fund Municipal Bond Fund Science and Technology Fund Small Cap Growth Fund Tax-Managed Equity Fund Annual Report March 31, 2002 CONTENTS Asset Strategy Fund........................ 3 Core Equity Fund........................... 21 High Income Fund........................... 39 International Growth Fund.................. 60 Large Cap Growth Fund...................... 80 Limited-Term Bond Fund..................... 97 Mid Cap Growth Fund........................ 115 Money Market Fund.......................... 132 Municipal Bond Fund........................ 145 Science and Technology Fund................ 164 Small Cap Growth Fund...................... 181 Tax-Managed Equity Fund.................... 198 Notes to Financial Statements.............. 214 Independent Auditors' Report............... 237 Income Tax Information..................... 238 Directors & Officers....................... 242 Annual Privacy Notice...................... 254 Householding Notice........................ 256 This report is submitted for the general information of the shareholders of W&R Funds, Inc. It is not authorized for distribution to prospective investors unless accompanied with or preceded by the W&R Funds, Inc. current prospectus and current Fund performance information. MANAGERS' DISCUSSION March 31, 2002 An interview with Michael L. Avery and Daniel J. Vrabac, portfolio managers of W&R Funds, Inc. - Asset Strategy Fund This report relates to the operation of W&R Funds, Inc. - Asset Strategy Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? The Fund posted slightly negative returns for the fiscal year, as the Class C shares of the Fund declined 1.98 percent, compared with the S&P 500 Index (reflecting the performance of securities that generally represent the stock market), which increased 0.21 percent during the fiscal year, and the Lipper Flexible Portfolio Funds Universe Average (generally representing the performance of the universe of funds with similar investment objectives), which increased 1.44 percent for the fiscal year. The Fund also lagged its bond benchmark indexes, as the Salomon Brothers Broad Investment Grade Index (reflecting the performance of securities that generally represent the bond market) increased 5.34 percent for the fiscal year, and the Salomon Brothers Short-Term Index for 1 Month Certificates of Deposit (reflecting the performance of securities that generally represent one-month certificates of deposit) increased 3.14 percent for the year. Multiple indexes are presented because the Fund primarily invests in stocks and bonds and short-term instruments. Why did the Fund lag its benchmark indexes during the fiscal year? Our relative performance had a lot to do with our allocation decisions, in our opinion. Early in the fiscal year, as we entered the economic slowdown that turned into a recession, we decided to be very conservative and to be overweighted in Treasury securities. We decided to own some equity shares, primarily in companies that we feel should benefit from the changed global environment brought on by the terrorist attacks. We also have acquired some gold bullion and gold-related equity securities. It was a very volatile year, quarter by quarter. The stock market was very inconsistent, as it appeared that investors kept trying to sense the end of the recession and rally the market, only to see those hopes extinguished. This led to a strong stock rally in the first fiscal quarter, a devastating stock market decline in the second fiscal quarter (furthered by the terrorist attacks), a powerful rally toward the end of 2001, and a flat performance in the fiscal fourth quarter. At the same time, bond yields rose 50 basis points (which is not desirable), then fell 80 basis points (which is good), rose another 40 basis points, then rose a further 40 basis points. In spite of yields rising 50 basis points during the fiscal year, we earned a positive return on our bond positions. We also realized strong returns on our investments in gold bullion and gold-related equity securities. However, this was not enough to offset the lower returns on our other equity holdings or to offset the fact that we were under-invested in equities during the rallies that did occur. What other market conditions or events influenced the Fund's performance during the fiscal year? We correctly anticipated the economic decline during 2001. However, we miscalculated investor psychology after the September 11 terrorist attacks. In our view, the economy remains weak, and it is unclear as to whether we will see a rebound by the second half of 2002 or whether we will have to wait until 2003. We believe that the biggest influence on Fund performance was our attempt to time the market early in the year in the face of our underlying bearish attitude. What strategies and techniques did you employ that specifically affected the Fund's performance? Generally, our strategy was to remain predominantly in fixed income (including cash) throughout the year. Had we stayed with this strategy alone, performance likely would have been far better. Where we miscalculated, we believe, was trying to move in and out of the equity market in volatile and uncertain times. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? Our view on the equity market is that it likely will continue to be very volatile, responding to profit announcements, Federal Reserve action on interest rates, and economic growth. However, unlike the late 1990s, we believe that investors will be unable to simply "ride the market" higher and higher. We anticipate that our emphasis will continue to be placed on strong security analysis and selection. The equity portion of the portfolio may be gradually increased, but only as we find stocks that we believe will prosper in an era of slower global growth, increased risk of terrorism, and higher costs of security (for government, corporations and individuals). Until that time, U.S. Treasuries, gold bullion and gold-related equity securities likely will continue to dominate the portfolio. Respectfully, /s/ Michael L. Avery Michael L. Avery /s/Daniel J. Vrabac Daniel J. Vrabac Managers W&R Asset Strategy Fund Comparison of Change in Value of $10,000 Investment Salomon W&R Salomon Brothers Lipper Asset Brothers Short-Term Flexible Strategy Broad Index for Portfolio Fund, Investment 1 month Funds Class C S&P 500 Grade Certificates Universe Shares Index Index of Deposit Average ------- ------- ------- -------- ------ --------- 04-30-95 10,000 10,000 10,000 10,000 10,000 03-31-96 10,300 12,832 10,936 10,541 11,934 03-31-97 10,212 15,366 11,473 11,122 13,185 03-31-98 12,758 22,748 12,848 11,760 17,058 03-31-99 12,987 26,963 13,682 12,406 18,297 03-31-00 18,129 31,862 13,930 13,097 21,135 03-31-01 17,365 24,898 15,681 13,949 19,085 03-31-02 17,020 24,950 16,519 14,387 19,360 ==== W&R Asset Strategy Fund, Class C Shares (1)(2) -- $17,020 ++++ S&P 500 Index (1) -- $24,950 -+-+-+ Salomon Brothers Broad Investment Grade Index (1) -- $16,519 *--*-- Salomon Brothers Short-Term Index for 1 Month Certificates of Deposit (1) -- $14,387 ---- Lipper Flexible Portfolio Funds Universe Average (1) -- $19,360 (1)Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of the indexes (including income) are not available, the investments were effected as of April 30, 1995. (2)The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return* Class A Class B Class C** Class Y 1-year period ended 3-31-02 -6.93% -5.82% -1.98% -1.14% 5-year period ended 3-31-02 -- -- 10.76% 11.75% Since inception of Class through 3-31-02*** -6.19% -5.43% 7.95% 9.25% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. Class A shares carry a maximum front-end sales load of 5.75%. Class B and Class C shares carry maximum contingent deferred sales charges of 5% and 1%, respectively. Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. ***7-10-00 for Class A shares, 7-3-00 for Class B shares, 4-20-95 for Class C shares and 12-29-95 for Class Y shares (the date on which shares were first acquired by shareholders). Past performance is not necessarily indicative of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF ASSET STRATEGY FUND Asset Strategy Fund GOAL To seek high total return over the long term. Strategy Invests in stocks, bonds and short-term instruments. Within each of these classes, the Fund may invest in both domestic and foreign securities. Founded 1995 Scheduled Dividend Frequency Quarterly (March, June, September and December) Performance Summary - Class C Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Dividends paid $0.21 ===== Capital gains distribution $0.20 ===== Net asset value on 3-31-02 $11.32 adjusted to: $11.52(A) 3-31-01 11.97 ------ Change per share $ (0.45) ====== (A)This number includes the capital gains distribution of $0.20 paid in December 2001 added to the actual net asset value on March 31, 2002. Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF ASSET STRATEGY FUND Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B --------------------------- --------------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) ------ ------------- ------------ ----------- ------- 1-year period ended 3-31-02...... -6.93% -1.25% -5.82% -2.03% 5-year period ended 3-31-02...... --- --- --- --- 10-year period ended 3-31-02...... --- --- --- --- Since inception of Class(F)........ -6.19% -2.91% -5.43% -3.66% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 5.75% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of each of the periods. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of each of the periods. (F)7-10-00 for Class A shares and 7-3-00 for Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return(A) Period Class C(B) Class Y(C) ------ --------- --------- 1-year period ended 3-31-02... -1.98% -1.14% 5-year period ended 3-31-02... 10.76% 11.75% 10-year period ended 3-31-02... --- --- Since inception of Class(D)..... 7.95% 9.25% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)4-20-95 for Class C shares and 12-29-95 for Class Y shares (the date on which shares were first acquired by shareholders). SHAREHOLDER SUMMARY OF ASSET STRATEGY FUND Portfolio Highlights On March 31, 2002, Asset Strategy Fund had net assets totaling $54,133,684 invested in a diversified portfolio of: 61.56% United States Government Securities 19.12% Common Stocks 10.76% Cash and Cash Equivalents and Unrealized Loss on Open Forward Currency Contracts 4.95% Corporate Debt Securities 3.11% Bullion 0.50% Other Government Securities As a shareholder of Asset Strategy Fund, for every $100 you had invested on March 31, 2002, your Fund owned: United States Government Securities $61.56 Common Stocks $19.12 Cash and Cash Equivalents and Unrealized Loss on Open Forward Currency Contracts $10.76 Corporate Debt Securities $ 4.95 Bullion $ 3.11 Other Government Securities $ 0.50 THE INVESTMENTS OF ASSET STRATEGY FUND March 31, 2002 Troy Ounces Value BULLION - 3.11% Gold......................................... 5,566 $ 1,684,286 (Cost: $1,519,910) COMMON STOCKS Shares Banks - 0.21% Charter One Financial, Inc.............. 3,600 112,392 Broadcasting - 0.26% Westwood One, Inc.*..................... 3,600 138,060 Business Equipment and Services - 0.22% Accenture Ltd*.......................... 2,100 56,070 KPMG Consulting, Inc.*.................. 3,200 64,784 ------------ 120,854 Chemicals - Specialty - 1.01% Air Products and Chemicals, Inc......... 2,300 118,795 OM Group, Inc........................... 3,900 281,970 USEC Inc................................ 23,100 147,840 ------------ 548,605 Computers - Peripherals - 1.99% EMC Corporation*........................ 24,400 290,848 Lexmark International, Inc.*............ 2,300 131,514 Microsoft Corporation*.................. 4,000 241,020 SAP Aktiengesellschaft, ADR............. 8,200 305,040 Take-Two Interactive Software, Inc.*.... 5,300 106,557 ------------ 1,074,979 Forest and Paper Products - 0.25% Sealed Air Corporation*................. 2,900 136,532 Gold and Precious Metals - 4.94% Agnico-Eagle Mines Limited.............. 19,300 257,655 AngloGold Limited, ADR.................. 29,700 747,846 Barrick Gold Corporation................ 34,091 632,729 Glamis Gold Ltd.*....................... 44,815 239,760 Goldcorp Incorporated (A)............... 8,220 143,138 Meridian Gold Inc. (A)*................. 8,870 129,410 Placer Dome Inc......................... 42,891 525,415 ------------ 2,675,953 Health Care - Drugs - 1.26% Pfizer Inc.............................. 6,500 258,310 Pharmacia Corporation................... 9,400 423,752 ------------ 682,062 Health Care - General - 0.57% Wyeth................................... 4,700 $308,555 Home Builders, Mobile Homes - 0.46% Lennar Corporation...................... 4,700 247,972 Hospital Supply and Management - 1.12% Health Management Associates, Inc., Class A* 14,500 300,585 Tenet Healthcare Corporation*........... 4,600 308,292 ------------ 608,877 Leisure Time Industry - 0.93% Midway Games Inc.*...................... 9,200 123,832 Sturm, Ruger & Company, Inc............. 10,700 138,030 THQ Inc.*............................... 4,900 240,124 ------------ 501,986 Mining - 1.96% Newmont Mining Corporation.............. 38,245 1,059,004 Petroleum - Domestic - 0.94% Anadarko Petroleum Corporation.......... 4,300 242,692 Burlington Resources Inc................ 6,600 264,594 ------------ 507,286 Petroleum - Services - 0.76% Baker Hughes Incorporated............... 7,200 275,400 Smith International, Inc.*.............. 2,000 135,500 ------------ 410,900 Steel - 1.01% Gibraltar Steel Corporation............. 25,200 548,604 Utilities - Electric - 0.52% Dominion Resources, Inc................. 4,300 280,188 Utilities - Gas and Pipeline - 0.71% El Paso Corporation..................... 7,400 325,822 Questar Corporation..................... 2,200 56,562 ------------ 382,384 TOTAL COMMON STOCKS - 19.12%................. $10,345,193 (Cost: $8,907,279) Principal Amount in CORPORATE DEBT SECURITIES Thousands Value Banks - 0.56% Banco Latinoamericano de Exportaciones, S.A., 6.59%, 10-6-02 (B)................. $300 $303,492 Beverages - 0.57% Diageo Capital plc, 6.0%, 3-27-03...................... 300 307,037 Food and Related - 0.26% GRUMA, S.A. de C.V., 7.625%, 10-15-07................... 150 142,125 Petroleum - Domestic - 0.56% Apache Corporation, 9.25%, 6-1-02...................... 300 303,564 Retail - General Merchandise - 0.56% Wal-Mart Stores, Inc., 6.875%, 8-1-02..................... 300 304,539 Steel - 0.56% CSN Islands Corporation, 9.625%, 8-2-02 (B)................. 300 304,875 Trucking and Shipping - 0.56% WMX Technologies, Inc., 7.7%, 10-1-02...................... 300 305,024 Utilities - Electric - 1.04% Dominion Resources, Inc., 7.4%, 9-16-02...................... 300 305,101 PP&L Capital Funding, Inc., 7.7%, 11-15-07..................... 250 256,081 ------------ 561,182 Utilities - Telephone - 0.28% Comtel Brasileira Ltda., 10.75%, 9-26-04.................... 150 153,750 TOTAL CORPORATE DEBT SECURITIES - 4.95% $ 2,685,588 (Cost: $2,638,929) Principal Amount in OTHER GOVERNMENT SECURITY - 0.50% Thousands Value Mexico United Mexican States, 8.625%, 3-12-08.................... $250 $269,125 (Cost: $244,661) UNITED STATES GOVERNMENT SECURITIES United States Treasury Notes: 2.75%, 10-31-03.................... 10,375 10,283,005 5.75%, 11-15-05 (C)................ 13,400 13,927,102 6.125%, 8-15-07.................... 8,675 9,115,187 TOTAL UNITED STATES GOVERNMENT SECURITIES - 61.56% $33,325,294 (Cost: $33,381,546) Face UNREALIZED LOSS ON OPEN Amount in FORWARD CURRENCY CONTRACTS - (0.00%) Thousands Japanese Yen, 12-11-02 (D).............. Y352,441 (1,870) Eurodollar, 5-15-02 (D)................. EUR6 (139) ------------ $(2,009) TOTAL SHORT-TERM SECURITIES - 4.56%.......... $2,467,658 (Cost: $2,467,658) TOTAL INVESTMENTS - 93.80%................... $50,775,135 (Cost: $49,159,983) CASH AND OTHER ASSETS, NET OF LIABILITIES - 6.20% 3,358,549 NET ASSETS - 100.00%......................... $54,133,684 Notes to Schedule of Investments *No income dividends were paid during the preceding 12 months. (A)Listed on an exchange outside the United States. (B)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At March 31, 2002, the total value of these securities amounted to $608,367 or 1.12% of net assets. (C)As of March 31, 2002, a portion of the security is used as cover for the following written call options. (See Note 6 to financial statements): Contracts Underlying Subject Expiration Month/ Premium Market Security to Call Exercise Price Received Value --------------------------------------------------------------------------------- Phelps Dodge Corporation 32 July/40 $11,744 $13,120 Phelps Dodge Corporation 103 July/40 36,771 42,230 ---------------------- $48,515 $55,350 ====================== (D)Principal amounts are denominated in the indicated foreign currency, where applicable (Y - Japanese Yen, EUR - Euro.) 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 ASSET STRATEGY FUND March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investments - at value (Notes 1 and 3): Bullion (cost - $1,520)...................... $ 1,684 Securities (cost - $47,640).................. 49,091 ------- 50,775 Cash............................................... 16 Receivables: Investment securities sold..................... 2,840 Dividends and interest......................... 538 Fund shares sold............................... 170 ------- Total assets............................. 54,339 ------- LIABILITIES Payable to Fund shareholders........................... 91 Outstanding call options at market (Note 6)............ 55 Accrued shareholder servicing (Note 2)................. 20 Payable for investment securities purchased............ 10 Accrued management fee (Note 2)........................ 7 Accrued distribution fee (Note 2)...................... 4 Accrued accounting services fee (Note 2)............... 3 Accrued service fee (Note 2)........................... 1 Other.................................................. 14 ------- Total liabilities........................... 205 ------- Total net assets................... $54,134 ======= NET ASSETS $0.01 par value capital stock: Capital stock.................................... $48 Additional paid-in capital.................... 55,873 Accumulated undistributed income (loss): Accumulated undistributed net investment income... 66 Accumulated undistributed net realized loss on investment transactions............... (3,461) Net unrealized appreciation in value of investments............................ 1,608 ------- Net assets applicable to outstanding units of capital................... $54,134 ======= Net asset value per share (net assets divided by shares outstanding): Class A............................................ $11.33 Class B............................................ $11.32 Class C............................................ $11.32 Class Y............................................ $11.33 Capital shares outstanding: Class A............................................... 363 Class B............................................... 228 Class C............................................. 4,134 Class Y................................................ 55 Capital shares authorized.............................. 200,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS ASSET STRATEGY FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization.......................... $2,031 Dividends (net of foreign withholding taxes of $2). 129 ------- Total income.................................. 2,160 ------- Expenses (Note 2): Investment management fee............................ 402 Distribution fee: Class A.......................................... 2 Class B.......................................... 18 Class C.......................................... 380 Class Y.......................................... 2 Shareholder servicing: Class A.......................................... 9 Class B.......................................... 8 Class C.......................................... 136 Class Y.......................................... 1 Service fee: Class A.......................................... 6 Class B.......................................... 6 Class C.......................................... 127 Accounting services fee............................... 35 Custodian fees........................................ 20 Audit fees............................................ 12 Legal fees............................................ 2 Other................................................. 61 ------- Total............................................ 1,227 ------- Net investment income....................... 933 ------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities........................... (3,253) Realized net loss on written call options................. (66) Realized net loss on purchased call options............... (11) Realized net gain on purchased put options................ --* ------- Realized net loss on investments..................... (3,330) ------- Unrealized appreciation in value of securities during the period.................................... 1,338 Unrealized depreciation in value of forward currency contracts during the period.......................... (88) Unrealized depreciation in value of written call options during the period.................................... (73) ------- Unrealized appreciation in value of investments during the period............................... 1,177 ------- Net loss on investments......................... (2,153) ------- Net decrease in net assets resulting from operations....................... $(1,220) ======= *Not shown due to rounding. See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS ASSET STRATEGY FUND (In Thousands) For the Fiscal Year Ended March 31, -------------- 2002 2001 INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income.................... $933 $517 Realized net gain (loss) on investments (3,330) 3,825 Unrealized appreciation (depreciation).. 1,177 (6,973) ------------------ Net decrease in net assets resulting from operations.............. (1,220) (2,631) ------------------ Distributions to shareholders from (Note 1E):* Net investment income: Class A............................ (89) (20) Class B............................ (44) (7) Class C............................ (911) (288) Class Y............................ (16) (9) Realized net gain on investment transactions: Class A............................ (64) (281) Class B............................ (43) (139) Class C............................ (833) (9,737) Class Y............................ (10) (96) ------------------ (2,010) (10,577) ------------------ Capital share transactions (Note 5).......... (1,608) 19,464 ------------------ Total increase (decrease)............... (4,838) 6,256 NET ASSETS Beginning of period.......................... 58,972 52,716 ------------------ End of period................................ $54,134 $58,972 =================== Undistributed net investment income.... $66 $193 =============== *See "Financial Highlights" on pages 17 - 20. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS ASSET STRATEGY FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-10-00* ended to 3-31-02 3-31-01 Net asset value, beginning of period.............. $11.98 $15.22 ------------------- Income (loss) from investment operations: Net investment income........................ 0.25 0.15 Net realized and unrealized loss on investments.......................... (0.40) (0.60) ------------------- Total from investment operations.................. (0.15) (0.45) ------------------- Less distributions: From net investment income................... (0.30) (0.13) From capital gains........................... (0.20) (2.66) ------------------- Total distributions............................... (0.50) (2.79) ------------------- Net asset value, end of period.................... $11.33 $11.98 =================== Total return**.................................... -1.25% -3.77% Net assets, end of period (in millions)............ $4 $2 Ratio of expenses to average net assets............. 1.45% 1.26%*** Ratio of net investment income to average net assets.......................... 2.28% 2.26%*** Portfolio turnover rate........................... 143.38% 214.77%**** *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. ****For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS ASSET STRATEGY FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 Net asset value, beginning of period.............. $11.97 $15.21 ------------------- Income (loss) from investment operations: Net investment income........................ 0.17 0.07 Net realized and unrealized loss on investments.......................... (0.41) (0.60) ------------------- Total from investment operations.................. (0.24) (0.53) ------------------- Less distributions: From net investment income................... (0.21) (0.05) From capital gains........................... (0.20) (2.66) ------------------- Total distributions............................... (0.41) (2.71) ------------------- Net asset value, end of period.................... $11.32 $11.97 =================== Total return..................................... -2.03% -4.35% Net assets, end of period (in millions)........... $3 $2 Ratio of expenses to average net assets........... 2.25% 2.15%** Ratio of net investment income to average net assets........................... 1.50% 1.37%** Portfolio turnover rate........................... 143.38% 214.77%*** *Commencement of operations. **Annualized. ***For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS ASSET STRATEGY FUND Class C Shares (A) For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended March 31, -------------------------------------------- 2002 2001 2000 1999 1998 Net asset value, beginning of period $11.97 $15.21 $11.20 $11.42 $9.73 --------------------------------------------- Income (loss) from investment operations: Net investment income 0.19 0.11 0.03 0.15 0.21 Net realized and unrealized gain (loss) on investments.... (0.43) (0.62) 4.33 0.05 2.16 --------------------------------------------- Total from investment operations.......... (0.24) (0.51) 4.36 0.20 2.37 --------------------------------------------- Less distributions: From net investment income......... (0.21) (0.07) (0.05) (0.16) (0.22) From capital gains.. (0.20) (2.66) (0.30) (0.26) (0.46) --------------------------------------------- Total distributions...... (0.41) (2.73) (0.35) (0.42) (0.68) --------------------------------------------- Net asset value, end of period....... $11.32 $11.97 $15.21 $11.20 $11.42 ============================================== Total return............. -1.98% - 4.22% 39.60% 1.79% 24.94% Net assets, end of period (in millions) $47 $54 $52 $30 $19 Ratio of expenses to average net assets 2.20% 2.15% 2.24% 2.32% 2.44% Ratio of net investment income to average net assets.......... 1.59% 0.86% 0.24% 1.38% 2.02% Portfolio turnover rate.. 143.38% 214.77% 204.12% 168.17% 220.67% (A)See Note 5. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS ASSET STRATEGY FUND Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended March 31, -------------------------------------------- 2002 2001 2000 1999 1998 Net asset value, beginning of period $11.98 $15.26 $11.21 $11.43 $9.73 --------------------------------------------- Income (loss) from investment operations: Net investment income 0.28 0.24 0.15 0.26 0.31 Net realized and unrealized gain (loss) on investments.... (0.42) (0.63) 4.33 0.05 2.16 --------------------------------------------- Total from investment operations.......... (0.14) (0.39) 4.48 0.31 2.47 --------------------------------------------- Less distributions: From net investment income......... (0.31) (0.23) (0.13) (0.27) (0.31) From capital gains.. (0.20) (2.66) (0.30) (0.26) (0.46) --------------------------------------------- Total distributions...... (0.51) (2.89) (0.43) (0.53) (0.77) --------------------------------------------- Net asset value, end of period....... $11.33 $11.98 $15.26 $11.21 $11.43 ============================================== Total return............. -1.14% -3.39% 40.85% 2.75% 26.06% Net assets, end of period (in thousands) $627 $550 $508 $307 $225 Ratio of expenses to average net assets 1.33% 1.32% 1.33% 1.45% 1.58% Ratio of net investment income to average net assets.......... 2.44% 1.71% 1.14% 2.25% 2.90% Portfolio turnover rate.. 143.38% 214.77% 204.12% 168.17% 220.67% See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with James D. Wineland, portfolio manager of W&R Funds, Inc. - Core Equity Fund This report relates to the operation of W&R Funds, Inc. - Core Equity Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? The Fund had a negative return for the fiscal year, underperforming its benchmark indexes. In a difficult economic environment, most large capitalization stocks struggled, and the benchmark index had a flat return for the period. The Class C shares of the Fund declined 3.94 percent during the last fiscal year, compared with the Lipper Large-Cap Core Funds Universe Average (generally reflecting the performance of the universe of funds with similar investment objectives), which declined 1.86 percent for the year, and the S&P 500 Index (reflecting the performance of securities that generally represent the stock market), which had a slight increase of 0.21 percent for the year. Why did the Fund lag its benchmark index during the fiscal year? We believe that our performance lagged the benchmark over the last 12 months due primarily to our holdings in telecommunications and energy stocks. Both of these groups performed poorly throughout 2001. While the energy group has recovered somewhat in the first quarter of 2002, the telecommunications sector has continued to struggle. What other market conditions or events influenced the Fund's performance during the fiscal year? A key issue during the second half of the fiscal year was the revelation and market response to the Enron bankruptcy. Accounting practices of corporate America and Wall Street came under scrutiny as never before. Companies with a history of aggressive accounting policies and questionable financial practices came under broad selling pressure. The war on terror also clearly had a heavy impact on the market. Defense-related stocks performed very well, as it became apparent that the campaign against terror will be lengthy and costly in terms of security and defense appropriations. Corporate earnings remained depressed during most of the fiscal year, despite signs of economic recovery in early 2002. By fiscal year-end, valuations of many stocks seemed to be quite extended with relatively high price-to-earnings ratios; we also feel that there is a growing likelihood that the Federal Reserve may increase interest rates in the coming months. What strategies and techniques did you employ that specifically affected the Fund's performance? The U.S. continues to be involved in a highly uncertain geopolitical situation. We feel that there is a high risk that an energy supply disruption could quickly develop. The Fund is thus currently heavily weighted in stocks of North American oil, natural gas, and oil service companies. Health care continues to be an area of emphasis as well. Few industries possess the demographics, revenue and earnings growth dynamics of the large pharmaceutical sector, in our opinion. We also feel that valuations of many market sectors remain quite high. We believe that technology stocks generally do not have sufficient earnings growth visibility to support their current stock prices, particularly if we are about to enter a period of tightening monetary policy. We have reduced our holdings in technology substantially since the beginning of 2002. On the other hand, we continue to have substantial holdings in the financial sector. While many stocks in this area have been under pressure due to investors' concerns regarding credit quality, we think the improving economy and the highly positive shape of the interest rate yield curve could create conditions for some positive earnings surprises and good stock performance later in 2002. Additionally, we feel that aerospace/defense has been very strong and we maintain holdings in that sector. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? We believe that geopolitical events will be critical to the financial markets in the near term. We think it is quite likely that the U.S. will broaden the campaign against terrorism during the remainder of 2002. The pace of global economic recovery is secondary to the war on terrorism as an investment issue. Our portfolio is structured to reflect the likely continued importance of defense spending on a long-term basis. We also are positioned for a potential growing concern regarding the supply of oil and natural gas. Companies that generate North American sources of energy remain very solid investments, in our opinion. We feel that the economy, both in the U.S. and globally, is likely to gather strength as 2002 progresses. However, we think current stock values, generally, are already reflecting a positive economic scenario and a rebound in corporate earnings that may prove to be too aggressive. Generally, the U.S. consumer remains strong. Auto sales, housing activity, and retail spending patterns continue to be encouraging. Having moved through the recent recession with only modest slowing of consumption, we should not expect the ensuing recovery to produce a strong positive rebound from already high absolute spending levels. Given the economic outlook, we feel that interest rates are likely to rise. The Federal Reserve aggressively eased monetary policy in 2000 and 2001 to prevent a more intense slowdown. Stock valuations, which benefit from lower capital costs, may not improve easily if there is a period of rising interest rates. Overall, the capital-spending boom of the late 1990s created a condition of enlarged capacity in many industries that may take time for our system to absorb. Some industries (telecommunications, financial services, technology) likely will face a period of difficult industry pricing and protracted consolidation and downsizing. Investor confidence has been shaken by the September 11 terrorist attacks and the Enron debacle. Our outlook remains cautious. Our expectations are modest, yet hopeful. We believe that the U.S. remains the world's most powerful nation economically, technologically, and militarily. While past performance is no guarantee of future results, high quality U.S. stocks have historically provided competitive returns to patient investors. We think this pattern is solidly intact, despite the current difficulties. Respectfully, /s/James D. Wineland James D. Wineland Manager W&R Core Equity Fund Comparison of Change in Value of $10,000 Investment W&R Core Lipper Equity Large-Cap Fund, Core Funds Class C S&P 500 Universe Shares Index Average --------- --------- ---------- 09-30-92 10,000 10,000 10,000 03-31-93 11,147 10,962 11,072 03-31-94 12,073 11,123 11,408 03-31-95 12,818 12,855 12,651 03-31-96 16,503 16,982 16,281 03-31-97 18,472 20,334 18,781 03-31-98 25,781 30,103 26,968 03-31-99 27,707 35,681 30,911 03-31-00 34,352 42,164 36,764 03-31-01 28,720 32,950 28,637 03-31-02 27,587 33,019 28,776 ===== W&R Core Equity Fund, Class C Shares (1) (2) -- $27,587 +++++ S&P 500 Index (1) -- $33,019 ----- Lipper Large-Cap Core Funds Universe Average (1) -- $28,776 (1)Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of both the indexes are not available, the investments were effected as of September 30, 1992. (2)The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return* Class A Class B Class C** Class Y 1-year period ended 3-31-02 -8.74% -7.76% -3.94% -3.18% 5-year period ended 3-31-02 -- -- 8.35% 9.24% Since inception of Class through 3-31-02*** -14.57% -14.93% 11.18% 10.56% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. Class A shares carry a maximum front-end sales load of 5.75%. Class B and Class C shares carry maximum contingent deferred sales charges of 5% and 1%, respectively. Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. ***7-3-00 for Class A shares, 7-11-00 for Class B shares, 9-21-92 for Class C shares and 12-29-95 for Class Y shares (the date on which shares were first acquired by shareholders). Past performance is not necessarily indicative of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF CORE EQUITY FUND Core Equity Fund GOALS To seek capital growth and income. Strategy Invests primarily in common stocks of large U.S. and foreign companies with dominant market positions in their industries and that have the potential for capital appreciation or that are expected to resist market decline. Founded 1992 Scheduled Dividend Frequency Annually (December) Performance Summary - Class C Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Capital gains distribution $0.31 ===== Net asset value on 3-31-02 $8.76 adjusted to: $9.07(A) 3-31-01 9.45 ------ Change per share $(0.38) ====== (A)This number includes the capital gains distribution of $0.31 paid in December 2001 added to the actual net asset value on March 31, 2002. Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF CORE EQUITY FUND Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B --------------------------- ----------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) -------------------- ------------ ------------ ----------------- 1-year period ended 3-31-02..... -8.74% -3.18% -7.76% -4.06% 5-year period ended 3-31-02..... -- -- -- -- 10-year period ended 3-31-02..... -- -- -- -- Since inception of Class(F)....... -14.57% -11.62% -14.93% -13.32% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 5.75% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of each of the periods. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of each of the periods. (F)7-3-00 for Class A shares and 7-11-00 for Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return(A) Period Class C(B) Class Y(C) ------ --------- --------- 1-year period ended 3-31-02..... -3.94% -3.18% 5-year period ended 3-31-02..... 8.35% 9.24% 10-year period ended 3-31-02..... -- -- Since inception of Class(D)....... 11.18% 10.56% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)9-21-92 for Class C shares and 12-29-95 for Class Y shares (the date on which shares were first acquired by shareholders). SHAREHOLDER SUMMARY OF CORE EQUITY FUND Portfolio Highlights On March 31, 2002, Core Equity Fund had net assets totaling $374,556,004 invested in a diversified portfolio of: 93.15% Common Stocks 6.34% Cash and Cash Equivalents 0.51% Preferred Stock As a shareholder of Core Equity Fund, for every $100 you had invested on March 31, 2002, your Fund owned: Financial Services Stocks $18.39 Energy Stocks $17.12 Health Care Stocks $14.91 Technology Stocks $12.48 Utilities Stocks $10.16 Consumer Goods and Services Stocks $ 7.79 Cash and Cash Equivalents $ 6.34 Raw Materials Stocks $ 4.22 Retail Stocks $ 3.24 Capital Goods Stocks $ 2.75 Miscellaneous Stocks $ 2.09 Preferred Stock $ 0.51 THE INVESTMENTS OF CORE EQUITY FUND March 31, 2002 COMMON STOCKS Shares Value Aircraft - 3.99% Lockheed Martin Corporation 259,300 $ 14,930,494 ------------ Aluminum - 1.88% Alcoa Incorporated 186,400 7,034,736 ------------ Banks - 6.39% Citigroup Inc. 117,300 5,808,696 Morgan (J.P.) Chase & Co. 148,100 5,279,765 U.S. Bancorp 314,400 7,096,008 Wells Fargo & Company 116,600 5,760,040 ------------ 23,944,509 ------------ Beverages - 1.38% Anheuser-Busch Companies, Inc. 98,900 5,162,580 ------------ Broadcasting - 3.19% Clear Channel Communications, Inc.* 140,100 7,202,541 Viacom Inc., Class B* 97,900 4,735,423 ------------ 11,937,964 ------------ Capital Equipment - 1.33% Caterpillar Inc. 87,600 4,980,060 ------------ Chemicals - Petroleum and Inorganic - 0.98% du Pont (E.I.) de Nemours and Company 78,000 3,677,700 ------------ Chemicals - Specialty - 1.36% Air Products and Chemicals, Inc. 98,900 5,108,185 ------------ Communications Equipment - 1.49% Cisco Systems, Inc.* 147,100 2,489,667 Nokia Oyj (A) 146,000 3,080,525 ------------ 5,570,192 ------------ Computers - Micro - 0.76% Dell Computer Corporation* 109,000 2,844,355 ------------ Computers - Peripherals - 3.96% EMC Corporation* 185,900 2,215,928 Microsoft Corporation* 176,000 10,604,880 SAP Aktiengesellschaft, ADR 53,900 2,005,080 ------------ 14,825,888 ------------ Electronic Components - 2.28% Analog Devices, Inc.* 67,300 3,031,192 Intel Corporation 123,900 3,768,418 Xilinx, Inc.* 44,100 1,760,252 ------------ 8,559,862 ------------ Farm Machinery - 1.42% Deere & Company 116,600 5,311,130 ------------ Health Care - Drugs - 10.88% Biogen, Inc.* 75,600 3,708,558 Forest Laboratories, Inc.* 144,900 11,838,330 Merck & Co., Inc. 65,900 3,794,522 Pfizer Inc. 255,675 10,160,525 Pharmacia Corporation 125,773 5,669,847 Schering-Plough Corporation 178,300 5,580,790 ------------ 40,752,572 ------------ Health Care - General - 2.16% Johnson & Johnson 50,000 3,247,500 Wyeth 73,800 4,844,970 ------------ 8,092,470 ------------ Hospital Supply and Management - 1.87% Guidant Corporation* 101,400 4,392,648 Medtronic, Inc. 57,600 2,604,096 ------------ 6,996,744 ------------ Insurance - Property and Casualty - 6.02% American International Group, Inc. 114,250 8,241,995 Chubb Corporation (The) 111,200 8,128,720 Munchener Ruckversicherungs - Gesellschaft Aktiengesellschaft (A) 24,900 6,179,632 ------------ 22,550,347 ------------ Leisure Time Industry - 1.15% Walt Disney Company (The) 187,100 4,318,268 ------------ Motion Pictures - 2.07% AOL Time Warner Inc.* 327,850 7,753,652 ------------ Multiple Industry - 1.61% General Electric Company 160,900 6,025,705 ------------ Petroleum - Domestic - 5.76% Anadarko Petroleum Corporation 227,400 12,834,456 Burlington Resources Inc. 217,700 8,727,593 ------------ 21,562,049 ------------ Petroleum - International - 4.71% Exxon Mobil Corporation 242,068 10,609,840 Royal Dutch Petroleum Company, NY Shares 129,600 7,039,872 ------------ 17,649,712 ------------ Petroleum - Services - 6.65% Baker Hughes Incorporated 290,600 11,115,450 Schlumberger Limited 151,100 8,887,702 Transocean Sedco Forex Inc. 147,346 4,896,308 ------------ 24,899,460 ------------ Retail - General Merchandise - 3.24% Target Corporation 281,500 12,138,280 ------------ Security and Commodity Brokers - 5.98% Charles Schwab Corporation (The) 125,150 1,638,214 Fannie Mae 69,600 5,559,648 Freddie Mac 82,400 5,221,688 Goldman Sachs Group, Inc. (The) 110,600 9,981,650 ------------ 22,401,200 ------------ Timesharing and Software - 0.48% eBay Inc.* 31,700 1,792,476 ------------ Utilities - Electric - 1.18% Dominion Resources, Inc. 67,700 4,411,332 ------------ Utilities - Gas and Pipeline - 2.76% El Paso Corporation 234,800 10,338,244 ------------ Utilities - Telephone - 6.22% BellSouth Corporation 103,200 3,803,952 Cox Communications, Inc., Class A* 236,900 8,916,916 SBC Communications Inc. 194,700 7,289,568 Vodafone Group Plc, ADR 179,400 3,306,342 ------------ 23,316,778 ------------ TOTAL COMMON STOCKS - 93.15% $348,886,944 (Cost: $266,195,947) ------------ PREFERRED STOCK - 0.51% Utilities - Telephone Cox Communications, Inc., 7.0% Convertible 37,600 $ 1,896,920 (Cost: $1,875,410) ------------ Principal Amount In SHORT-TERM SECURITIES Thousands Value Food and Related - 0.89% General Mills, Inc., 2.0588%, Master Note $3,350 $ 3,350,000 ------------ Health Care - Drugs - 1.33% Abbott Laboratories 1.81%, 5-7-02 5,000 4,990,950 ------------ Household - General Products - 1.87% Kimberly-Clark Worldwide Inc., 1.77%, 4-17-02 7,000 6,994,493 ------------ Security and Commodity Brokers - 1.71% UBS Finance Delaware LLC, 1.85%, 4-1-02 6,396 6,396,000 ------------ Utilities - Gas and Pipeline - 0.53% Questar Corporation, 1.87%, 4-23-02 2,000 1,997,715 ------------ TOTAL SHORT-TERM SECURITIES - 6.33% $ 23,729,158 (Cost: $23,729,158) ------------ TOTAL INVESTMENT SECURITIES - 99.99% $374,513,022 (Cost: $291,800,515) ------------ CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.01% 42,982 ------------ NET ASSETS - 100.00% $374,556,004 ------------ Notes to Schedule of Investments *No income dividends were paid during the preceding 12 months. (A)Listed on an exchange outside the United States. 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 CORE EQUITY FUND March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities - at value (Notes 1 and 3)....... $374,513 Cash................................................... 1 Receivables: Investment securities sold.......................... 980 Dividends and interest.............................. 418 Fund shares sold.................................... 154 Prepaid insurance premium............................... 2 -------- Total assets.................................... 376,068 -------- LIABILITIES Payable to Fund shareholders............................ 1,254 Accrued shareholder servicing (Note 2).................. 147 Accrued management fee (Note 2)......................... 36 Accrued distribution fee (Note 2)....................... 29 Accrued service fee (Note 2)............................ 10 Accrued accounting services fee (Note 2)................ 6 Other................................................... 30 -------- Total liabilities............................... 1,512 -------- Total net assets........................... $374,556 ======== NET ASSETS $0.01 par value capital stock: Capital stock..................................... $427 Additional paid-in capital........................ 329,240 Accumulated undistributed income (loss): Accumulated undistributed net investment loss..... (5) Accumulated undistributed net realized loss on investment transactions....................... (37,815) Net unrealized appreciation in value of investments................................ 82,709 -------- Net assets applicable to outstanding units of capital.......................... $374,556 ======== Net asset value per share (net assets divided by shares outstanding): Class A.............................................. $8.89 Class B.............................................. $8.74 Class C.............................................. $8.76 Class Y.............................................. $9.19 Capital shares outstanding: Class A.............................................. 1,048 Class B.............................................. 698 Class C.............................................. 40,587 Class Y.............................................. 379 Capital shares authorized................................ 400,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS CORE EQUITY FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT LOSS Income (Note 1B): Dividends (net of foreign withholding taxes of $39).............................. $ 4,466 Interest and amortization...................... 258 -------- Total income............................... 4,724 -------- Expenses (Note 2): Distribution fee: Class A...................................... 4 Class B...................................... 42 Class C...................................... 2,996 Class Y...................................... 7 Investment management fee........................ 2,901 Shareholder servicing: Class A...................................... 15 Class B...................................... 22 Class C...................................... 1,117 Class Y...................................... 4 Service fee: Class A...................................... 12 Class B...................................... 14 Class C...................................... 998 Accounting services fee.......................... 71 Custodian fees................................... 41 Audit fees....................................... 19 Legal fees....................................... 6 Other............................................ 161 -------- Total expenses............................... 8,430 -------- Net investment loss...................... (3,706) -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities..................... (37,018) Realized net loss on written call options........... (795) Realized net gain on foreign currency transactions.. 12 -------- Realized net loss on investments................ (37,801) Unrealized appreciation in value of investments during the period........................... 23,521 -------- Net loss on investments..................... (14,280) -------- Net decrease in net assets resulting from operations..................... $(17,986) ======== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS CORE EQUITY FUND (In Thousands) For the Fiscal Year Ended March 31, ------------------------ 2002 2001 -------- -------- DECREASE IN NET ASSETS Operations: Net investment loss............. $ (3,706) $ (5,135) Realized net gain (loss) on investments.............. (37,801) 58,202 Unrealized appreciation (depreciation).............. 23,521 (143,457) -------- -------- Net decrease in net assets resulting from operations.............. (17,986) (90,390) -------- -------- Distributions to shareholders from (Note 1E):* Net investment income: Class A......................... -- -- Class B......................... -- -- Class C......................... -- -- Class Y......................... -- -- Realized net gain on investment transactions: Class A....................... (247) (426) Class B....................... (199) (600) Class C....................... (12,921) (95,020) Class Y....................... (112) (404) -------- -------- (13,479) (96,450) -------- -------- Capital share transactions (Note 5)....................... (44,714) 50,130 -------- -------- Total decrease................. (76,179) (136,710) NET ASSETS Beginning of period................ 450,735 587,445 -------- -------- End of period...................... $374,556 $450,735 ======== ======== Undistributed net investment loss............ $(5) $(2) ==== === *See "Financial Highlights" on pages 35 - 38. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS CORE EQUITY FUND (A) Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 ------------- ------------- Net asset value, beginning of period............... $9.51 $13.89 ----- ------ Loss from investment operations: Net investment loss............................ (0.20) (0.00) Net realized and unrealized loss on investments............................. (0.11) (2.00) ----- ------ Total from investment operations................... (0.31) (2.00) ----- ------ Less distributions: From net investment income..................... (0.00) (0.00) From capital gains............................. (0.31) (2.38) ----- ------ Total distributions................................ (0.31) (2.38) ----- ------ Net asset value, end of period..................... $8.89 $ 9.51 ===== ====== Total return**..................................... -3.18% -16.72% Net assets, end of period (in millions)........................... $9 $4 Ratio of expenses to average net assets..................................... 1.26% 1.18%*** Ratio of net investment loss to average net assets............................. -0.11% -0.11%*** Portfolio turnover rate............................ 22.36% 39.02%**** (A)Core Equity Fund (formerly Total Return Fund) changed its name effective October 2, 2000. *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. ****For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS CORE EQUITY FUND (A) Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-11-00* ended to 3-31-02 3-31-01 -------------- ------------ Net asset value, beginning of period..................................... $9.44 $14.10 ----- ------ Loss from investment operations: Net investment loss........................... (0.14) (0.05) Net realized and unrealized loss on investments............................ (0.25) 2.23) ----- ------ Total from investment operations.................. (0.39) (2.28) ----- ------ Less distributions: From net investment income.................... (0.00) (0.00) From capital gains............................ (0.31) (2.38) ----- ------ Total distributions............................... (0.31) (2.38) ----- ------ Net asset value, end of period.................... $8.74 $ 9.44 ===== ====== Total return...................................... -4.06% -18.50% Net assets, end of period (in millions)................................. $6 $5 Ratio of expenses to average net assets.................................... 2.18% 2.11%** Ratio of net investment loss to average net assets......................... -1.04% -1.02%** Portfolio turnover rate........................... 22.36% 9.02%*** (A)Core Equity Fund (formerly Total Return Fund) changed its name effective October 2, 2000. *Commencement of operations. **Annualized. ***For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS CORE EQUITY FUND (A) Class C Shares (B) For a Share of Capital Stock Outstanding Throughout Each Period:* For the fiscal year ended March 31, ------------------------------------- 2002 2001 2000 1999 1998 Net asset value, beginning of period......................... $9.45 $13.76 $11.52 $12.24 $ 9.09 ----- ------ ------ ------ ------ Income (loss) from investment operations: Net investment income (loss)................. (0.08) (0.11) (0.01) 0.03 (0.02) Net realized and unrealized gain (loss) on investments................ 0.30) (1.82) 2.71 0.82 3.56 ----- ------ ------ ------ ------ Total from investment operations........................ (0.38) (1.93) 2.70 0.85 3.54 ----- ------ ------ ------ ------ Less distributions: From net investment income........................ (0.00) (0.00) (0.03) (0.01) (0.00) From capital gains................ (0.31) (2.38) (0.43) (1.56) (0.39) ----- ------ ------ ------ ------ Total distributions................... (0.31) (2.38) (0.46) (1.57) (0.39) ----- ------ ------ ------ ------ Net asset value, end of period..................... $8.76 $9.45 $13.76 $11.52 $12.24 ===== ===== ====== ====== ====== Total return.......................... -3.94% -16.40% 23.98% 7.47% 39.57% Net assets, end of period (in millions).............. $356 $440 $585 $508 $473 Ratio of expenses to average net assets........................ 2.05% 1.97% 1.98% 1.93% 1.92% Ratio of net investment income (loss) to average net assets........................ -0.91% -0.93% -0.12% 0.30% -0.23% Portfolio turnover rate............... 22.36% 39.02% 75.64% 54.73% 36.94% (A)Core Equity Fund (formerly Total Return Fund) changed its name effective October 2, 2000. (B)See Note 5. *Per share amounts have been adjusted retroactively to reflect the 100% stock dividend effected June 26, 1998. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS CORE EQUITY FUND (A) Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period:* For the fiscal year ended March 31, ------------------------------------- 2002 2001 2000 1999 1998 ----- ------ ------ ------ ------ Net asset value, beginning of period........................ $9.82 $14.08 $11.78 $12.46 $ 9.18 ----- ------ ------ ------ ------ Income (loss) from investment operations: Net investment income (loss)................ (0.11) (0.04) 0.06 0.12 0.05 Net realized and unrealized gain (loss) on investments.................. (0.21) (1.84) 2.80 0.84 3.62 ----- ------ ------ ------ ------ Total from investment operations....................... (0.32) (1.88) 2.86 0.96 3.67 ----- ------ ------ ------ ------ Less distributions: From net investment income....................... (0.00) (0.00) (0.13) (0.08) (0.00) From capital gains............... (0.31) (2.38) (0.43) (1.56) (0.39) ----- ------ ------ ------ ------ Total distributions.................. (0.31) (2.38) (0.56) (1.64) (0.39) ----- ------ ------ ------ ------ Net asset value, end of period.................... $9.19 $ 9.82 $14.08 $11.78 $12.46 ===== ====== ====== ====== ====== Total return......................... -3.18% -15.62% 24.96% 8.37% 40.63% Net assets, end of period (in millions)............. $4 $2 $2 $1 $1 Ratio of expenses to average net assets....................... 1.17% 1.15% 1.16% 1.15% 1.20% Ratio of net investment income (loss) to average net assets....................... -0.03% -0.11% 0.67% 1.10% 0.50% Portfolio turnover rate.............. 22.36% 39.02% 75.64% 54.73% 36.94% (A)Core Equity Fund (formerly Total Return Fund) changed its name effective October 2, 2000. *Per share amounts have been adjusted retroactively to reflect the 100% stock dividend effected June 26, 1998. See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with Louise D. Rieke, portfolio manager of W&R Funds, Inc. - High Income Fund This report relates to the operation of W&R Funds, Inc. - High Income Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? The Fund did rather well during the fiscal year, significantly outperforming its benchmark index. The Class C shares of the Fund increased 7.58 percent for the fiscal year, compared with the Salomon Brothers High Yield Market Index (generally reflecting the performance of securities that represent the high yield bond market), which increased 1.4 percent during the period, and the Lipper High Current Yield Funds Universe Average (reflecting the performance of the universe of funds with similar objectives), which declined 1.09 percent during the period. What helped the Fund to outperform its benchmark index during the fiscal year? One reason behind the Fund's strong performance was our lack of exposure to the wireline telecommunications companies and Competitive Local Exchange Carriers (CLECs), many of which ran into financial difficulty during the year and are now restructuring. Another contributing reason was our emphasis on stable industries, including cable, broadcast media, health care and the leisure sector. Our rationale was that the consumer, while appearing strong, was holding back on major purchases, while the manufacturing sector began to show weakness. That philosophy held up until the tragic attacks on September 11. The leisure and lodging sectors were severely impacted immediately after the attacks, but by fiscal year-end had bounced back to even higher prices than before. What other market conditions or events influenced the Fund's performance during the fiscal year? One of the largest factors, we believe, was our desire to protect the downside by avoiding the wireline (long distance, CLEC) sector, as mentioned above. The whole sector has fallen tremendously, due primarily to overbuilding of the infrastructure. The composition of the Fund during the fiscal year was neutral to defensive. We entered January 2002 believing that this was the year for an economic turnaround, although we intend to wait to see specific signs of one before structuring the Fund in a more offensive position. What strategies and techniques did you employ that specifically affected the Fund's performance? Primarily, we tried to stay defensive, meaning we emphasized what we felt were stable industries such as cable, health care and gaming. At fiscal year-end, the Fund had approximately 25 percent of its holdings invested in BB and higher-rated securities. We generally attempted to stay with quality credits until we could see signs of an economic turnaround. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? We feel that attractive sectors currently are the broadcast media, environmental services, health care, lodging and energy. We continue to look for sectors such as environmental services and broadcasting, which we believe will do better during an improving economy. Also of interest currently are individual names that we feel are potential turnaround candidates and that show above-market return potential. Respectfully, /s/Louise D. Rieke Louise D. Rieke Manager W&R High Income Fund Comparison of Change in Value of $10,000 Investment Salomon Lipper Brothers High W&R High Current High Income Yield Yield Funds Fund, Class Market Universe C Shares Index Average ----------- ------ --------- 07-31-97 $10,000 $10,000 $10,000 03-31-98 11,177 10,868 10,851 03-31-99 10,986 10,982 10,742 03-31-00 11,005 10,720 10,809 03-31-01 11,025 11,010 10,514 03-31-02 11,860 11,164 10,399 +++++ W&R High Income Fund, Class C Shares(1) -- $11,860 ===== Salomon Brothers High Yield Market Index -- $11,164 ----- Lipper High Current Yield Funds Universe Average -- $10,399 (1)The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return* Class A Class B Class C** Class Y 1-year period ended 3-31-02 2.23% 3.66% 7.58% 8.50% Since inception of Class through 3-31-02*** 1.79% 2.32% 3.72% 3.86% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. Class A shares carry a maximum front-end sales load of 5.75%. Class B and Class C shares carry maximum contingent deferred sales charges of 5% and 1%, respectively. Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. ***7-3-00 for Class A shares, 7-18-00 for Class B shares, 7-31-97 for Class C shares and 12-30-98 for Class Y shares (the date on which shares were first acquired by shareholders). Past performance is not necessarily indicative of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF HIGH INCOME FUND High Income Fund GOALS To seek a high level of current income as a primary goal and capital growth as a secondary goal when consistent with its primary goal. Strategy Invests primarily in high-yield, high-risk, fixed-income securities of U.S. and foreign issuers. The Fund may invest up to 20% of its total assets in common stocks in order to seek capital growth. Founded 1997 Scheduled Dividend Frequency Declared daily, paid monthly Performance Summary - Class C Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Dividends paid $0.68 ===== Net asset value on 3-31-02 $ 8.48 3-31-01 8.54 ------ Change per share $(0.06) ====== Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF HIGH INCOME FUND Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B -------------------------- ------------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) ---------------------- ---------- ------------- ----------- ------- 1-year period ended 3-31-02..... 2.23% 8.46% 3.66% 7.64% 5-year period ended 3-31-02..... -- -- -- -- 10-year period ended 3-31-02..... -- -- -- -- Since inception of Class(F)....... 1.79% 5.31% 2.32% 4.48% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 5.75% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of each of the periods. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of each of the periods. (F)7-3-00 for Class A shares and 7-18-00 for Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return (A) Period Class C(B) Class Y(C) ---------------- -------- -------- 1-year period ended 3-31-02..... 7.58% 8.50% 5-year period ended 3-31-02..... -- -- 10-year period ended 3-31-02..... -- -- Since inception of Class(D)....... 3.72% 3.86% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)7-31-97 for Class C shares and 12-30-98 for Class Y shares (the date on which shares were first acquired by shareholders). A substantial portion of the Fund's returns during recent periods is attributable to investments in initial public offerings. No assurance can be given that the Fund will continue to be able to invest in such offerings to the same extent as it has in the past or that future offerings in which the Fund invests will have as equally beneficial impact on performance. Investing in high income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. SHAREHOLDER SUMMARY OF HIGH INCOME FUND Portfolio Highlights On March 31, 2002, High Income Fund had net assets totaling $20,231,237 invested in a diversified portfolio of: 82.26% Corporate Debt Securities 7.79% Cash and Cash Equivalents 7.43% Common and Preferred Stocks, Rights and Warrants 2.52% Other Government Securities As a shareholder of High Income Fund, for every $100 you had invested on March 31, 2002, your Fund owned: Consumer Goods and Services Bonds $26.45 Business Equipment and Services Bonds $ 9.14 Health Care Bonds $ 8.61 Cash and Cash Equivalents $ 7.79 Common and Preferred Stocks, Rights and Warrants $ 7.43 Retail Bonds $ 6.27 Utilities Bonds $ 6.18 Shelter Bonds $ 6.07 Multi-Industry Bonds $ 5.69 Energy Bonds $ 4.93 Miscellaneous Bonds $ 4.56 Raw Materials Bonds $ 4.36 Other Government Securities $ 2.52 THE INVESTMENTS OF HIGH INCOME FUND March 31, 2002 COMMON AND PREFERRED STOCKS, RIGHTS AND WARRANTS Shares Value Broadcasting - 1.73% Adelphia Communications Corporation, 13% Preferred.......................... 2,500 $ 237,500 Charter Communications, Inc.*.............. 10,000 113,100 ------------ 350,600 ------------ Communications Equipment - 0.00% Primus Telecommunications Group, Incorporated, Warrants*................ 300 3 ------------ Homebuilders, Mobile Homes - 0.27% WCI Communities, Inc. *.................... 2,200 53,680 ------------ Multiple Industry - 2.45% Anvil Holdings, Inc., 13.0% Preferred*..... 14,774 229,000 CSC Holdings, Inc., 11.125% Preferred...... 2,569 267,176 ------------ 496,176 ------------ Retail - General Merchandise - 1.10% United Auto Group, Inc. *.................. 9,900 223,146 ------------ Savings and Loans - 1.85% California Federal Preferred Capital Corporation, 9.125% Preferred.......... 15,000 373,650 ------------ Security and Commodity Brokers - 0.00% ONO Finance Plc Rights (A)*................. 250 63 ------------ Utilities - Telephone - 0.03% Intermedia Communications Inc., 13.5% Preferred* 1 614 IWO Holdings, Inc., Warrants (A)*.......... 250 6,250 ------------ 6,864 ------------ TOTAL COMMON AND PREFERRED STOCKS, RIGHTS AND WARRANTS - 7.43% $ 1,504,182 (Cost: $1,625,200) ------------ Principal Amount in CORPORATE DEBT SECURITIES Thousands Beverages - 1.26% Constellation Brands, Inc., 8.125%, 1-15-12..................... $250 255,000 ------------ Broadcasting - 6.41% Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation, 9.625%, 11-15-09 (A)................ 250 237,500 Entravision Communications Corporation, 8.125%, 3-15-09 (A)................. 100 101,000 Gray Communications Systems, Inc., 9.25%, 12-15-11 (A)................. 125 128,750 Insight Communications Company, Inc., 0.0%, 2-15-11 (B)................... 250 163,750 Mediacom Broadband LLC and Mediacom Broadband Corporation, 11.0%, 7-15-13...................... 250 276,250 Young Broadcasting Inc., 10.0%, 3-1-11....................... 375 390,000 ------------ 1,297,250 ------------ Business Equipment and Services - 9.14% Allbritton Communications Company, 9.75%, 11-30-07..................... 250 263,750 Allied Waste North America, Inc., 10.0%, 8-1-09....................... 300 303,750 Avis Rent A Car, Inc., 11.0%, 5-1-09....................... 250 272,500 Graphic Packaging Corporation, 8.625%, 2-15-12 (A)................. 100 103,750 Iron Mountain Incorporated, 8.625%, 4-1-13...................... 300 315,000 Lamar Advertising Company, 8.625%, 9-15-07..................... 250 261,250 Nextel Partners, Inc., 12.5%, 11-15-09 (A)................. 100 67,000 Owens & Minor, Inc., 8.5%, 7-15-11....................... 250 261,250 ------------ 1,848,250 ------------ Capital Equipment - 1.21% CSK Auto, Inc., 12.0%, 6-15-06 (A).................. 230 243,800 ------------ Chemicals - Specialty - 4.36% Applied Extrusion Technologies, Inc., 10.75%, 7-1-11...................... 250 265,000 Buckeye Cellulose Corporation, 8.5%, 12-15-05...................... 250 225,000 OM Group, Inc., 9.25%, 12-15-11 (A)................. 125 130,000 UCAR Finance Inc., 10.25%, 2-15-12 (A)................. 250 262,500 ------------ 882,500 ------------ Communications Equipment - 1.23% PanAmSat Corporation, 8.5%, 2-1-12 (A).................... 250 248,750 ------------ Construction Materials - 1.30% Interface, Inc., 10.375%, 2-1-10 (A)................. 250 262,812 ------------ Consumer Electronics - 1.51% LIN Holdings Corp.: 0.0%, 3-1-08 (B).................... 250 216,562 0.0%, 3-1-08 (B).................... 100 89,000 ------------ 305,562 ------------ Containers - 1.22% Corporacion Durango, S.A. de C.V., 13.125%, 8-1-06..................... 250 247,500 ------------ Cosmetics and Toiletries - 1.76% Armkel, LLC, and Armkel Finance, Inc., 9.5%, 8-15-09....................... 100 106,500 Chattem, Inc., 8.875%, 4-1-08...................... 250 250,000 ------------ 356,500 ------------ Food and Related - 2.23% Aurora Foods Inc., 8.75%, 7-1-08....................... 335 319,088 Pilgrim's Pride Corporation, 9.625%, 9-15-11..................... 125 131,250 ------------ 450,338 ------------ Forest and Paper Products - 1.00% Norske Skog Canada Limited, 8.625%, 6-15-11 (A)................. 200 202,500 ------------ Health Care - General - 1.83% Alliance Imaging, Inc., 10.375%, 4-15-11.................... 250 266,250 AmerisourceBergen Corporation, 8.125%, 9-1-08...................... 100 104,500 ------------ 370,750 ------------ Homebuilders, Mobile Homes - 0.53% WCI Communities, Inc., 10.625%, 2-15-11.................... 100 108,000 ------------ Hospital Supply and Management - 6.78% Beverly Enterprises, Inc., 9.625%, 4-15-09..................... 250 255,313 Columbia/HCA Healthcare Corporation, 7.0%, 7-1-07........................ 250 252,704 Extendicare Health Services, Inc., 9.35%, 12-15-07..................... 250 227,500 Triad Hospitals, Inc., 8.75%, 5-1-09....................... 250 266,250 United Surgical Partners Holdings, Inc., 10.0%, 12-15-11..................... 125 127,656 US Oncology, Inc., 9.625%, 2-1-12 (A).................. 250 242,500 ------------ 1,371,923 ------------ Hotels and Gaming - 2.32% Ameristar Casinos, Inc., 10.75%, 2-15-09..................... 150 164,625 Choctaw Resort Development Enterprise, 9.25%, 4-1-09....................... 50 51,500 Circus and Eldorado Joint Venture and Silver Legacy Capital Corp., 10.125%, 3-1-12 (A)................. 100 102,750 Mohegan Tribal Gaming Authority, 8.0%, 4-1-12 (A).................... 150 149,625 ------------ 468,500 ------------ Household - General Products - 3.70% Core-Mark International, Inc., 11.375%, 9-15-03.................... 250 240,000 Sealy Mattress Company, 0.0%, 12-15-07 (B).................. 250 244,375 Simmons Company, 10.25%, 3-15-09..................... 250 264,687 ------------ 749,062 ------------ Leisure Time Industry - 2.48% Hollywood Park, Inc., 9.25%, 2-15-07...................... 250 238,750 Premier Parks Inc., 9.75%, 6-15-07...................... 250 262,188 ------------ 500,938 ------------ Metal Fabrication - 0.50% Wolverine Tube, Inc., 10.5%, 4-1-09 (A)................... 100 100,750 ------------ Motion Pictures - 2.52% AMC Entertainment Inc.: 9.5%, 3-15-09....................... 150 149,250 9.5%, 2-1-11........................ 100 99,500 Regal Cinemas Corporation, 9.375%, 2-1-12 (A).................. 250 261,250 ------------ 510,000 ------------ Motor Vehicle Parts - 0.52% Collins & Aikman Floorcoverings, Inc., 9.75%, 2-15-10 (A).................. 100 104,625 ------------ Multiple Industry - 5.69% AAF-McQuay Inc., 8.875%, 2-15-03..................... 370 370,000 Phoenix Color Corp., 10.375%, 2-1-09..................... 100 74,500 Renaissance Media Group LLC, 0.0%, 4-15-08 (B)................... 250 207,500 TransWestern Publishing Company LLC, 9.625%, 11-15-07.................... 250 262,500 WESCO Distribution, Inc., 9.125%, 6-1-08...................... 250 236,250 ------------ 1,150,750 ------------ Petroleum - Domestic - 2.28% Chesapeake Energy Corporation, 8.125%, 4-1-11...................... 200 200,500 Snyder Oil Corporation, 8.75%, 6-15-07...................... 250 260,625 ------------ 461,125 ------------ Petroleum - Services - 2.65% Key Energy Services, Inc., 8.375%, 3-1-08...................... 250 255,000 R&B Falcon Corporation, 9.5%, 12-15-08...................... 250 280,830 ------------ 535,830 ------------ Railroad - 0.32% TFM, S.A. de C.V., 0.0%, 6-15-09 (B)................... 70 65,100 ------------ Real Estate Investment Trusts - 4.54% Host Marriott, L.P., 9.25%, 10-1-07...................... 250 258,750 Meditrust: 7.51%, 9-26-03...................... 150 147,986 7.82%, 9-10-26...................... 250 250,000 Meritage Corporation, 9.75%, 6-1-11....................... 250 261,875 ------------ 918,611 ------------ Retail - General Merchandise - 3.91% Advance Stores Company, Incorporated, 10.25%, 4-15-08 (A)................. 250 264,375 AutoNation, Inc., 9.0%, 8-1-08........................ 150 157,500 Domino's, Inc., 10.375%, 1-15-09.................... 250 267,500 United Auto Group, Inc., 9.625%, 3-15-12 (A)................. 100 102,625 ------------ 792,000 ------------ Retail - Specialty Stores - 2.36% AmeriGas Partners, L.P. and AP Eagle Finance Corp., 8.875%, 5-20-11..................... 100 103,000 Jo-Ann Stores, Inc., 10.375%, 5-1-07..................... 110 107,250 Michaels Stores, Inc., 9.25%, 7-1-09....................... 250 266,563 ------------ 476,813 ------------ Tobacco - 0.52% DIMON Incorporated, 9.625%, 10-15-11.................... 100 106,000 ------------ Utilities - Telephone - 6.18% AT&T Wireless Group, 7.875%, 3-1-11...................... 250 249,420 Alamosa (Delaware), Inc., 12.5%, 2-1-11....................... 150 123,000 Horizon PCS, Inc., 13.75%, 6-15-11 (A)................. 100 77,500 IWO Holdings, Inc., 14.0%, 1-15-11...................... 250 212,500 ------------ Insight Midwest, L.P. and Insight Capital, Inc., 10.5%, 11-1-10...................... 125 135,625 Tritel PCS, Inc., 10.375%, 1-15-11.................... 250 281,250 Utilities - Telephone US Unwired Inc., 0.0%, 11-01-09 (B).................. 100 66,000 VoiceStream Wireless Corporation, 10.375%, 11-15-09................... 97 104,760 ------------ 1,250,055 ------------ TOTAL CORPORATE DEBT SECURITIES - 82.26% $ 16,641,594 (Cost: $16,034,453) ------------ OTHER GOVERNMENT SECURITIES Brazil - 1.15% Federative Republic of Brazil (The), 11.0%, 1-11-12...................... 250 232,500 ------------ Mexico - 1.37% United Mexican States, 9.75%, 4-6-05....................... 250 277,500 ------------ TOTAL OTHER GOVERNMENT SECURITIES - 2.52% $ 510,000 (Cost: $477,702) ------------ SHORT-TERM SECURITIES - 6.27% Retail - Food Stores Kroger Co. (The), 2.85%, 4-1-02....................... 1,000 1,000,000 Safeway Inc., 2.15%, 4-1-02....................... 268 268,000 ------------ (Cost: $1,268,000) $ 1,268,000 ------------ TOTAL INVESTMENT SECURITIES - 98.48% $ 19,923,776 (Cost: $19,405,355) ------------ CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.52% 307,461 ------------ NET ASSETS - 100.00% $ 20,231,237 ------------ Notes to Schedule of Investments *No income dividends were paid during the preceding 12 months. (A)Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At March 31, 2002, the total value of these securities amounted to $3,400,675 or 16.81% of net assets. (B)The security does not bear interest for an initial period of time and subsequently becomes interest bearing. 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 HIGH INCOME FUND March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities - at value (Notes 1 and 3) $19,924 Receivables: Dividends and interest.......................... 385 Fund shares sold................................ 26 ------- Total assets.................................. 20,335 ------- LIABILITIES Payable to Fund shareholders............................ 59 Dividends payable....................................... 18 Accrued shareholder servicing (Note 2).................. 9 Due to custodian........................................ 4 Accrued accounting services fee (Note 2)................ 1 Accrued distribution fee (Note 2)....................... 1 Accrued service fee (Note 2)............................ 1 Other................................................... 11 ------- Total liabilities............................. 104 ------- Total net assets........................ $20,231 ======== NET ASSETS $0.01 par value capital stock: Capital stock.................................. $ 24 Additional paid-in capital..................... 24,597 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions................... (4,908) Net unrealized appreciation in value of investments......................... 518 ------- Net assets applicable to outstanding units of capital........................ $20,231 ======== Net asset value per share (net assets divided by shares outstanding): Class A................................................ $8.48 Class B................................................ $8.48 Class C................................................ $8.48 Class Y................................................ $8.48 Capital shares outstanding: Class A................................................ 223 Class B................................................ 113 Class C................................................ 2,042 Class Y................................................ 8 Capital shares authorized................................... 200,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS HIGH INCOME FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization...................... $1,804 Dividends...................................... 140 ------- Total income................................. 1,944 ------- Expenses (Note 2): Distribution fee: Class A...................................... 1 Class B...................................... 7 Class C...................................... 133 Class Y...................................... --* Investment management fee...................... 124 Shareholder servicing: Class A...................................... 3 Class B...................................... 3 Class C...................................... 65 Class Y...................................... --* Service fee: Class A...................................... 2 Class B...................................... 2 Class C...................................... 45 Registration fees.............................. 47 Accounting services fee........................ 12 Audit fees..................................... 11 Custodian fees................................. 7 Other.......................................... 10 ------- Total.......................................... 472 Less expenses in excess of voluntary waiver of investment management fee (Note 2)............................ (124) ------- Total expenses.......................... 348 ------- Net investment income.............. 1,596 ------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments....................... (641) Unrealized appreciation in value of investments during the period.................. 490 ------- Net loss on investments........................ (151) ------- Net increase in net assets resulting from operations............... $1,445 ======== *Not shown due to rounding. See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS HIGH INCOME FUND (In Thousands) For the Fiscal Year Ended March 31, ------------------- 2002 2001 ------ ------ INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income.................. $1,596 $1,703 Realized net loss on investments....... (641) (3,053) Unrealized appreciation................ 490 1,325 ------ ------ Net increase (decrease) in net assets resulting from operations....... 1,445 (25) ------ ------ Distributions to shareholders from net investment income (Note 1E):* Class A................................ (94) (18) Class B................................ (72) (21) Class C................................ (1,428) (1,663) Class Y................................ (2) (1) ------ ------ (1,596) (1,703) ------ ------ Capital share transactions (Note 5)............ 733 (1,506) ------ ------ Total increase (decrease).............. 582 (3,234) NET ASSETS Beginning of period............................ 19,649 22,883 ------ ------ End of period.................................. $20,231 $19,649 ======= ======= Undistributed net investment income............ $ -- $ -- ==== ==== *See "Financial Highlights" on pages 56 - 59. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS HIGH INCOME FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 ------------- ------------ Net asset value, beginning of period.............................. $8.54 $9.04 ----- ----- Income (loss) from investment operations: Net investment income.................. 0.74 0.58 Net realized and unrealized loss on investments................ (0.06) (0.50) ----- ----- Total from investment operations........... 0.68 0.08 ----- ----- Less distributions: Declared from net investment income.................. (0.74) (0.58) From capital gains..................... (0.00) (0.00) ----- ----- Total distributions........................ (0.74) (0.58) ----- ----- Net asset value, end of period............. $8.48 $8.54 ===== ===== Total return**............................. 8.46% 0.90% Net assets, end of period (000 omitted).......................... $1,895 $442 Ratio of expenses to average net assets including voluntary expense waiver............... 0.84% 1.05%*** Ratio of net investment income to average net assets including voluntary expense waiver............... 9.00% 9.01%*** Ratio of expenses to average net assets excluding voluntary expense waiver............... 1.14% 1.42%*** Ratio of net investment income to average net assets excluding voluntary expense waiver............... 8.70% 8.64%*** Portfolio turnover rate.................... 82.42% 114.89%**** *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. ****For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS HIGH INCOME FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-18-00* ended to 3-31-02 3-31-01 ------------ ------------ Net asset value, beginning of period....................... $8.54 $9.03 ----- ----- Income (loss) from investment operations: Net investment income..................... 0.68 0.48 Net realized and unrealized loss on investments........................ (0.06) (0.49) ----- ----- Total from investment operations.............. 0.62 (0.01) ----- ----- Less distributions: Declared from net investment income..................... (0.68) (0.48) From capital gains........................ (0.00) (0.00) ----- ----- Total distributions........................... (0.68) (0.48) ----- ----- Net asset value, end of period................ $8.48 $8.54 ===== ===== Total return.................................. 7.64% 0.09% Net assets, end of period (in millions)............................. $1 $1 Ratio of expenses to average net assets including voluntary expense waiver.................. 1.74% 1.85%** Ratio of net investment income to average net assets including voluntary expense waiver.............. 8.09% 8.30%** Ratio of expenses to average net assets excluding voluntary expense waiver.................. 2.36% 2.50%** Ratio of net investment income to average net assets excluding voluntary expense waiver.................. 7.47% 7.65%** Portfolio turnover rate....................... 82.42% 114.89%*** *Commencement of operations. **Annualized. ***For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS HIGH INCOME FUND Class C Shares (A) For a Share of Capital Stock Outstanding Throughout Each Period: For the period For the fiscal from year ended March 31, 7-31-97* ---------------------------------- to 2002 2001 2000 1999 3-31-98 ------ ------ ------ ------ ---------- Net asset value, beginning of period................. $8.54 $9.27 $9.94 $10.79 $10.00 ----- ----- ----- ------ ------ Income (loss) from investment operations: Net investment income 0.68 0.73 0.69 0.63 0.37 Net realized and unrealized gain (loss) on investments........ (0.06) (0.73) (0.67) (0.82) 0.79 ----- ----- ----- ------ ------ Total from investment operations............. 0.62 0.00 0.02 (0.19) 1.16 ----- ----- ----- ------ ------ Less distributions: Declared from net investment income.. (0.68) (0.73) (0.69) (0.63) (0.37) From capital gains..... (0.00) (0.00) (0.00) (0.03) (0.00) ----- ----- ----- ------ ------ Total distributions........ (0.68) (0.73) (0.69) (0.66) (0.37) ----- ----- ----- ------ ------ Net asset value, end of period.......... $8.48 $8.54 $9.27 $ 9.94 $10.79 ===== ===== ===== ====== ====== Total return............... 7.58% 0.18% 0.17% -1.72% 11.77% Net assets, end of period (in millions).......... $17 $19 $23 $25 $12 Ratio of expenses to average net assets including voluntary expense waiver................. 1.82% 1.78% 2.17% 2.20% 2.52%** Ratio of net investment income to average net assets including voluntary expense waiver................. 8.01% 8.38% 7.16% 6.29% 5.98%** Ratio of expenses to average net assets excluding voluntary expense waiver................. 2.46% 2.41% 2.26% -- -- Ratio of net investment income to average net assets excluding voluntary expense waiver......... 7.36% 7.75% 7.07% -- -- Portfolio turnover rate 82.42% 114.89% 71.31% 50.98% 67.82% (A)See Note 5. *Commencement of operations. **Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS HIGH INCOME FUND Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the period For the fiscal from year ended March 31, 12-30-98* ---------------------------- to 2002 2001 2000 3-31-99 --------- -------- ------- --------- Net asset value, beginning of period.............. $8.54 $9.27 $9.94 $9.97 ----- ----- ----- ----- Income (loss) from investment operations: Net investment income............ 0.75 0.78 0.77 0.20 Net realized and unrealized gain (loss) on investments............... (0.06) (0.73) (0.67) 0.00 ----- ----- ----- ----- Total from investment operations....................... 0.69 0.05 0.10 0.20 ----- ----- ----- ----- Less distributions: Declared from net investment income............ (0.75) (0.78) (0.77) (0.20) From capital gains............... (0.00) (0.00) (0.00) (0.03) ----- ----- ----- ----- Total distributions.................. (0.75) (0.78) (0.77) (0.23) ----- ----- ----- ----- Net asset value, end of period........................ $8.48 $8.54 $9.27 $9.94 ===== ===== ===== ===== Total return......................... 8.50% 0.79% 0.94% 2.45% Net assets, end of period (000 omitted)............. $64 $12 $6 $6 Ratio of expenses to average net assets including voluntary expense waiver......... 0.79% 1.20% 1.40% 0.26%** Ratio of net investment income to average net assets including voluntary expense waiver................... 8.99% 8.95% 7.85% 8.55%** Ratio of expenses to average net assets excluding voluntary expense waiver......... 1.08% 1.62% 1.46% -- Ratio of net investment income to average net assets excluding voluntary expense waiver................... 8.71% 8.52% 7.79% -- Portfolio turnover rate.............. 82.42% 114.89% 71.31% 50.98%** *Commencement of operations. **Annualized. See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with Thomas A. Mengel, portfolio manager of W&R Funds, Inc. - International Growth Fund This report relates to the operation of W&R Funds, Inc. - International Growth Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? The Fund struggled during what proved to be a difficult environment for international equities, underperforming its benchmark index. The Class C shares of the Fund declined 18.73 percent, compared with the Morgan Stanley Capital International E.A.FE. Index (the index that generally reflects the performance of the securities markets in Europe, Australia and the Far East), which declined 8.5 percent for the fiscal year, and the Lipper International Funds Universe Average (the index that generally reflects the performance of funds with similar investment objectives), which declined 7.4 percent during the period. Why did the Fund lag its benchmark indexes during the fiscal year? The Fund underperformed its benchmark index, we believe, because we remained in a defensive investment position for the first half of the fiscal year. Our cautious approach was initially a reaction to the rapidly deteriorating global technology sector and its potential impact on earnings, equity prices, investor sentiment and global economies. Early in 2001 it was apparent that this tremendous capital spending disruption had thrown the United States into recession, and we felt that there was serious risk that the global economic slowdown might become a global recession. Uncertainty following the terrorist attacks of September 11 further supported our cautious investment mode. In the final calendar quarter of 2001, we pared our defensive investment positions and raised our holdings of cyclical and growth-oriented companies. This was in response to improved investor confidence and early signs of global economic stabilization late in that quarter, which we believe primarily resulted from an unprecedented pace of monetary ease in the United States. Most major foreign central banks also reduced interest rates throughout 2001. In addition, several countries provided fiscal stimulus, such as tax cuts, to aid their economies. The Fund also was negatively impacted by the generally strong U.S. dollar during the period. Europe's single currency, the euro, was especially weak in the first half of the fiscal year, as the European Central Bank was slow to reduce interest rates. The dollar, in contrast, was boosted by aggressive U.S. monetary easing and safe-haven inflows during the global slowdown. This resulted in a negative currency contribution to our investment performance. What other market conditions or events influenced the Fund's performance during the fiscal year? Investors in 2001 were faced with the first major global economic downturn in over 25 years. In addition to the cyclical business slowdown, we were on the painful downside of a massive technology sector capital spending boom/bust. Despite efforts to cut operating costs, many companies announced major earnings disappointments. Corporate profitability continued to be hurt by broad disinflationary pressures in the prices of many goods, and even outright deflation in the retail prices of consumer electronics and personal computers. Global central banks responded swiftly and, we feel, appropriately by reducing interest rates and providing ample liquidity to financial markets. Additional interest-rate cuts and fiscal stimulus were added in response to the tragic terrorist attacks of September 11. This external shock immediately created disruptions and distortions in the global economy, while introducing additional uncertainty into the global business cycle. Now it appears as though the unprecedented amount of global monetary ease has pulled the world economy out of a sharp, but short, downturn. Europe was able to avoid an outright recession. Continental Europe enjoyed a successful introduction of euro notes and coins in January 2002, which was a major step in reducing transaction costs and barriers to business. Consumer and business sentiment in major countries has improved for several months now. What strategies and techniques did you employ that specifically affected the Fund's performance? Because the Fund holds primarily foreign investments, the strong U.S. dollar had a negative impact on valuation for much of the fiscal year. The Fund continued to hold what we felt were fundamentally sound growth companies that were negatively impacted early in the fiscal year by high energy prices and, later in the period, by the global economic slowdown which favored fixed income investments rather than equity exposure. We continue to believe in the investment discipline that foreign investments provide important long-term portfolio diversification. However, the U.S. equity market outperformed major foreign markets during both the high-tech boom and the global slowdown that followed. What industries did you emphasize during the fiscal year, and what looks attractive to you going forward? Early in the fiscal year we remained in a defensive investment approach, with limited exposure to regions most closely aligned with the slowing U.S. economic activity: Asia, Latin America, Japan, Canada and emerging markets in general. Holdings in Japan and minor markets also were minimized due to what we felt were unresolved domestic financial issues, along with the increased credit risk associated with a global downturn. In the fourth calendar quarter we observed improved investor confidence and early signs of global economic stabilization. In response, we pared our cash and defensive holdings and increased our investments in cyclical and growth-oriented companies. We raised sector weightings in banking, insurance, telecommunications and services. We also repositioned European holdings to further highlight France and Britain, where we felt that early resumption of economic growth was most likely to occur within Europe. While investors continue to debate the strength and duration of this global recovery, we believe that companies may still face deflationary pricing pressures and uncertain cost structures. These challenges should increase business competition and stress the importance of prudent corporate governance. We are hopeful that our careful financial scrutiny of investment opportunities will help us select those growth companies that are well managed and in the best position to thrive in this new business environment. We intend to continue to closely monitor industrial and consumer activities so we may take advantage of shifts between economic sectors. Several important foreign elections this year will be observed for their potential impact on business, industry and consumers. We remain alert to the heightened military and political tension in the Middle East and Gulf regions, and intend to quickly shift to a more defensive investment posture if such a move becomes appropriate. Crude oil prices have moved up moderately, but we will be vigilant to the risks and windfalls of any dramatic price rise in this critical commodity. Aside from a possible temporary oil-price shock, we believe that a global recovery should be free of broad inflationary concerns. Monetary and fiscal policy should remain supportive of the global business cycle, in our opinion. Central banks will need to raise interest rates from current extremely low levels, but we believe that rates likely will remain at levels that are historically quite modest. Tax rates for both consumers and business have been lowered in many major and minor countries, creating the potential for a more efficient allocation of capital. Respectfully, /s/Thomas A. Mengel Thomas A. Mengel Manager W&R International Growth Fund Comparison of Change in Value of $10,000 Investment Morgan Stanley W&R Capital International International Lipper Growth E.A.FE. International Fund, Index Funds Class C (with net Universe Shares dividends) Average --------- ---------- ---------- 09-30-92 10,000 10,000 10,000 03-31-93 9,753 10,767 10,710 03-31-94 9,785 13,190 13,291 03-31-95 10,160 13,992 13,179 03-31-96 10,937 15,717 15,407 03-31-97 13,654 15,946 16,885 03-31-98 18,466 18,913 20,282 03-31-99 20,378 20,060 20,315 03-31-00 40,328 25,093 28,474 03-31-01 24,015 18,600 20,417 03-31-02 19,518 17,023 18,905 ===== W&R International Growth Fund, Class C (2) (3) -- $19,518 ***** Morgan Stanley Capital International E.A.FE. Index (with net dividends) (2) - $17,023 *-*-* Lipper International Funds Universe Average (2) - $18,905 Past performance is not necessarily indicative of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Comparative performance of W&R International Growth Fund, Class C Shares following change in objective. Morgan Stanley W&R Capital International International Lipper Growth E.A.FE. International Fund, Index Funds Class C (with net Universe Shares dividends) Average --------- ---------- ---------- 04-30-95 10,000 10,000 10,000 03-31-96 10,625 10,826 11,321 03-31-97 13,265 10,983 12,407 03-31-98 17,939 13,027 14,903 03-31-99 19,797 13,817 14,927 03-31-00 39,178 17,284 20,923 03-31-01 23,330 12,811 15,002 03-31-02 18,961 11,726 13,892 ===== W&R International Growth Fund, Class C (3) (4) -- $18,961 ***** Morgan Stanley Capital International E.A.FE. Index (with net dividends) (4) - $11,726 *-*-* Lipper International Funds Universe Average (4) - $13,892 (1)Effective as of 4-20-95, the name of the Fund was changed to W&R International Growth Fund and its investment objective was changed to long-term appreciation, with realization of income as a secondary objective. (2)Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of both the indexes are not available, the investments were effected as of September 30, 1992. (3)The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. (4)Because the Fund's new investment objective became effective on a date other than at the end of a month, and partial month calculations of the performance of both the indexes are not available, the investments were effected as of April 30, 1995. Average Annual Total Return* Class A Class B Class C** Class Y 1-year period ended 3-31-02 -22.83% -22.16% -18.73% -17.79% 5-year period ended 3-31-02 -- -- 7.41% 8.45% Since inception of Class through 3-31-02*** -29.61% -29.71% 7.41% 11.15% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. Class A shares carry a maximum front-end sales load of 5.75%. Class B and Class C shares carry maximum contingent deferred sales charges of 5% and 1%, respectively. Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. ***7-3-00 for Class A shares, 7-10-00 for Class B shares, 9-21-92 for Class C shares and 12-29-95 for Class Y shares (the date on which shares were first acquired by shareholders). Past performance is not necessarily indicative of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF INTERNATIONAL GROWTH FUND International Growth Fund GOALS To seek long-term appreciation of capital as a primary goal and current income as a secondary goal. Strategy Invests primarily in common stocks of foreign companies that have the potential to provide long-term growth. The Fund emphasizes growth stocks which are securities of companies whose earnings are likely to grow faster than the economy. Founded 1992 Scheduled Dividend Frequency Annually (December) Performance Summary - Class C Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Capital gains distribution $0.03 ===== Net asset value on 3-31-02 $9.69 adjusted to: $ 9.72(A) 3-31-01 11.96 ------ Change per share $(2.24) ====== (A)This number includes the capital gains distribution of $0.03 paid in December 2001 added to the actual net asset value on March 31, 2002. Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF INTERNATIONAL GROWTH FUND Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B ----------------------- ------------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) --------------------- ---------- ---------- --------- -------- 1-year period ended 3-31-02.... -22.83% -18.12% -22.16% -18.93% 5-year period ended 3-31-02.... -- -- -- -- 10-year period ended 3-31-02.... -- -- -- -- Since inception of Class(F)...... -29.61% -27.18% -29.71% -28.55% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 5.75% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of each of the periods. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of each of the periods. (F)7-3-00 for Class A shares and 7-10-00 for Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return(A) Period Class C(B) Class Y(C) ---------------- ---------- ---------- 1-year period ended 3-31-02.... -18.73% -17.79% 5-year period ended 3-31-02.... 7.41% 8.45% 10-year period ended 3-31-02.... -- -- Since inception of Class(D)..... 7.41% 11.15% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)9-21-92 for Class C shares and 12-29-95 for Class Y shares (the date on which shares were first acquired by shareholders). International investing involves special risks, including political, economic and currency risks. SHAREHOLDER SUMMARY OF INTERNATIONAL GROWTH FUND Portfolio Highlights On March 31, 2002, International Growth Fund had net assets totaling $91,182,343 invested in a diversified portfolio of: 88.35% Common Stocks 10.99% Cash and Cash Equivalents and Unrealized Loss on Open Forward Currency Contract 0.66% Preferred Stocks As a shareholder of International Growth Fund, for every $100 you had invested on March 31, 2002, your Fund owned: Common Stocks $88.35 Cash and Cash Equivalents and Unrealized Loss on Open Forward Currency Contract $10.99 Preferred Stocks $ 0.66 THE INVESTMENTS OF INTERNATIONAL GROWTH FUND March 31, 2002 COMMON STOCKS Shares Value Australia - 0.76% Novogen LTD (A)*........................ 474,580 $ 696,529 ------------ Belgium - 3.87% Fortis (A).............................. 90,800 2,017,041 Interbrew S.A. (A)...................... 54,700 1,512,340 ------------ 3,529,381 ------------ China - 0.67% China Unicom Limited (A)*............... 630,000 613,878 ------------ Finland - 1.14% Stora Enso Oyj, R Shares (A)............ 48,500 612,390 UPM-Kymmene Oyj (A)..................... 12,400 423,278 ------------ 1,035,668 ------------ France - 13.72% Altran Technologies Company (A)......... 22,000 1,256,739 ASSURANCES GENERALES DE FRANCE (A)*..... 14,900 731,785 Aventis S.A. (A)........................ 24,000 1,655,217 BNP Paribas SA (A)...................... 23,800 1,199,980 Carrefour SA (A)*....................... 25,300 1,189,687 Infogrames Entertainment S.A. (A)*...... 26,020 278,243 Lafarge S.A. (A)........................ 6,900 615,873 Lagardere SCA (A)....................... 12,230 579,354 Publicis Groupe S.A. (A)................ 34,300 1,160,688 SODEXHO ALLIANCE (A).................... 4,500 183,234 Suez (A)................................ 63,400 1,789,867 TF1 SA (A).............................. 18,200 565,160 TotalFinaElf, S.A. (A).................. 8,450 1,302,412 ------------ 12,508,239 ------------ Germany - 17.09% Allianz AG, Registered Shares (A)....... 9,800 2,316,938 Altana AG (A)........................... 13,730 731,712 BASF Aktiengesellschaft (A)............. 14,100 572,168 DaimlerChrysler AG, Registered Shares (A) 10,600 480,446 Deutsche Post AG (A).................... 66,000 985,084 E.ON AG (A)............................. 15,500 784,199 Fraport AG (A)(B)*...................... 31,100 709,545 GEHE AG (A)............................. 25,600 1,035,486 Henkel Kommanditgesellschaft auf Aktien (A) 13,800 853,210 Infineon Technologies AG (A)............ 37,200 836,407 Munchener Ruckversicherungs - Gesellschaft Aktiengesellschaft (A) 10,000 2,481,780 Rhoen-Klinikum AG (A)................... 32,319 1,726,597 SAP Aktiengesellschaft (A).............. 4,700 712,140 Schering AG (A)*........................ 9,700 566,778 Wella AG (A)............................ 15,500 794,997 ------------ 15,587,487 ------------ Ireland - 1.26% DePfa Deutsche Prandbriefbank AG (A)*... 17,100 1,151,198 ------------ Italy - 9.63% Alleanza Assicurazioni SpA (A).......... 62,800 602,642 Assicurazioni Generali S.p.A. (A)....... 38,000 936,127 Autogrill S.p.A. (A).................... 61,500 675,854 Autostrade - Concessioni e Costruzioni Autostrade S.p.A. (A).............. 116,600 883,357 Eni S.p.A. (A).......................... 28,000 409,624 IntesaBCI SpA (A)*...................... 158,200 473,896 RAS S.p.A. (A).......................... 98,500 1,286,607 Saipem S.p.A. (A)....................... 160,500 985,332 Telecom Italia S.p.A., Ordinary Shares (A) 135,100 1,110,570 UniCredito Italiano SpA (A)............. 326,400 1,415,461 ------------ 8,779,470 ------------ Japan - 7.19% Canon Inc. (A).......................... 35,000 1,298,398 Honda Motor Co., Ltd. (A)............... 11,000 446,221 Kao Corporation (A)..................... 52,000 968,445 NTT DoCoMo, Inc. (A).................... 200 542,884 Nintendo Co., Ltd. (A).................. 3,700 544,738 Takeda Chemical Industries, Ltd. (A).... 33,000 1,336,173 Toshiba Corporation (A)................. 110,000 467,785 Toyota Motor Corporation (A)............ 33,000 950,500 ------------ 6,555,144 ------------ Korea - 0.52% Korea Telecom Corp., ADR*............... 19,800 474,804 ------------ Luxembourg - 1.50% ARCELOR (A)*............................ 78,000 1,066,382 Thiel Logistik AG (A)(B)*............... 21,000 299,904 ------------ 1,366,286 ------------ Netherlands - 4.07% ASML Holding N.V.*...................... 23,700 601,151 Koninklijke Philips Electronics N.V. (A)* 27,500 837,427 Ordina N.V. (A)*........................ 58,406 688,644 Unilever N.V. - Certicaaten Van Aandelen (A) 27,700 1,587,172 ------------ 3,714,394 ------------ Portugal - 0.95% Portugal Telecom, SGPS, S.A. (A)*....... 116,500 865,353 ------------ Spain - 2.17% GRUPO AUXILIAR METALURGICO, S.A. (A)*... 70,000 1,188,642 Red Electrica de Espana (A)............. 80,750 791,067 ------------ 1,979,709 ------------ Sweden - 1.06% Modern Times Group MTG AB, Class B (A)* 35,000 961,650 ------------ Switzerland - 2.59% Compagnie Financiere Richemont AG (A)*.. 20,000 460,186 Credit Suisse Group, Registered Shares (A)* 11,500 435,322 Syngenta AG (A)*........................ 6,200 378,273 UBS AG, Registered Shares (A)........... 22,200 1,091,479 ------------ 2,365,260 ------------ United Kingdom - 17.76% Amdocs Limited*......................... 22,100 588,965 Amey plc (A)............................ 162,300 602,055 Boots Company PLC (The) (A)............. 31,000 296,868 BP p.l.c. (A)........................... 139,700 1,243,330 British Sky Broadcasting Group plc (A)* 78,200 926,489 Capita Group plc (The) (A).............. 174,500 1,031,225 Compass Group PLC (A)................... 175,400 1,173,917 Kingfisher plc (A)...................... 166,000 914,806 Lloyds TSB Group plc (A)................ 95,200 977,422 Pearson plc (A)......................... 43,300 556,166 Reckitt Benckiser plc (A)............... 147,100 2,417,288 Reed International P.L.C. (A)........... 173,000 1,677,657 Rio Tinto plc (A)....................... 45,600 901,289 Royal Bank of Scotland Group plc (The) (A) 32,500 836,742 Shire Pharmaceuticals Group plc (A)*.... 63,000 487,136 St. James's Place Capital plc (A)....... 181,400 738,777 Vodafone Group Plc (A).................. 443,350 819,151 ------------ 16,189,283 ------------ United States - 2.40% Pharmacia Corporation................... 37,200 1,676,976 UTStarcom, Inc.*........................ 19,400 508,959 ------------ 2,185,935 ------------ TOTAL COMMON STOCKS - 88.35% $ 80,559,668 (Cost: $82,168,580) ------------ PREFERRED STOCKS - 0.66% Shares Value Brazil Petroleo Brasileiro S.A. - Petrobras (A) 24,400 $ 606,325 (Cost: $393,373) ------------ Face UNREALIZED LOSS ON OPEN FORWARD Amount in CURRENCY CONTRACT - (0.04%) Thousands Japanese Yen, 1-28-03 (C).......... Y260,628 $ (34,614) ------------ Principal Amount in SHORT-TERM SECURITIES Thousands Commercial Paper Chemicals - Petroleum and Inorganic - 1.10% du Pont (E.I.) de Nemours and Company, 1.6963092%, Master Note............ $1,000 1,000,000 Electrical Equipment - 3.29% Emerson Electric Co., 1.78%, 04-22-02.................... 3,000 2,996,885 Food and Related - 0.54% General Mills, Inc., 2.0588004%, Master Note............ 488 488,000 Security and Commodity Brokers - 2.74% UBS Finance (DE), 1.85%, 04-01-02.................... 2,500 2,500,000 Utilities - Telephone - 3.29% SBC Communications Inc., 1.77%, 04-04-02.................... 3,000 2,999,558 ------------ Total Commercial Paper - 10.96% 9,984,443 ------------ Repurchase Agreement - 2.64% J.P. Morgan Securities Inc., 1.73% Repurchase Agreement dated 3-28-02, to be repurchased at $2,410,463 on 04-1-02** 2,410 2,410,000 ------------ TOTAL SHORT-TERM SECURITIES - 13.60% $ 12,394,443 (Cost: $12,394,443) ------------ TOTAL INVESTMENT SECURITIES - 102.57% $ 93,525,822 (Cost: $94,956,396) ------------ LIABILITIES, NET OF CASH AND OTHER ASSETS - (2.57%) (2,343,479) ------------ NET ASSETS - 100.00% $ 91,182,343 ------------ Notes to Schedule of Investments *No income dividends were paid during the preceding 12 months. **Collateralized by $2,050,000 U.S. Treasury Bond, 7.625% due 2-15-25; market value and accrued interest aggregate $2,468,328. (A)Listed on an exchange outside the United States. (B)Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At March 31, 2002, the total value of these securities amounted to $1,009,449 or 1.11% of net assets. (C)Principal amounts are denominated in the indicated foreign currency, where applicable (Y - Japanese Yen). 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 INTERNATIONAL GROWTH FUND March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities -- at value (Notes 1 and 3)............ $ 93,526 Cash......................................................... 1 Receivables: Investment securities sold............................... 464 Dividends and interest................................... 224 Fund shares sold......................................... 95 Prepaid insurance premium.................................... 1 -------- Total assets......................................... 94,311 -------- LIABILITIES Payable for investment securities purchased.................. 2,622 Payable to Fund shareholders................................. 358 Accrued shareholder servicing (Note 2)....................... 65 Accrued management fee (Note 2).............................. 11 Accrued distribution fee (Note 2)............................ 7 Accrued accounting services fee (Note 2)..................... 3 Accrued service fee (Note 2)................................. 2 Other........................................................ 61 -------- Total liabilities.................................... 3,129 -------- Total net assets................................. $ 91,182 ======== NET ASSETS $0.01 par value capital stock: Capital stock............................................ $ 93 Additional paid-in capital............................... 133,351 Accumulated undistributed loss: Accumulated undistributed net investment loss............ (2) Accumulated undistributed net realized loss on investment transactions........................... (40,825) Net unrealized depreciation in value of investments....................................... (1,435) -------- Net assets applicable to outstanding units of capital....................................... $ 91,182 ======== Net asset value per share (net assets divided by shares outstanding): Class A...................................................... $9.82 Class B...................................................... $9.65 Class C...................................................... $9.69 Class Y...................................................... $10.55 Capital shares outstanding: Class A...................................................... 671 Class B...................................................... 220 Class C...................................................... 7,658 Class Y...................................................... 788 Capital shares authorized........................................ 400,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS INTERNATIONAL GROWTH FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT LOSS Income (Note 1B): Dividends (net of foreign withholding taxes of $136)...................................... $ 468 Interest and amortization............................... 1,287 -------- Total income........................................ 1,755 -------- Expenses (Note 2): Investment management fee............................... 953 Distribution fee: Class A............................................. 4 Class B............................................. 16 Class C............................................. 729 Class Y............................................. 17 Shareholder servicing: Class A............................................. 31 Class B............................................. 16 Class C............................................. 472 Class Y............................................. 11 Service fee: Class A............................................. 11 Class B............................................. 5 Class C............................................. 243 Custodian fees.......................................... 163 Accounting services fee................................. 44 Audit fees.............................................. 17 Legal fees.............................................. 2 Other................................................... 84 -------- Total expenses...................................... 2,818 -------- Net investment loss............................. (1,063) -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities............................. (27,854) Realized net loss on foreign currency transactions.......... (60) -------- Realized net loss on investments........................ (27,914) -------- Unrealized appreciation in value of securities during the period....................................... 5,140 Unrealized depreciation in value of forward currency contracts during the period.................... (219) -------- Unrealized appreciation in value of investments during the period................................... 4,921 -------- Net loss on investments............................. (22,993) -------- Net decrease in net assets resulting from operations............................. $(24,056) ======== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS INTERNATIONAL GROWTH FUND (In Thousands) For the Fiscal Year Ended March 31, --------------------- 2002 2001 -------- --------- DECREASE IN NET ASSETS Operations: Net investment loss....................... $ (1,063) $ (1,812) Realized net loss on investments.......... (27,914) (566) Unrealized appreciation (depreciation)........................ 4,921 (93,703) -------- -------- Net decrease in net assets resulting from operations......... (24,056) (96,081) -------- -------- Distributions to shareholders from realized net gain on investment transactions (Note 1E):* Class A............................... (21) (909) Class B............................... (7) (536) Class C............................... (265) (44,762) Class Y............................... (19) (892) -------- -------- (312) (47,099) -------- -------- Capital share transactions (Note 5).................................. (21,059) 41,213 -------- -------- Total decrease............................ (45,427) (101,967) NET ASSETS Beginning of period........................... 136,609 238,576 -------- -------- End of period................................. $ 91,182 $136,609 ======== ======== Undistributed net investment loss............. $(2) $(1) === === *See "Financial Highlights" on pages 76 - 79. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS INTERNATIONAL GROWTH FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 ---------- ---------- Net asset value, beginning of period...................................... $12.03 $24.33 ------ ------ Income (loss) from investment operations: Net investment loss............................ (0.17) (0.02) Net realized and unrealized loss on investments............................. (2.01) (6.46) ------ ------ Total from investment operations................... (2.18) (6.48) ------ ------ Less distributions: From net investment income..................... (0.00) (0.00) From capital gains............................. (0.03) (5.82) ------ ------ Total distributions................................ (0.03) (5.82) ------ ------ Net asset value, end of period..................... $ 9.82 $12.03 ====== ====== Total return**..................................... -18.12% -29.73% Net assets, end of period (in millions)........................... $7 $5 Ratio of expenses to average net assets..................................... 1.89% 1.72%*** Ratio of net investment loss to average net assets.......................... -0.49% -0.31%*** Portfolio turnover rate............................ 133.83% 103.03%**** *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. ****For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS INTERNATIONAL GROWTH FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-10-00* ended to 3-31-02 3-31-01 ------------- ------------ Net asset value, beginning of period..................................... $11.94 $24.59 ------ ------ Income (loss) from investment operations: Net investment loss........................... (0.19) (0.09) Net realized and unrealized loss on investments............................ (2.07) (6.74) ------ ------ Total from investment operations.................. (2.26) (6.83) ------ ------ Less distributions: From net investment income.................... (0.00) (0.00) From capital gains............................ (0.03) (5.82) ------ ------ Total distributions............................... (0.03) (5.82) ------ ------ Net asset value, end of period.................... $ 9.65 $11.94 ====== ====== Total return...................................... -18.93% -30.89% Net assets, end of period (in millions)................................. $2 $2 Ratio of expenses to average net assets.................................... 2.89% 2.61%** Ratio of net investment loss to average net assets............................ -1.42% -1.30%** Portfolio turnover rate........................... 133.83% 103.03%*** *Commencement of operations. **Annualized. ***For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS INTERNATIONAL GROWTH FUND Class C Shares (A) For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended March 31, ------------------------------------------- 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ Net asset value, beginning of period................. $11.96 $28.58 $15.58 $15.04 $12.40 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment loss....... (0.11) (0.17) (0.34) (0.07) (0.10) Net realized and unrealized gain (loss) on investments........... (2.13) (10.63) 15.14 1.55 4.12 ------ ------ ------ ------ ------ Total from investment operations................ (2.24) (10.80) 14.80 1.48 4.02 ------ ------ ------ ------ ------ Less distributions: From net investment income................ (0.00) (0.00) (0.00) (0.00) (0.00) From capital gains........ (0.03) (5.82) (1.80) (0.94) (1.38) ------ ------ ------ ------ ------ Total distributions........... (0.03) (5.82) (1.80) (0.94) (1.38) ------ ------ ------ ------ ------ Net asset value, end of period............. $ 9.69 $11.96 $28.58 $15.58 $15.04 ====== ====== ====== ====== ====== Total return.................. -18.73% - 40.45% 97.89% 10.36% 35.24% Net assets, end of period (in millions)............. $74 $123 $233 $100.. $87 Ratio of expenses to average net assets........ 2.62% 2.36% 2.37% 2.35% 2.35% Ratio of net investment loss to average net assets................ -1.03% -1.03% -1.48% -0.53% -0.82% Portfolio turnover rate....... 133.83% 103.03% 125.71% 116.25% 105.11% (A)See Note 5. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS INTERNATIONAL GROWTH FUND Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended March 31, ------------------------------------------------ 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ Net asset value, beginning of period................ $12.87 $29.86 $16.08 $15.35 $12.52 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income (loss)............... (0.18) (0.17) (1.41) 0.05 0.01 Net realized and unrealized gain (loss) on investments.......... (2.11) (11.00) 16.99.. 1.62 4.20 ------ ------ ------ ------ ------ Total from investment operations............... (2.29) (11.17) 15.58.. 1.67 4.21 ------ ------ ------ ------ ------ Less distributions: From net investment income............... (0.00) (0.00) (0.00) (0.00) (0.00) From capital gains....... (0.03) (5.82) (1.80) (0.94) (1.38) ------ ------ ------ ------ ------ Total distributions.......... (0.03) (5.82) (1.80) (0.94) (1.38) ------ ------ ------ ------ ------ Net asset value, end of period............ $10.55 $12.87 $29.86 $16.08 $15.35 ====== ====== ====== ====== ====== Total return................. -17.79% -39.91% 99.74% 11.41% 36.45% Net assets, end of period (000 omitted)..... $8,314 $6,594 $5,296.. $629 $419 Ratio of expenses to average net assets.... 1.52% 1.44% 1.48% 1.44% 1.51% Ratio of net investment income (loss) to average net assets............... -0.11% -0.02% -0.80% 0.36% 0.07% Portfolio turnover rate...... 133.83% 103.03% 125.71% 116.25% 105.11% See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with Daniel P. Becker, portfolio manager of W&R Funds, Inc. - Large Cap Growth Fund This report relates to the operation of W&R Funds, Inc. - Large Cap Growth Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? During the economically weak environment that dominated the period, the Fund had a difficult time. The Fund posted negative returns for the period and underperformed its benchmark index. During the fiscal year, the Class A shares of the Fund declined 2.85 percent before the impact of sales load and, with sales load, declined 8.43 percent. This compared with the S&P 500 Index (reflecting the performance of securities that generally represent the stock market), which increased 0.21 percent during the period, and the Lipper Large-Cap Growth Funds Universe Average (generally representing the performance of the universe of funds with similar investment objectives), which declined 5.88 percent during the period. It should be noted that, in the comparison charts, the value for the benchmark index and the Lipper category does not reflect a sales load. Why did the Fund lag its benchmark index during the fiscal year? The Fund's underperformance relative to the benchmark index was, we believe, attributable to a somewhat more aggressive positioning in cyclical industries, in preparation for what we felt was an ensuing rebound in economic growth. We still believe that a re-acceleration in growth is likely during the 2002 calendar year. We do feel that the Fund benefited from large holdings in tobacco and health care companies early in the fiscal year, and from holdings in semiconductor companies later in the year. What other market conditions or events influenced the Fund's performance during the fiscal year? The year was characterized by a massive collapse in economic growth, which was primarily driven by the capital spending and industrial/cyclical-linked industries. Many years of prosperity had resulted in overcapacity in many economically sensitive industries, and the unwinding of the prior-spending boom ultimately threw the economy into recession. Companies then became quick to restructure, reducing employee levels, capital spending and research and development costs. These further cuts deepened the economic problems and were responsible, we believe, for the sharpest decline in corporate profits in decades. Stocks leveraged to these cyclical events did very poorly in 2002. Some stocks in the health care and consumer staple industries, however, did very well as they were far removed from the economic turmoil. What strategies and techniques did you employ that specifically affected the Fund's performance? During the middle of 2001, we felt it was appropriate to begin to attempt to position the Fund to benefit from an economic recovery. We felt the recovery would appear by early 2002, and consequently added to positions in semiconductor and industrial gas stocks, while decreasing positions in what we felt were less-economically-leveraged stocks in consumer related areas. We feel that the performance of the Fund was initially hurt by these moves but, by late 2001, performance had been enhanced by this strategy. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? During 2001, we primarily emphasized the pharmaceutical, tobacco, financial and semiconductor industries. We tried to establish a balance between what we view as high quality, very profitable, stable businesses and those that were currently unprofitable but that we felt were set to improve as the economy improved. Looking forward, we intend to maintain our balance between companies that should benefit from stronger economic growth and those with profits that are relatively immune to economic fluctuations. We intend to emphasize drug, tobacco, financial and capital-spending-linked companies. As we go further into the fiscal year, we expect to increase our exposure to economically linked industries and decrease our holdings in more stable businesses. Respectfully, /s/Daniel P. Becker Daniel P. Becker Manager W&R Large Cap Growth Fund Comparison of Change in Value of $10,000 Investment W&R Lipper Large Large-Cap Cap Growth Growth S&P Funds Fund, 500 Universe Class A Index Average --------- --------- ---------- 07-3-00 $9,425 $10,000 $10,000 03-31-01 9,023 8,043 6,563 03-31-02 8,766 8,060 6,177 ===== W&R Large Cap Growth Fund, Class A Shares (1) -- $8,766 +++++ S&P 500 Index -- $8,060 ***** Lipper Large-Cap Growth Funds Universe Average -- $6,177 (1)The value of the investment in the Fund is impacted by the sales load at the time of the investment and by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return* Class A Class B Class C Class Y 1-year period ended 3-31-02 -8.43% -7.97% -3.60% -2.74% Since inception of Class through 3-31-02** -7.25% -7.62% -4.88% -4.10% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. 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 5% and 1%, respectively. (Accordingly, the Class C shares reflect no CDSC since it only applies to Class C shares held for twelve months or less.) Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **6-30-00 for Class A shares, 7-6-00 for Class B shares, 7-3-00 for Class C shares and 7-6-00 for Class Y shares (the date on which shares were first acquired by shareholders). Past performance is not predictive of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF LARGE CAP GROWTH FUND Large Cap Growth Fund GOAL To seek the appreciation of your investment. Strategy Invests primarily in a diversified portfolio of common stocks issued by growth-oriented large to medium sized U.S. and foreign companies that the Fund's investment manager believes have appreciation potential. Founded 2000 Scheduled Dividend Frequency Annually (December) Performance Summary - Class A Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Net asset value on 3-31-02 $ 9.21 3-31-01 9.48 ------ Change per share $(0.27) ====== Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF LARGE CAP GROWTH FUND Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B ------------------------- -------------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) ----------------- ---------- ---------- ----------- -------- 1-year period ended 3-31-02..... -8.43% -2.85% -7.97% -4.13% 5-year period ended 3-31-02..... -- -- -- -- 10-year period ended 3-31-02..... -- -- -- -- Since inception of Class(F)....... -7.25% -4.06% -7.62% -5.43% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 5.75% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of each of the periods. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of each of the periods. (F)6-30-00 for Class A shares and 7-6-00 for Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return(A) Period Class C(B) Class Y(C) ----------------- --------- --------- 1-year period ended 3-31-02..... -3.60% -2.74% 5-year period ended 3-31-02..... -- -- 10-year period ended 3-31-02..... -- -- Since inception of Class(D)...... -4.88% -4.10% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 1.00% which declines to zero at the end of the first year after investment. Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)7-3-00 for Class C shares and 7-6-00 for Class Y shares (the date on which shares were first acquired by shareholders). SHAREHOLDER SUMMARY OF LARGE CAP GROWTH FUND Portfolio Highlights On March 31, 2002, Large Cap Growth Fund had net assets totaling $29,212,745 invested in a diversified portfolio of: 86.29% Common Stock 13.71% Cash and Cash Equivalents As a shareholder of Large Cap Growth Fund, for every $100 you had invested on March 31, 2002, your Fund owned: Technology Stocks $26.71 Health Care Stocks $19.42 Financial Services Stocks $14.17 Cash and Cash Equivalents $13.71 Consumer Goods and Services Stocks $10.44 Retail Stocks $ 5.02 Business Equipment and Services $ 4.99 Capital Goods Stocks $ 3.33 Miscellaneous Stocks $ 2.21 THE INVESTMENTS OF LARGE CAP GROWTH FUND March 31, 2002 COMMON STOCKS Shares Value Aircraft - 2.74% Lockheed Martin Corporation............. 13,900 $ 800,362 ------------ Banks - 5.81% Bank of America Corporation............. 11,800 802,636 Citigroup Inc........................... 9,800 485,296 Wells Fargo & Company................... 8,300 410,020 ------------ 1,697,952 ------------ Business Equipment and Services - 4.99% Accenture Ltd*.......................... 13,619 363,627 First Data Corporation.................. 10,100 881,225 Office Depot, Inc.*..................... 10,700 212,395 ------------ 1,457,247 ------------ Capital Equipment - 1.91% Cooper Cameron Corporation*............. 10,900 557,099 ------------ Chemicals - Specialty - 1.85% Air Products and Chemicals, Inc......... 2,800 144,620 Praxair, Inc............................ 6,600 394,680 ------------ 539,300 ------------ Communications Equipment - 2.01% Cisco Systems, Inc.*.................... 34,600 585,605 ------------ Computers - Peripherals - 7.16% EMC Corporation*........................ 20,700 246,744 Microsoft Corporation*.................. 16,400 988,182 Oracle Corporation*..................... 15,200 194,484 SAP Aktiengesellschaft, ADR............. 17,800 662,160 ------------ 2,091,570 ------------ Electronic Components - 7.14% Analog Devices, Inc.*................... 10,900 490,936 Linear Technology Corporation........... 9,700 429,177 Maxim Integrated Products, Inc.*........ 6,300 351,288 Microchip Technology Incorporated*...... 19,500 815,490 ------------ 2,086,891 ------------ Electronic Instruments - 7.66% Applied Materials, Inc.*................ 14,100 765,348 Lam Research Corporation*............... 22,000 645,150 Novellus Systems, Inc.*................. 9,500 514,235 Teradyne, Inc.*......................... 7,900 311,497 ------------ 2,236,230 ------------ Farm Machinery - 1.42% Deere & Company......................... 9,100 414,505 ------------ Food and Related - 0.81% Kraft Foods Inc......................... 6,100 235,765 ------------ Health Care - Drugs - 10.42% Amgen Inc.*............................. 9,400 561,039 Forest Laboratories, Inc.*.............. 9,200 751,640 McKesson HBOC, Inc...................... 10,500 393,015 Pfizer Inc.............................. 33,700 1,339,238 ------------ 3,044,932 ------------ Health Care - General - 6.26% Johnson & Johnson....................... 13,900 902,805 Wyeth................................... 14,100 925,665 ------------ 1,828,470 ------------ Homebuilders, Mobile Homes - 0.36% Lennar Corporation...................... 2,000 105,520 ------------ Hospital Supply and Management - 2.74% Health Management Associates, Inc., Class A*........................... 29,900 619,827 Medtronic, Inc.......................... 4,000 180,840 ------------ 800,667 ------------ Household - General Products - 1.17% Colgate-Palmolive Company............... 6,000 342,900 ------------ Leisure Time Industry - 0.48% Walt Disney Company (The)............... 6,100 140,788 ------------ Motion Pictures - 0.00% AOL Time Warner Inc.*................... 50 1,182 ------------ Motor Vehicles - 1.47% Harley-Davidson, Inc.................... 7,800 430,014 ------------ Retail - General Merchandise - 2.95% Kohl's Corporation*..................... 3,400 241,910 Target Corporation...................... 6,700 288,904 Wal-Mart Stores, Inc.................... 5,400 330,966 ------------ 861,780 ------------ Retail - Specialty Stores - 2.07% Blockbuster Inc., Class A............... 12,700 298,069 Home Depot, Inc. (The).................. 6,300 306,243 ------------ 604,312 ------------ Security and Commodity Brokers - 8.36% Fannie Mae.............................. 7,700 615,076 Freddie Mac............................. 9,300 589,341 Goldman Sachs Group, Inc. (The)......... 8,900 803,225 Morgan Stanley Dean Witter & Co......... 7,600 435,556 ------------ 2,443,198 ------------ Tobacco - 6.51% Philip Morris Companies Inc............. 36,100 1,901,387 ------------ TOTAL COMMON STOCKS - 86.29% $25,207,676 (Cost: $23,420,900) ------------ Principal Amount in SHORT-TERM SECURITIES Thousands Commercial Paper Chemicals - Petroleum and Inorganic - 4.87% du Pont (E.I.) de Nemours and Company, 1.6963092%, Master Note............ $1,422 1,422,000 Food and Related - 4.19% General Mills, Inc., 2.0588004%, Master Note............ 1,225 1,225,000 ------------ Total Commercial Paper - 9.06% 2,647,000 ------------ Repurchase Agreement - 4.58% J.P. Morgan Securities Inc., 1.73% Repurchase Agreement dated 3-28-02, to be repurchased at $1,337,257 on 04-1-02** 1,337 1,337,000 ------------ TOTAL SHORT-TERM SECURITIES - 13.64% $ 3,984,000 (Cost: $3,984,000) ------------ TOTAL INVESTMENT SECURITIES - 99.93% $ 29,191,676 (Cost: $27,404,900) ------------ CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.07% 21,069 ------------ NET ASSETS - 100.00% $ 29,212,745 ------------ Notes to Schedules of Investments *No income dividends were paid during the preceding 12 months. **Collateralized by $1,140,000 U.S. Treasury Bond, 7.625% due 2-15-25; market value and accrued interest aggregate $1,372,631. 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 LARGE CAP GROWTH FUND March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities -- at value (Notes 1 and 3).. $29,192 Cash............................................... 1 Receivables: Fund shares sold............................... 52 Dividends and interest......................... 34 ------- Total assets............................... 29,279 ------- LIABILITIES Payable to Fund shareholders....................... 32 Accrued shareholder servicing (Note 2)............. 14 Accrued management fee (Note 2).................... 3 Accrued accounting services fee (Note 2)........... 2 Accrued distribution fee (Note 2).................. 1 Accrued service fee (Note 2)....................... 1 Other.............................................. 13 ------- Total liabilities.......................... 66 ------- Total net assets....................... $29,213 ======= NET ASSETS $0.01 par value capital stock: Capital stock................................... $ 32 Additional paid-in capital...................... 36,680 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions..................... (9,286) Net unrealized appreciation in value of investments.............................. 1,787 ------- Net assets applicable to outstanding units of capital.............................. $29,213 ======= Net asset value per share (net assets divided by shares outstanding): Class A............................................ $9.21 Class B............................................ $9.05 Class C............................................ $9.10 Class Y............................................ $9.22 Capital shares outstanding: Class A............................................ 2,118 Class B............................................ 266 Class C............................................ 717 Class Y............................................ 83 Capital shares authorized.............................. 400,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS LARGE CAP GROWTH FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT LOSS Income (Note 1B): Dividends.......................................... $ 233 Interest and amortization.......................... 93 ----- Total income................................... 326 ----- Expenses (Note 2): Investment management fee.......................... 191 Shareholder servicing: Class A........................................ 55 Class B........................................ 22 Class C........................................ 28 Class Y........................................ 1 Registration fees.................................. 81 Distribution fee: Class A........................................ 12 Class B........................................ 18 Class C........................................ 48 Class Y........................................ 1 Service fee: Class A........................................ 34 Class B........................................ 6 Class C........................................ 16 Accounting services fee............................ 21 Audit fees......................................... 12 Custodian fees..................................... 7 Other.............................................. 5 ----- Total.......................................... 558 Less expenses in excess of voluntary waiver of investment management fee (Note 2)........................... (36) ----- Total expenses......................... 522 ----- Net investment loss.................. (196) ----- REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments.................... (5,708) Unrealized appreciation in value of investments during the period................................ 5,055 ----- Net loss on investments........................... (653) ----- Net decrease in net assets resulting from operations.......................... $(849) ===== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS LARGE CAP GROWTH FUND (In Thousands) For the fiscal period from For the fiscal June 30, year ended 2000* through March 31, March 31, 2002 2001 INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income (loss)............. $ (196)... $ 89 Realized net loss on investments......... (5,708).... (3,419) Unrealized appreciation (depreciation)... 5,055..... (3,268) ---------------------- Net decrease in net assets resulting from operations..................... (849).... (6,598) ---------------------- Distributions to shareholders from (Note 1E):** Net investment income: Class A................................... -- (107) Class B................................... -- -- Class C................................... -- (7) Class Y................................... -- (2) Realized net gain on investment transactions: Class A................................... -- (109) Class B................................... -- (11) Class C................................... -- (37) Class Y................................... -- (1) ---------------------- -- (274) ---------------------- Capital share transactions (Note 5)............ 1,934 32,000 ---------------------- Total increase......................... 1,085 25,128 NET ASSETS Beginning of period........................... 28,128 3,000 ---------------------- End of period................................ $29,213 $28,128 ======================= Undistributed net investment income.............. $-- $-- ======================= *Commencement of operations **See "Financial Highlights" on pages 93 - 96. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS LARGE CAP GROWTH FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 6-30-00* ended to 3-31-02 3-31-01 ------------------------ Net asset value, beginning of period............... $9.48 $10.00 ------------------------ Income (loss) from investment operations: Net investment income (loss)................... (0.04) 0.05 Net realized and unrealized loss on investments............................. (0.23) (0.45) ------------------------ Total from investment operations................... (0.27) (0.40) ------------------------ Less distributions: From net investment income..................... (0.00) (0.06) From capital gains............................. (0.00) (0.06) ------------------------ Total distributions................................ (0.00) (0.12) ------------------------ Net asset value, end of period..................... $9.21 $9.48 ======================== Total return**..................................... -2.85% -4.27% Net assets, end of period (in millions)............ $20 $19 Ratio of expenses to average net assets including voluntary expense waiver........................ 1.58% 1.13%*** Ratio of net investment income (loss) to average net assets including voluntary expense waiver....................... -0.38% 0.89%*** Ratio of expenses to average net assets excluding voluntary expense waiver....................... 1.69% 1.34%*** Ratio of net investment income (loss) to average net assets excluding voluntary expense waiver....................... -0.49% 0.68%*** Portfolio turnover rate............................ 98.59% 75.42% *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS LARGE CAP GROWTH FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-6-00* ended to 3-31-02 3-31-01 ------------------------ Net asset value, beginning of period............... $9.44 $10.02 ------------------------ Income (loss) from investment operations: Net investment loss............................ (0.16) (0.03) Net realized and unrealized loss on investments............................. (0.23) (0.49) ------------------------ Total from investment operations................... (0.39) (0.52) ------------------------ Less distributions: From net investment income..................... (0.00) (0.00) From capital gains............................. (0.00) (0.06) ------------------------ Total distributions................................ (0.00) (0.06) ------------------------ Net asset value, end of period..................... $9.05 $9.44 ======================== Total return....................................... -4.13% -5.32% Net assets, end of period (in millions)............... $2 $2 Ratio of expenses to average net assets including voluntary expense waiver........................ 2.98% 2.53%** Ratio of net investment loss to average net assets including voluntary expense waiver....................... -1.79% -0.60%** Ratio of expenses to average net assets excluding voluntary expense waiver........................ 3.19% 3.00%** Ratio of net investment loss to average net assets excluding voluntary expense waiver....................... -2.00% -1.07%** Portfolio turnover rate............................ 98.59% 75.42% *Commencement of operations. **Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS LARGE CAP GROWTH FUND Class C Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 ------------------------ Net asset value, beginning of period................ $9.45 $10.00 ------------------------ Income (loss) from investment operations: Net investment loss............................. (0.12) (0.00) Net realized and unrealized loss on investments.............................. (0.23) (0.48) ------------------------ Total from investment operations.................... (0.35) (0.48) ------------------------ Less distributions: From net investment income...................... (0.00) (0.01) From capital gains.............................. (0.00) (0.06) ------------------------ Total distributions................................. (0.00) (0.07) ------------------------ Net asset value, end of period...................... $9.10 $9.45 ======================== Total return........................................ -3.60% -4.93% Net assets, end of period (in millions)............. $7 $7 Ratio of expenses to average net assets including voluntary expense waiver......................... 2.51% 2.06%** Ratio of net investment loss to average net assets including voluntary expense waiver.............. -1.31% -0.08%** Ratio of expenses to average net assets excluding voluntary expense waiver......................... 2.68% 2.44%** Ratio of net investment loss to average net assets excluding voluntary expense waiver.............. -1.48% -0.46%** Portfolio turnover rate............................. 98.59% 75.42% *Commencement of operations. **Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS LARGE CAP GROWTH FUND Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-6-00* ended to 3-31-02 3-31-01 ------------------------ Net asset value, beginning of period................. $9.48 $10.02 ------------------------ Income (loss) from investment operations: Net investment income (loss)..................... (0.01) 0.09 Net realized and unrealized loss on investments.......................... (0.25) (0.50) ------------------------ Total from investment operations..................... (0.26) (0.41) ------------------------ Less distributions: From net investment income....................... (0.00) (0.07) From capital gains............................... (0.00) (0.06) ------------------------ Total distributions.................................. (0.00) (0.13) ------------------------ Net asset value, end of period....................... $9.22 $9.48 ======================== Total return......................................... -2.74% -4.38% Net assets, end of period (000 omitted).............. $768 $279 Ratio of expenses to average net assets including voluntary expense waiver......................... 1.36% 1.13%** Ratio of net investment income (loss) to average net assets including voluntary expense waiver.... -0.20% 1.11%** Ratio of expenses to average net assets excluding voluntary expense waiver......................... 1.45% 1.34%** Ratio of net investment income (loss) to average net assets excluding voluntary expense waiver.... -0.29% 0.90%** Portfolio turnover rate.............................. 98.59% 75.42% *Commencement of operations. **Annualized. See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with W. Patrick Sterner, portfolio manager of W&R Funds, Inc. - Limited-Term Bond Fund This report relates to the operation of W&R Funds, Inc. - Limited-Term Bond Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? The Class C shares of the Fund had a positive return of 4.46 percent, only slightly underperforming its benchmark. The Salomon Brothers 1-5 Years Treasury/Government Sponsored/Corporate Index (reflecting the performance of securities generally representing the limited-term sector of the bond market) increased 5.60 percent for the fiscal year, while the Lipper Short-Intermediate Investment Grade Debt Funds Universe Average (generally reflecting the performance of the universe of funds with similar investment objectives) returned 4.09 percent. Why did the Fund slightly lag its benchmark index during the fiscal year? While the Fund performed in line with its benchmark in many areas, we feel that our performance may have been hurt somewhat in the final quarter of the period by positions in several telecommunications companies. That industry has been a poor performer of late because of liquidity concerns and questions regarding past accounting practices. There were, however, several factors that contributed positively to the Fund's performance over the last year. The most important, in our opinion, was an overweighting in corporate bonds, the best performing sector of the fixed income market during the period. Exposure to the defense industry, railroads and waste disposal companies within the corporate sector also contributed positively to the overall return. What other market conditions or events influenced the Fund's performance during the fiscal year? During the last part of the fiscal year, the Fund weathered a dramatic sell-off in the bond market. A short duration and exposure in 15-year mortgage-backed securities helped returns, in our opinion. What strategies and techniques did you employ that specifically affected the Fund's performance? Our management style attempts to identify relative value opportunities between sectors of the market. Those sectors include treasuries, agencies, corporates and mortgage-backed securities. Based on our determination that intermediate-maturity corporates offered good value, we overweighted the sector to what we felt was the benefit of the Fund. In addition, as interest rates declined during the year, we continued to shorten duration. This helped to insulate the Fund from the dramatic sell-off in the last quarter. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? We emphasized corporates and mortgage-backed securities during the fiscal year, and we continue to believe that they offer value going forward. In the corporate area, telecommunications companies have cheapened significantly and we feel that they may offer opportunities at some point during the coming year. Respectfully, /s/W. Patrick Sterner W. Patrick Sterner Manager W&R Limited-Term Bond Fund Comparison of Change in Value of $10,000 Investment Salomon W&R Brothers Lipper Short- Limited- 1-5 Years Intermediate Term Treasury/ Investment Bond Government Grade Debt Fund, Sponsored/ Funds Class C Corporate Universe Shares Index Average --------- ---------- -------------- 09-30-92 10,000 10,000 10,000 03-31-93 10,206 10,295 10,301 03-31-94 10,350 10,573 10,539 03-31-95 10,632 11,033 10,882 03-31-96 11,419 11,983 11,823 03-31-97 11,821 12,601 12,384 03-31-98 12,666 13,655 13,437 03-31-99 13,255 14,539 14,160 03-31-00 13,352 14,974 14,469 03-31-01 14,618 16,634 15,902 03-31-02 15,269 17,566 16,553 ===== W&R Limited-Term Bond Fund, Class C Shares (1) (2) -- $15,269 ***** Salomon Brothers 1-5 Years Treasury/ Government Sponsored/ Corporate Index (1) -- $17,566 ----- Lipper Short-Intermediate Investment Grade Debt Funds Universe Average (1) -- $16,553 (1)Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of the indexes are not available, the investments were effected as of September 30, 1992. (2)The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return* Class A Class B Class C** Class Y 1-year period ended 3-31-02 0.94% 0.52% 4.46% 5.41% 5-year period ended 3-31-02 -- -- 5.25% 6.19% Since inception of Class through 3-31-02*** 4.88% 4.74% 4.58% 5.55% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. Class A shares carry a maximum front-end sales load of 4.25%. Class B and Class C shares carry maximum contingent deferred sales charges of 5% and 1%, respectively. Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. ***8-17-00 for Class A shares, 7-3-00 for Class B shares, 9-21-92 for Class C shares and 12-29-95 for Class Y shares (the date on which shares were first acquired by shareholders). Past performance is not necessarily indicative of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF LIMITED-TERM BOND FUND Limited-Term Bond Fund GOAL To seek a high level of current income consistent with preservation of capital. Strategy Invests primarily in investment-grade debt securities of U.S. issuers, including corporate bonds, mortgage-backed securities and U.S. Government securities. The Fund maintains a dollar-weighted average maturity of not less than two years and not more than five years. Founded 1992 Scheduled Dividend Frequency Declared daily, paid monthly Performance Summary - Class C Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Dividends paid $0.42 ===== Net asset value on 3-31-02 $10.20 3-31-01 10.17 ------ Change per share $ 0.03 ====== Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF LIMITED-TERM BOND FUND Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B ----------------------- ---------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) ----------------- ---------- ---------- ------- ------- 1-year period ended 3-31-02..... 0.94% 5.42% 0.52% 4.52% 5-year period ended 3-31-02..... -- -- -- -- 10-year period ended 3-31-02..... -- -- -- -- Since inception of Class(F)....... 4.88% 7.73% 4.74% 6.94% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 4.25% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of each of the periods. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of each of the periods. (F)8-17-00 for Class A shares and 7-3-00 for Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return(A) Period Class C(B) Class Y(C) ----------------- ---------- --------- 1-year period ended 3-31-02..... 4.46% 5.41% 5-year period ended 3-31-02..... 5.25% 6.19% 10-year period ended 3-31-02..... -- -- Since inception of Class(D)....... 4.58% 5.55% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)9-21-92 for Class C shares and 12-29-95 for Class Y shares (the date on which shares were first acquired by shareholders). SHAREHOLDER SUMMARY OF LIMITED-TERM BOND FUND Portfolio Highlights On March 31, 2002, Limited-Term Bond Fund had net assets totaling $28,918,618 invested in a diversified portfolio of: 97.28% Bonds 2.72% Cash and Cash Equivalents As a shareholder of Limited-Term Bond Fund, for every $100 you had invested on March 31, 2002, your Fund owned: Corporate Bonds $56.37 U.S. Government Securities $40.61 Cash and Cash Equivalents $ 2.72 Municipal Bond $ 0.30 THE INVESTMENTS OF LIMITED-TERM BOND FUND March 31, 2002 Principal Amount in CORPORATE DEBT SECURITIES Thousands Value Aircraft - 5.00% Lockheed Martin Corporation, 7.25%, 5-15-06..................... $600 $ 629,829 Raytheon Company, 6.75%, 8-15-07..................... 800 815,148 ------------ 1,444,977 ------------ Banks - 2.13% Mercantile Bancorporation Inc., 7.625%, 10-15-02................... 600 614,837 ------------ Beverages - 2.20% Grand Metropolitan Investment Corp., 7.125%, 9-15-04.................... 600 635,818 ------------ Broadcasting - 1.74% Time Warner Entertainment Company, L.P., 9.625%, 5-1-02..................... 500 502,502 ------------ Chemicals - Specialty - 2.85% Praxair, Inc., 6.75%, 3-1-03...................... 800 825,166 ------------ Construction Materials - 2.15% Black & Decker Corp., 7.5%, 4-1-03....................... 601 622,028 ------------ Finance Companies - 6.44% Aristar, Inc., 5.85%, 1-27-04..................... 670 683,984 General Motors Acceptance Corporation, 7.0%, 9-15-02...................... 600 608,787 John Deere Capital Corporation, 5.125%, 10-19-06................... 600 569,680 ------------ 1,862,451 ------------ Forest and Paper Products - 1.89% International Paper Company, 6.125%, 11-1-03.................... 535 548,175 ------------ Insurance - Life - 2.38% Aon Corporation, 7.4%, 10-1-02...................... 673 687,064 ------------ Insurance - Property and Casualty - 1.78% American General Finance Corporation, 6.2%, 3-15-03...................... 500 514,750 ------------ Multiple Industry - 8.84% Ford Motor Credit Company, 6.7%, 7-16-04...................... 500 506,485 Household Finance Corporation, 6.5%, 1-24-06...................... 800 800,797 National Rural Utilities Cooperative Finance Corporation, 6.0%, 5-15-06...................... 750 743,565 UtiliCorp United, 6.875%, 10-1-04.................... 500 505,454 ------------ 2,556,301 ------------ Petroleum - Domestic - 3.22% Phillips Petroleum Company, 6.65%, 3-1-03...................... 400 410,688 Union Pacific Corporation, 6.5%, 5-15-05...................... 500 520,322 ------------ 931,010 ------------ Petroleum - International - 0.88% Chevron Corporation Profit Sharing/Savings Plan Trust Fund, 8.11%, 12-1-04..................... 243 255,470 ------------ Railroad - 3.58% Norfolk Southern Corporation, 7.35%, 5-15-07..................... 588 621,106 Union Pacific Corporation, 7.6%, 5-1-05....................... 390 415,040 ------------ 1,036,146 ------------ Trucking and Shipping - 2.82% WMX Technologies, Inc., 7.0%, 5-15-05...................... 800 814,793 ------------ Utilities - Gas and Pipeline - 4.15% NorAm Energy Corp., 6.375%, 11-1-03.................... 600 602,338 Williams Companies, Inc. (The), 6.5%, 11-15-02..................... 600 597,112 ------------ 1,199,450 ------------ Utilities - Telephone - 4.32% AT&T Corp., 6.75%, 4-1-04...................... 377 383,221 Qwest Corporation, 7.625%, 6-9-03..................... 500 484,730 WorldCom, Inc., 7.875%, 5-15-03.................... 400 382,516 ------------ 1,250,467 ------------ TOTAL CORPORATE DEBT SECURITIES - 56.37% $ 16,301,405 (Cost: $16,172,651) ------------ MUNICIPAL BOND - 0.30% Kansas Kansas Development Finance Authority, Health Facilities Revenue Bonds (Stormont-Vail HealthCare, Inc.), Taxable, 7.25%, 11-15-02.................... 85 $ 87,307 (Cost: $85,000) ------------ UNITED STATES GOVERNMENT SECURITIES Agency Obligations - 8.45% Federal Home Loan Mortgage Corporation: 5.125%, 1-13-03.................... 650 662,146 4.875%, 5-14-04.................... 650 661,068 Federal National Mortgage Association, 5.0%, 2-14-03...................... 500 509,171 Tennessee Valley Authority, 5.0%, 12-18-03..................... 600 610,691 ------------ Total Agency Obligations 2,443,076 ------------ Mortgage-Backed Obligations - 29.48% Federal Home Loan Mortgage Corporation Agency REMIC/CMO: 6.05%, 9-15-20..................... 68 68,473 6.5%, 6-15-24...................... 256 262,304 Federal Home Loan Mortgage Corporation Fixed Rate Participation Certificates: 5.5%, 2-1-16....................... 752 734,399 5.5%, 1-1-17....................... 889 868,707 Federal National Mortgage Association Fixed Rate Pass-Through Certificates: 8.0%, 2-1-08....................... 34 36,440 6.5%, 12-1-10...................... 218 224,220 6.0%, 1-1-11....................... 200 202,886 6.5%, 2-1-11....................... 227 233,478 7.0%, 5-1-11....................... 112 116,729 7.0%, 7-1-11....................... 142 148,391 7.0%, 9-1-12....................... 160 166,324 6.0%, 11-1-13...................... 309 310,843 7.0%, 9-1-14....................... 305 315,603 7.0%, 10-1-14...................... 315 326,465 6.0%, 6-1-16....................... 545 543,264 6.5%, 6-1-16....................... 507 516,284 7.0%, 4-1-26....................... 181 185,470 Government National Mortgage Association Fixed Rate Pass-Through Certificates: 6.5%, 1-15-14...................... 263 269,952 5.5%, 1-15-17...................... 892 874,470 6.0%, 1-15-17...................... 794 796,609 7.0%, 10-15-28..................... 609 622,534 7.0%, 4-15-29...................... 409 417,437 7.0%, 7-15-29...................... 279 284,879 ------------ Total Mortgage-Backed Obligations 8,526,161 ------------ Treasury Obligation - 2.68% U.S. Treasury Note, 5.0%, 8-15-11...................... 800 773,282 ------------ TOTAL UNITED STATES GOVERNMENT SECURITIES - 40.61% $ 11,742,519 (Cost: $11,701,714) ------------ TOTAL SHORT-TERM SECURITIES - 1.54% $ 446,000 (Cost: $446,000) ------------ TOTAL INVESTMENT SECURITIES - 98.82% $ 28,577,231 (Cost: $28,405,365) ------------ CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.18% 341,387 ------------ NET ASSETS - 100.00% $ 28,918,618 ------------ Notes to Schedule of Investments 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 LIMITED-TERM BOND FUND March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities -- at value (Notes 1 and 3).............. $28,577 Cash........................................................... 1 Receivables: Interest............................................... 426 Fund shares sold....................................... 27 ------- Total assets......................................... 29,031 ------- LIABILITIES Payable to Fund shareholders................................... 74 Dividends payable.............................................. 13 Accrued shareholder servicing (Note 2)......................... 10 Accrued accounting services fee (Note 2)....................... 2 Accrued distribution fee (Note 2).............................. 2 Accrued management fee (Note 2)................................ 2 Accrued service fee (Note 2)................................... 1 Other.......................................................... 8 ------- Total liabilities.................................... 112 ------- Total net assets................................ $28,919 ======= NET ASSETS $0.01 par value capital stock: Capital stock............................................ $ 28 Additional paid-in capital............................... 29,033 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions............................. (314) Net unrealized appreciation in value of investments...... 172 ------ Net assets applicable to outstanding units of capital $28,919 ======= Net asset value per share (net assets divided by shares outstanding): Class A..................................................... $10.20 Class B..................................................... $10.20 Class C..................................................... $10.20 Class Y..................................................... $10.20 Capital shares outstanding: Class A..................................................... 600 Class B..................................................... 139 Class C..................................................... 2,007 Class Y..................................................... 89 Capital shares authorized........................................ 200,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS LIMITED-TERM BOND FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization................................. $1,432 ------ Expenses (Note 2): Distribution fee: Class A................................................. 1 Class B................................................. 6 Class C................................................. 139 Class Y................................................. 4 Investment management fee................................. 118 Shareholder servicing: Class A................................................. 4 Class B................................................. 2 Class C................................................. 63 Class Y................................................. 2 Service fee: Class A................................................. 6 Class B................................................. 2 Class C................................................. 47 Registration fees......................................... 47 Accounting services fee................................... 17 Audit fees................................................ 13 Custodian fees............................................ 4 Other..................................................... 12 ------ Total..................................................... 487 Less expenses in excess of voluntary waiver of investment management fee (Note 2)................. (60) ------ Total expenses..................................... 427 ------ Net investment income......................... 1,005 ------ REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments.................................. (6) Unrealized depreciation in value of investments during the period......................................... (40) ------ Net loss on investments................................... (46) ------ Net increase in net assets resulting from operations $ 959 ====== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS LIMITED-TERM BOND FUND (In Thousands) For the Fiscal Year Ended March 31, --------------------- 2002 2001 INCREASE IN NET ASSETS Operations: Net investment income............................ $ 1,005 $ 967 Realized net loss on investments................. (6) (33) Unrealized appreciation (depreciation)........... (40) 826 --------------------- Net increase in net assets resulting from operations........................... 959 1,760 --------------------- Distributions to shareholders from net investment income (Note 1E):* Class A.......................................... (121) (5) Class B.......................................... (33) (11) Class C.......................................... (767) (869) Class Y.......................................... (84) (82) --------------------- (1,005) (967) --------------------- Capital share transactions (Note 5)...................... 8,138 (161) --------------------- Total increase................................... 8,092 632 NET ASSETS Beginning of period...................................... 20,827 20,195 --------------------- End of period............................................ $28,919 $20,827 ================== Undistributed net investment income...................... $-- $-- ================== *See "Financial Highlights" on pages 111 - 114. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS LIMITED-TERM BOND FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 8-17-00* ended to 3-31-02 3-31-01 Net asset value, beginning of period..................... $10.17 $9.84 ------------------------- Income from investment operations: Net investment income............................... 0.51 0.36 Net realized and unrealized gain on investments......................... 0.03 0.33 ------------------------- Total from investment operations......................... 0.54 0.69 ------------------------- Less distributions: Declared from net investment income................. (0.51) (0.36) From capital gains.................................. (0.00) (0.00) ------------------------- Total distributions...................................... (0.51) (0.36) ------------------------- Net asset value, end of period........................... $10.20 $10.17 ========================= Total return**........................................... 5.42% 7.01% Net assets, end of period (000 omitted).................. $6,124 $494 Ratio of expenses to average net assets including voluntary expense waiver............................ 1.04% 0.85%*** Ratio of net investment income to average net assets including voluntary expense waiver........... 4.76% 5.83%*** Ratio of expenses to average net assets excluding voluntary expense waiver............................ 1.19% 1.09%*** Ratio of net investment income to average net assets excluding voluntary expense waiver........... 4.61% 5.59%*** Portfolio turnover rate.................................. 32.97% 16.10%**** *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. ****For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS LIMITED-TERM BOND FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 Net asset value, beginning of period.................... $10.17 $9.80 ------------------------- Income from investment operations: Net investment income.............................. 0.42 0.36 Net realized and unrealized gain on investments........................ 0.03 0.37 ------------------------- Total from investment operations........................ 0.45 0.73 ------------------------- Less distributions: Declared from net investment income................ (0.42) (0.36) From capital gains................................. (0.00) (0.00) ------------------------- Total distributions..................................... (0.42) (0.36) ------------------------- Net asset value, end of period.......................... $10.20 $10.17 ========================= Total return............................................ 4.52% 7.54% Net assets, end of period (000 omitted)................. $1,419 $425 Ratio of expenses to average net assets including voluntary expense waiver........................... 1.88% 1.81%** Ratio of net investment income to average net assets including voluntary expense waiver.......... 4.02% 4.91%** Ratio of expenses to average net assets excluding voluntary expense waiver........................... 2.15% 2.33%** Ratio of net investment income to average net assets excluding voluntary expense waiver.......... 3.76% 4.39%** Portfolio turnover rate................................. 32.97% 16.10%*** *Commencement of operations. **Annualized. ***For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS LIMITED-TERM BOND FUND Class C Shares (A) For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended March 31, ------------------------------------------ 2002 2001 2000 1999 1998 Net asset value, beginning of period.... $10.17 $9.76 $10.16 $10.14 $9.90 ----------------------------------------------- Income (loss) from investment operations: Net investment income....... 0.42 0.48 0.47 0.44 0.45 Net realized and unrealized gain (loss) on investments......... 0.03 0.41 (0.40) 0.02 0.24 ----------------------------------------------- Total from investment operations.................. 0.45 0.89 0.07 0.46 0.69 ----------------------------------------------- Less distributions: Declared from net investment income (0.42) (0.48) (0.47) (0.44) (0.45) From capital gains.......... (0.00) (0.00) (0.00) (0.00) (0.00) ----------------------------------------------- Total distributions.............. (0.42) (0.48) (0.47) (0.44) (0.45) ----------------------------------------------- Net asset value, end of period................... $10.20 $10.17 $9.76 $10.16 $10.14 =============================================== Total return..................... 4.46% 9.48% 0.73% 4.65% 7.15% Net assets, end of period (in millions)........ $20 $18 $19 $21 $18 Ratio of expenses to average net assets including voluntary expense waiver.............. 1.94% 1.82% 1.81% 2.11% 2.12% Ratio of net investment income to average net assets including voluntary expense waiver.... 4.04% 4.97% 4.75% 4.34% 4.52% Ratio of expenses to average net assets excluding voluntary expense waiver.............. 2.21% 2.34% 2.19% -- -- Ratio of net investment income to average net assets excluding voluntary expense waiver.... 3.77% 4.44% 4.37% -- -- Portfolio turnover rate.......... 32.97% 16.10% 37.02% 32.11% 27.37% (A)See Note 5. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS LIMITED-TERM BOND FUND Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended March 31, ----------------------------------------------- 2002 2001 2000 1999 1998 Net asset value, beginning of period......... $10.17 $9.76 $10.16 $10.14 $9.90 ----------------------------------------------- Income (loss) from investment operations: Net investment income....... 0.51 0.59 0.57 0.53 0.53 Net realized and unrealized gain (loss) on investments......... 0.03 0.41 (0.40) 0.02 0.24 ----------------------------------------------- Total from investment operations.................. 0.54 1.00 0.17 0.55 0.77 ----------------------------------------------- Less distributions: Declared from net investment income... (0.51) (0.59) (0.57) (0.53) (0.53) From capital gains.......... (0.00) (0.00) (0.00) (0.00) (0.00) ----------------------------------------------- Total distributions.............. (0.51) (0.59) (0.57) (0.53) (0.53) ----------------------------------------------- Net asset value, end of period............... $10.20 $10.17 $9.76 $10.16 $10.14 =============================================== Total return..................... 5.41% 10.56% 1.69% 5.60% 7.91% Net assets, end of period (000 omitted)........ $906 $1,836 $1,229 $263 $184 Ratio of expenses to average net assets including voluntary expense waiver.............. 1.04% 0.83% 0.69% 1.20% 1.32% Ratio of net investment income to average net assets including voluntary expense waiver.... 4.97% 5.95% 6.03% 5.25% 5.32% Ratio of expenses to average net assets excluding voluntary expense waiver.............. 1.18% 1.07% 0.84% -- -- Ratio of net investment income to average net assets excluding voluntary expense waiver.... 4.83% 5.71% 5.88% -- -- Portfolio turnover rate.......... 32.97% 16.10% 37.02% 32.11% 27.37% See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with Kimberly A. Scott, portfolio manager of W&R Funds, Inc. - Mid Cap Growth Fund This report relates to the operation of W&R Funds, Inc. - Mid Cap Growth Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? The Fund struggled somewhat in an environment of declining interest rates and weak economic conditions, underperforming its benchmark index. The Fund's Class A shares declined 1.67 percent before the impact of sales load and, with sales load impact, declined 7.32 percent. This compares with the Russell Mid-Cap Growth Index (generally reflecting the performance of securities that represent the mid cap sector of the stock market), which increased 4.59 percent during the same period, and the Lipper Mid-Cap Growth Funds Universe Average (reflecting the universe of funds with similar investment objectives), which declined 0.47 percent for the period. It should be noted that, in the comparison charts, the values for the benchmark index and the Lipper category do not reflect a sales load. Why did the Fund lag its benchmark index during the fiscal year? We feel that our excessive exposure to poorly performing energy, telecommunications and media stocks primarily contributed to the Fund's underperformance. In addition, stock selection issues in both the consumer discretionary and consumer staples sectors, along with the Fund's cash balance, appeared to put a drag on overall performance during the year. What other market conditions or events influenced the Fund's performance during the fiscal year? Mid-cap growth stocks staged a rally early in the fiscal year - during the spring of 2001 - that took them to their peak in front of a long descent that ended after the terrorist attacks on September 11. The Federal Reserve provided liquidity to the markets throughout the year, and the economy entered the early stages of a rebound toward the end of 2001. Mid-cap growth stocks regained some ground through December, but closed the fiscal year below the peak set in May of last year. The broader Russell Mid-Cap Growth Index saw weakness in the technology and telecommunications sectors, due primarily to the earnings struggles related to economic weakness, over-capacity and balance sheets that were loaded with debt. Energy stocks also were weak, as prices for oil and natural gas retreated sharply early in the year. In this environment, the Fund's heavier exposure to the telecommunications and energy sectors, in particular, contributed significantly to its underperformance relative to the benchmark. What strategies and techniques did you employ that specifically affected the Fund's performance? The Fund's performance was helped, we feel, by overweight positions in both the consumer discretionary and financial services sectors, where a number of strong stocks made a positive contribution to our performance during the year. These gains were offset, however, by overweight positions in poorly performing telecommunications and energy stocks, as mentioned above. Furthermore, we now believe that the Fund's cash position was a liability, as stocks regained ground through late September and into December. The Fund also saw some negative impact from our light exposure to more economically sensitive stocks in the materials-and-processing and producer durables sectors, both of which gained ground late in the fiscal year. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? Areas of emphasis last year included the consumer discretionary sector, in general, and media and advertising-related names more specifically. The focus on media and advertising came as a result of our expectations for a nice rebound in advertising spending as the economy began to recover last year. However, the advertising downturn proved to be much steeper and more protracted than anticipated, and the stocks of advertising-dependent companies continued to perform poorly. Nonetheless, advertising and media stocks remain an area of focus, as the advertising cycle appears to have finally begun the early part of its upturn. Energy was another area of emphasis during the fiscal year, although at a much-reduced level from the beginning of the year. A significantly overweight position in energy stocks was reduced to what we feel is a modest overweight. Natural-gas-related investments are of particular interest as declining production yields and growing demand are expected to lead to higher gas prices and increases in earnings for the companies. The Fund remains slightly overweighted in the energy sector. We anticipate that additional areas of emphasis going forward may be industrial cyclicals, including select technology names, the consumer discretionary group, and biotechnology and service companies in the health care arena. Respectfully, /s/Kimberly A. Scott Kimberly A. Scott Manager W&R Mid Cap Growth Fund Comparison of Change in Value of $10,000 Investment W&R Lipper Mid Mid-Cap Cap Russell Growth Growth Mid-Cap Funds Fund Growth Universe Class A Index Average --------- --------- ---------- 7-3-00 $9,425 $10,000 $10,000 3-31-01 8,871 5,899 6,623 3-31-02 8,723 6,170 6,591 ===== W&R Mid Cap Growth Fund, Class A Shares (1) -- $8,723 +++++ Russell Mid-Cap Growth Index -- $6,170 ***** Lipper Mid-Cap Growth Funds Universe Average -- $6,591 (1)The value of the investment in the Fund is impacted by the sales load at the time of the investment and by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return* Class A Class B Class C Class Y 1-year period ended 3-31-02 -7.32% -6.75% -2.53% -1.52% Since inception of Class through 3-31-02** -7.50% -7.74% -5.24% -5.55% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. 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 5% and 1%, respectively. (Accordingly, the Class C shares reflect no CDSC since it only applies to Class C shares held for twelve months or less.) Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **6-30-00 for Class A shares, 7-6-00 for Class B shares, 7-3-00 for Class C shares and 7-10-00 for Class Y shares (the date on which shares were first acquired by shareholders). Past performance is not predictive of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF MID CAP GROWTH FUND Mid Cap Growth Fund GOAL To seek the growth of your investment. Strategy Invests primarily in common stocks of U.S. and foreign companies whose market capitalizations are within the range of capitalizations of companies comprising the Russell Mid Cap Growth Index and that the Fund's investment manager believes offer above-average growth potential. Founded 2000 Scheduled Dividend Frequency Annually (December) Performance Summary - Class A Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Dividends paid $0.05 ===== Net asset value on 3-31-02 $ 8.91 3-31-01 9.11 ------ Change per share $(0.20) ====== Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF MID CAP GROWTH FUND Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B ------------------------- -------------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) --------------------- ------------ ---------- ------- -------- 1-year period ended 3-31-02.... -7.32% -1.67% -6.75% -2.87% 5-year period ended 3-31-02.... -- -- -- -- 10-year period ended 3-31-02.... -- -- -- -- Since inception of Class(F)...... -7.50% -4.32% -7.74% -5.60% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 5.75% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of each of the periods. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of each of the periods. (F)6-30-00 for Class A shares and 7-6-00 for Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return(A) Period Class C(B) Class Y(C) ----------------- ---------- --------- 1-year period ended 3-31-02..... -2.53% -1.52% 5-year period ended 3-31-02..... -- -- 10-year period ended 3-31-02..... -- -- Since inception of Class(D)....... -5.24% -5.55% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 1.00% which declines to zero at the end of the first year after investment. Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)7-3-00 for Class C shares and 7-10-00 for Class Y shares (the date on which shares were first acquired by shareholders). SHAREHOLDER SUMMARY OF MID CAP GROWTH FUND Portfolio Highlights On March 31, 2002, Mid Cap Growth Fund had net assets totaling $21,512,013 invested in a diversified portfolio of: 78.45% Common Stock 16.20% Cash and Cash Equivalents 4.64% United States Government Security 0.71% Preferred Stock As a shareholder of Mid Cap Growth Fund, for every $100 you had invested on March 31, 2002, your Fund owned: Business Equipment and Services Stocks $19.33 Cash and Cash Equivalents $16.20 Technology Stocks $12.63 Health Care Stocks $11.49 Financial Services Stocks $ 7.53 Capital Goods Stocks $ 6.41 Utilities Stocks $ 6.16 Consumer Goods and Services Stocks $ 5.61 Energy Stocks $ 4.90 United States Government Security $ 4.64 Retail Stocks $ 3.55 Raw Materials Stocks $ 0.84 Preferred Stock $ 0.71 THE INVESTMENTS OF MID CAP GROWTH FUND March 31, 2002 COMMON STOCKS Shares Value Banks - 4.78% Charter One Financial, Inc.............. 17,450 $ 544,789 Synovus Financial Corp.................. 15,850 483,108 ------------ 1,027,897 Broadcasting - 3.38% Charter Communications, Inc.*........... 34,100 385,671 Cox Radio, Inc., Class A*............... 12,000 340,800 ------------ 726,471 ------------ Business Equipment and Services - 11.91% Arbitron Inc.*.......................... 6,350 214,630 Convergys Corporation*.................. 3,650 107,930 Getty Images, Inc.*..................... 12,200 365,329 Interpublic Group of Companies, Inc. (The) 10,850 371,938 KPMG Consulting, Inc.*.................. 29,350 594,191 Lamar Advertising Company*.............. 9,750 395,753 TMP Worldwide Inc.*..................... 9,350 322,248 Total System Services, Inc.............. 7,600 191,140 ------------ 2,563,159 ------------ Capital Equipment - 1.06% Cooper Cameron Corporation*............. 4,450 227,439 ------------ Chemicals - Specialty - 0.84% OM Group, Inc........................... 2,500 180,750 ------------ Communications Equipment - 2.52% ADC Telecommunications, Inc.*........... 90,700 369,149 McData Corporation, Class A*............ 12,350 146,595 McData Corporation, Class B*............ 2,250 27,315 ------------ 543,059 ------------ Computers - Micro - 1.58% Apple Computer, Inc.*................... 14,350 339,593 ------------ Computers - Peripherals - 2.57% Brocade Communications Systems, Inc.*... 4,300 116,143 Siebel Systems, Inc.*................... 6,650 216,823 Veritas Software Corp. (A)*............. 5,050 221,266 ------------ 554,232 ------------ Cosmetics and Toiletries - 1.25% Estee Lauder Companies Inc. (The), Class A 7,900 269,864 ------------ Electrical Equipment - 1.71% Federal Signal Corporation.............. 2,900 68,788 Molex Incorporated...................... 5,100 177,149 Molex Incorporated, Class A............. 4,000 122,420 ------------ 368,357 ------------ Electronic Components - 5.96% Altera Corporation*..................... 8,200 179,047 Cypress Semiconductor Corporation*...... 6,150 141,450 Intersil Holding Corporation *......... 8,850 250,676 Lattice Semiconductor Corporation*...... 4,900 86,069 Microchip Technology Incorporated (A)*.. 5,800 242,556 Network Appliance, Inc.*................ 18,750 382,031 ------------ 1,281,829 ------------ Farm Machinery - 1.80% Deere & Company......................... 8,500 387,175 ------------ Health Care - Drugs - 7.04% Alcon, Inc.*............................ 7,500 253,875 Biogen, Inc.*........................... 9,150 448,853 Cell Therapeutics, Inc.*................ 4,400 108,746 Cephalon, Inc.*......................... 1,700 107,091 Forest Laboratories, Inc.*.............. 2,700 220,590 Genzyme Corporation - General Division* 4,100 179,313 NPS Pharmaceuticals, Inc.*.............. 3,000 97,875 Neurocrine Biosciences, Inc.*........... 2,400 97,416 ------------ 1,513,759 ------------ Health Care - General - 2.06% Biomet, Inc............................. 16,375 442,862 ------------ Hospital Supply and Management - 2.39% Express Scripts, Inc., Class A (A)*..... 5,200 299,494 Laboratory Corporation of America Holdings* 2,250 215,685 ------------ 515,179 ------------ Metal Fabrication - 1.84% Fastenal Company........................ 5,250 395,010 ------------ Petroleum - Domestic - 3.60% Burlington Resources Inc................ 11,600 465,044 Noble Affiliates, Inc................... 7,900 308,574 ------------ 773,618 ------------ Petroleum - Services - 1.30% Baker Hughes Incorporated............... 7,300 279,225 ------------ Publishing - 0.98% Martha Stewart Living Omnimedia, Inc.*.. 11,750 210,325 ------------ Restaurants - 0.63% Starbucks Corporation*.................. 5,900 136,438 ------------ Retail - Food Stores - 1.15% Rite Aid Corporation*................... 71,750 248,255 ------------ Retail - Specialty Stores - 1.77% Abercrombie & Fitch, Class A*........... 12,350 380,380 ------------ Security and Commodity Brokers - 2.75% Charles Schwab Corporation (The)........ 37,300 488,257 Prudential Financial, Inc............... 3,300 102,465 ------------ 590,722 ------------ Timesharing and Software - 7.42% Concord EFS, Inc.*...................... 14,050 467,233 Digital Insight Corporation*............ 11,000 302,500 eBay Inc.*.............................. 14,600 825,557 ------------ 1,595,290 ------------ Utilities - Gas and Pipeline - 1.25% El Paso Corporation..................... 6,100 268,583 ------------ Utilities - Telephone - 4.91% CenturyTel, Inc......................... 6,200 210,800 Citizens Communications Company*........ 40,550 435,912 Commonwealth Telephone Enterprises, Inc.* 4,000 154,060 Sprint Corporation - PCS Group*......... 24,800 255,192 ------------ 1,055,964 ------------ TOTAL COMMON STOCKS - 78.45% $ 16,875,435 (Cost: $16,902,214) ------------ PREFERRED STOCK - 0.71% Security and Commodity Brokers Prudential Financial, Inc. and Prudential Financial Capital Trust I, 6.75% Equity Security Units, Convertible*....... 2,750 $ 151,882 (Cost: $146,181) ------------ Principal Amount in UNITED STATES GOVERNMENT SECURITY - 4.64% Thousands Federal Home Loan Bank, 1.77%, 4-23-02..................... $1,000 $ 998,918 (Cost: $998,918) ------------ SHORT-TERM SECURITIES Commercial Paper Chemicals - Petroleum and Inorganic - 4.39% du Pont (E.I.) de Nemours and Company, 1.69631%, Master Note.............. 945 945,000 Food and Related - 4.34% General Mills, Inc., 2.0588004%, Master Note............ 934 934,000 ------------ Total Commercial Paper - 8.73% 1,879,000 ------------ Repurchase Agreement - 8.22% J.P. Morgan Securities Inc., 1.73% Repurchase Agreement dated 3-28-02, to be repurchased at $1,769,340 on 4-1-02** 1,769 1,769,000 ------------ TOTAL SHORT-TERM SECURITIES - 16.95% $ 3,648,000 (Cost: $3,648,000) ----------- TOTAL INVESTMENT SECURITIES - 100.75% $21,674,235 (Cost: $21,695,313) ----------- LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.75%) (162,222) ------------ NET ASSETS - 100.00% $21,512,013 ------------ Notes to Schedule of Investments *No income dividends were paid during the preceding 12 months. **Collateralized by $1,505,000 U.S. Treasury Bond, 7.625% due 2-15-25; market value and accrued interest aggregate $1,812,114. (A)Security serves as cover for the following written call options outstanding at March 31, 2002. (See Note 6 to financial statements): Contracts Underlying Subject Expiration Month/ Premium Market Security to Call Exercise Price Received Value ------------------------------------------------------------------------------ Express Scripts, Inc., Class A 29 May/60 $4,263 $4,930 Microchip Technology Incorporated 58 July/50 9,686 10,440 Veritas Software Corp. 50 May/50 11,100 7,000 ------------------ $25,049 $22,370 ================== 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 MID CAP GROWTH FUND March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities -- at value (Notes 1 and 3)............. $21,674 Cash.......................................................... 1 Receivables: Investment securities sold................................ 135 Fund shares sold.......................................... 50 Dividends and interest.................................... 14 ------- Total assets.......................................... 21,874 ------- LIABILITIES Payable for investment securities purchased................... 270 Payable to Fund shareholders.................................. 44 Outstanding call options at market (Note 6)................... 22 Accrued shareholder servicing (Note 2)........................ 11 Accrued accounting services fee (Note 2)...................... 1 Accrued distribution fee (Note 2)............................. 1 Accrued service fee (Note 2).................................. 1 Other......................................................... 12 ------- Total liabilities..................................... 362 ------- Total net assets.................................. $21,512 ======= NET ASSETS $0.01 par value capital stock: Capital stock............................................. $ 24 Additional paid-in capital................................ 25,266 Accumulated undistributed income (loss): Accumulated undistributed net investment income........... 5 Accumulated undistributed net realized loss on investment transactions............................ (3,765) Net unrealized depreciation in value of securities........ (21) Net unrealized appreciation in value of written call options.......................................... 3 ------- Net assets applicable to outstanding units of capital.................................. $21,512 ======= Net asset value per share (net assets divided by shares outstanding): Class A....................................................... $8.91 Class B....................................................... $8.81 Class C....................................................... $8.85 Class Y....................................................... $8.91 Capital shares outstanding: Class A....................................................... 1,657 Class B....................................................... 221 Class C....................................................... 493 Class Y....................................................... 49 Capital shares authorized......................................... 400,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS MID CAP GROWTH FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization................................. $ 245 Dividends................................................. 51 ----- Total income.......................................... 296 ----- Expenses (Note 2): Investment management fee................................. 166 Shareholder servicing: Class A............................................... 47 Class B............................................... 17 Class C............................................... 20 Class Y............................................... --* Registration fees......................................... 72 Distribution fee: Class A............................................... 8 Class B............................................... 14 Class C............................................... 31 Class Y............................................... 1 Service fee: Class A............................................... 26 Class B............................................... 5 Class C............................................... 10 Audit fees................................................ 12 Accounting services fee................................... 12 Custodian fees............................................ 11 Other..................................................... 4 ----- Total................................................. 456 Less expenses in excess of voluntary waiver of investment management fee (Note 2)............ (165) ----- Total expenses................................ 291 ----- Net investment income.................. 5 ----- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities............................... (1,919) Realized net gain on written call options..................... 18 Realized net loss on written put options...................... (18) ----- Realized net loss on investments.......................... (1,919) ----- Unrealized appreciation in value of securities during the period......................................... 1,414 Unrealized appreciation in value of written call options during the period................................. 1 ----- Unrealized appreciation in value of investments during the period..................................... 1,415 ----- Net loss on investments............................... (504) ----- Net decrease in net assets resulting from operations............................... $(499) ===== *Not shown due to rounding. See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS MID CAP GROWTH FUND (In Thousands) For the fiscal period from For the fiscal 6-30-00* year ended through 3-31-02 3-31-01 -------------- --------------- INCREASE (DECREASE) IN NET ASSETS Operations Net investment income................... $ 5 $ 140 Realized net loss on investments......................... (1,919) (1,438) Unrealized appreciation (depreciation)...................... 1,415 (1,434) ------- ------- Net decrease in net assets resulting from operations................. (499) (2,732) ------- ------- Distributions to shareholders from (Note 1E):** Net investment income: Class A............................. (75) (55) Class B............................. -- (1) Class C............................. -- (5) Class Y............................. (3) (1) Realized net gain on investment transactions: Class A............................. -- (269) Class B............................. -- (40) Class C............................. -- (94) Class Y............................. -- (5) ------- ------- (78) (470) ------- ------- Capital share transactions (Note 5)................................ 4,911 17,380 ------- ------- Total increase.......................... 4,334 14,178 NET ASSETS Beginning of period......................... 17,178 3,000 ------- ------- End of period............................... $21,512 $17,178 ======= ======= Undistributed net investment income....................... $5 $78 === === *Commencement of operations. **See "Financial Highlights" on pages 128 - 131. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MID CAP GROWTH FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 6-30-00* ended to 3-31-02 3-31-01 ----------- ----------- Net asset value, beginning of period.................................... $9.11 $10.00 ----- ------ Income (loss) from investment operations: Net investment income........................ 0.02 0.11 Net realized and unrealized loss on investments...................... (0.17) (0.65) ----- ------ Total from investment operations................. (0.15) (0.54) ----- ------ Less distributions: From net investment income................... (0.05) (0.06) From capital gains........................... (0.00) (0.29) ----- ------ Total distributions.............................. (0.05) (0.35) ----- ------ Net asset value, end of period................... $8.91 $ 9.11 ===== ====== Total return**................................... -1.67% -5.88% Net assets, end of period (in millions)................................ $15 $11 Ratio of expenses to average net assets including voluntary expense waiver..................... 1.17% 1.01%*** Ratio of net investment income to average net assets including voluntary expense waiver..................... 0.34% 1.85%*** Ratio of expenses to average net assets excluding voluntary expense waiver..................... 1.84% 1.65%*** Ratio of net investment income (loss) to average net assets excluding voluntary expense waiver..................... -0.33% 1.21%*** Portfolio turnover rate.......................... 39.05% 110.18% *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MID CAP GROWTH FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-6-00* ended to 3-31-02 3-31-01 ----------- ----------- Net asset value, beginning of period.................................... $9.07 $10.01 ----- ------ Income (loss) from investment operations: Net investment income (loss)................. (0.09) 0.02 Net realized and unrealized loss on investments...................... (0.17) (0.66) ----- ------ Total from investment operations................. (0.26) (0.64) ----- ------ Less distributions: From net investment income................... (0.00) (0.01) From capital gains........................... (0.00) (0.29) ----- ------ Total distributions.............................. (0.00) (0.30) ----- ------ Net asset value, end of period................... $8.81 $ 9.07 ===== ====== Total return..................................... -2.87% -6.85% Net assets, end of period (in millions)................................ $2 $2 Ratio of expenses to average net assets including voluntary expense waiver..................... 2.49% 2.40%** Ratio of net investment income (loss) to average net assets including voluntary expense waiver..................... -0.95% 0.44%** Ratio of expenses to average net assets excluding voluntary expense waiver..................... 3.90% 3.93%** Ratio of net investment loss to average net assets excluding voluntary expense waiver..................... -2.37% -1.09%** Portfolio turnover rate.......................... 39.05% 110.18% *Commencement of operations. **Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MID CAP GROWTH FUND Class C Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 ----------- ----------- Net asset value, beginning of period...................................... $9.08 $10.00 ----- ------ Income (loss) from investment operations: Net investment income (loss).............................. (0.05) 0.04 Net realized and unrealized loss on investments............................. (0.18) (0.66) ----- ------ Total from investment operations..................................... (0.23) (0.62) ----- ------ Less distributions: From net investment income..................... (0.00) (0.01) From capital gains............................. (0.00) (0.29) ----- ------ Total distributions................................ (0.00) (0.30) ----- ------ Net asset value, end of period..................... $8.85 $ 9.08 ===== ====== Total return....................................... -2.53% -6.58% Net assets, end of period (in millions).................................. $4 $4 Ratio of expenses to average net assets including voluntary expense waiver....................... 2.10% 1.99%** Ratio of net investment income (loss) to average net assets including voluntary expense waiver....................... -0.55% 0.84%** Ratio of expenses to average net assets excluding voluntary expense waiver....................... 3.30% 3.26%** Ratio of net investment loss to average net assets excluding voluntary expense waiver....................... -1.74% -0.43%** Portfolio turnover rate............................ 39.05% 110.18% *Commencement of operations. **Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MID CAP GROWTH FUND Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-10-00* ended to 3-31-02 3-31-01 ----------- ----------- Net asset value, beginning of period........................................ $9.11 $10.23 ----- ------ Income (loss) from investment operations: Net investment income............................ 0.00 0.11 Net realized and unrealized loss on investments............................... (0.14) (0.88) ----- ------ Total from investment operations....................................... (0.14) (0.77) ----- ------ Less distributions: From net investment income....................... (0.06) (0.06) From capital gains............................... (0.00) (0.29) ----- ------ Total distributions.................................. (0.06) (0.35) ----- ------ Net asset value, end of period....................... $8.91 $ 9.11 ===== ====== Total return......................................... -1.52% -7.97% Net assets, end of period (000 omitted).................................... $438 $184 Ratio of expenses to average net assets including voluntary expense waiver......................... 0.83% 1.03%** Ratio of net investment income to average net assets including voluntary expense waiver......................... 0.50% .77%** Ratio of expenses to average net assets excluding voluntary expense waiver......................... 1.30% 1.68%** Ratio of net investment income to average net assets excluding voluntary expense waiver......................... 0.03% 1.11%** Portfolio turnover rate.............................. 39.05% 110.18% *Commencement of operations. **Annualized. See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with Mira Stevovich, portfolio manager of W&R Funds, Inc. - Money Market Fund This report relates to the operation of W&R Funds, Inc. - Money Market Fund for the fiscal year ended March 31, 2002. The following discussion and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? The Fund's return declined somewhat during the fiscal year, due primarily to the sharp decline in interest rates throughout 2001, as the Federal Reserve cut its target rates several times in an attempt to stimulate the U.S. economy. Overall, however, the Fund's yield has compared favorably with peer money market funds, all of which were impacted by the interest rate environment. What market conditions or events influenced the Fund's performance during the fiscal year? The weak U.S. economy during the fiscal year resulted in lower credit quality among companies issuing debt securities. We remain vigilant in our review and monitoring of companies in which we invest during uncertain economic times, while attempting to invest only in companies with the highest credit quality. However, securities issued by the highest quality companies are issued at premium rates of interest (the lowest yielding securities). Therefore, our emphasis on the highest credit quality and safest investments has translated into a somewhat lower overall return for the Fund than would be realized under more normal market conditions. What strategies and techniques did you employ that specifically affected the Fund's performance? Our concern with credit quality was the primary focus of our management strategy during the fiscal year. We have chosen to extend overall Fund maturity with very select securities that we believe are of the highest quality, based on our strict credit risk constraints. Following the terrorist attacks of September 11, we assumed a defensive posture and kept new security purchases relatively short, to help maintain liquidity during uncertain times. What industries did you emphasize during the fiscal year, and what looks attractive to you going forward? We have extended the average maturity of the Fund, primarily with U.S. Treasury securities and U.S. Government Agency securities, which carry the highest credit quality ratings. Currently, we feel that U.S. Government Agency securities look attractive and carry less credit risk than other securities. Although there appeared to be evidence of improvement in the U.S. economy by fiscal year-end, we feel that potential for volatility remains. We thus intend to review security purchases on a case-by-case basis, following closely the developments in all industries and the effects on each company in which we invest. Respectfully, /s/Mira Stevovich Mira Stevovich Manager W&R Money Market Fund THE INVESTMENTS OF MONEY MARKET FUND March 31, 2002 Principal Amount in CORPORATE OBLIGATIONS Thousands Value Commercial Paper Beverages - 2.74% Diageo Capital plc, 1.8%, 5-14-02................. $358 $ 357,230 ------------ Food and Related - 6.52% Nestle Capital Corp.: 1.77%, 4-17-02................ 250 249,803 1.8%, 5-7-02.................. 250 249,550 Unilever Capital Corporation: 1.76%, 4-8-02................. 350 349,880 ------------ 849,233 ------------ Health Care - Drugs - 9.20% GlaxoSmithKline Finance plc: 1.81%, 4-24-02................ 250 249,711 1.82%, 5-7-02................. 250 249,545 Merck & Co., Inc., 1.76%, 4-15-02................ 199 198,864 Pharmacia Corporation: 1.78%, 4-10-02................ 250 249,889 1.79%, 4-16-02................ 250 249,814 ------------ 1,197,823 ------------ Household - General Products - 3.83% Procter & Gamble Company (The): 1.81%, 4-29-02................ 250 249,648 1.81%, 5-8-02................. 250 249,535 ------------ 499,183 ------------ Multiple Industry - 3.84% BOC Group Inc., 1.85%, 4-1-02................. 500 500,000 ------------ Retail - General Merchandise - 2.00% Wal-Mart Stores, Inc., 1.9%, 4-2-02.................. 260 259,986 ------------ Utilities - Electric - 11.89% AES Hawaii Inc. (Bank of America N.A.): 1.85%, 4-11-02................ 200 199,897 1.85%, 4-26-02................ 350 349,550 Idaho Power Co.: 1.83%, 4-11-02................ 250 249,873 1.82%, 4-19-02................ 250 249,773 Tampa Electric Co.: 1.83%, 4-2-02................. 250 249,987 1.83%, 4-9-02................. 250 249,898 ------------ 1,548,978 ------------ Utilities - Gas and Pipeline - 3.84% Northern Illinois Gas Company, 1.82%, 4-11-02................ 250 249,874 Questar Corp., 1.83%, 4-2-02................. 250 249,987 ------------ 499,861 ------------ Utilities - Telephone - 1.92% SBC Communications Inc., 1.81%, 4-11-02................ 250 249,874 ------------ Total Commercial Paper - 45.78% 5,962,168 ------------ Notes Capital Equipment - 1.92% Caterpillar Financial Services Corp.: 2.01125%, 6-5-02.............. 250 250,073 ------------ Finance Companies - 1.92% Deere (John) Capital Corp.: 1.89%, 7-19-02................ 250 250,041 ------------ Health Care - Drugs - 2.72% Lilly (Eli) and Company, 4.226%, 3-22-03............... 350 354,737 ------------ Hospital Supply and Management - 1.92% Meriter Management Services, Inc. (U.S. Bank Milwaukee, National Association), 2.05%, 4-3-02................. 250 250,000 ------------ Utilities - Gas and Pipeline - 1.92% Questar Corp., 2.02%, 4-3-02................. 250 250,000 ------------ Utilities - Telephone - 2.30% BellSouth Corporation, 4.287%, 4-26-02............... $300 $ 299,962 ------------ Total Notes - 12.70% 1,654,813 ------------ TOTAL CORPORATE OBLIGATIONS - 58.48% $ 7,616,981 (Cost: $7,616,981) ------------ MUNICIPAL OBLIGATIONS California - 1.57% Pollution Control Financing Authority, Environmental Improvement Revenue Bonds, Shell Oil Company Project, Series 1998A (Taxable), 1.86%, 4-1-02...................... 205 205,000 ------------ Colorado - 2.49% City and County of Denver, Colorado, Department of Aviation, Airport System, Subordinate Commercial Paper Taxable Notes, Series 2000B (Westdeutsche Landesbank Girozentrale and Bayerische Landesbank Girozentrale), 1.79%, 4-8-02...................... 325 324,887 ------------ Indiana - 1.54% City of Whiting, Indiana, Industrial Sewage and Solid Waste Disposal Revenue Bonds (Amoco Oil Company Project), Taxable Series 1995 (Amoco Corporation), 1.8%, 5-7-02....................... 200 200,000 ------------ Louisiana - 3.46% Industrial Development Board of the Parish Of Calcasieu, Inc., Environmental Revenue Bonds (CITGO Petroleum Corporation Project), Series 1996 (Taxable), (Westdeutsche Landesbank Girozentrale), 1.82%, 4-10-02..................... 450 450,000 ------------ New York - 2.50% The City of New York, General Obligation Bonds, Fiscal 1995 Series B, Taxable Adjustable Rate Bonds (Bayerische Landesbank Girozentrale, New York Branch), 1.85%, 4-8-02...................... 325 325,000 ------------ Ohio - 3.46% State of Ohio, Taxable Solid Waste Revenue Bonds, Series 2000, Taxable (BP Exploration & Oil Inc. Project - BP Amoco P.L.C. Guarantor), 1.78%, 5-2-02...................... $450 450,000 ------------ Washington - 6.84% Watts Brothers Frozen Foods, L.L.C., Variable Rate Demand Taxable Revenue Bonds, 1997 (U.S. Bank of Washington, National Association), 2.05%, 4- 4-02..................... 546 546,000 Washington State Housing Finance Commission: Taxable Variable Rate Demand Multifamily Revenue Bonds: Springfield Meadows Apartments Project, Series 2001B (U.S. Bank, National Association), 1.9%, 4-1-02....................... 250 250,000 Brittany Park Project, Series 1996B (U.S. Bank of Washington, National Association), 2.1%, 4- 4-02...................... 95 95,000 ------------ 891,000 ------------ Wisconsin - 3.42% Sheboygan County, Wisconsin, Taxable General Obligation Promissory Notes, 2.5%, 2-1-03....................... 445 445,000 ------------ TOTAL MUNICIPAL OBLIGATIONS - 25.28% $ 3,290,887 (Cost: $3,290,887) ------------ UNITED STATES GOVERNMENT SECURITIES Federal Home Loan Bank, 2.075%, 2-14-03.................... 400 400,000 Federal Home Loan Mortgage Corporation, 2.25%, 2-14-03..................... 400 400,000 Federal National Mortgage Association, 1.69%, 4-1-02...................... 500 500,000 United States Treasury Bill: 1.75%, 5-30-02..................... 200 199,426 1.8%, 6-6-02....................... 250 249,175 1.86%, 6-6-02...................... 400 398,640 TOTAL UNITED STATES GOVERNMENT SECURITIES - 16.48% $ 2,147,241 (Cost: $2,147,241) ------------ TOTAL INVESTMENT SECURITIES - 100.24% $ 13,055,109 (Cost: $13,055,109) ------------ LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.24%) (31,665) ------------ NET ASSETS - 100.00% $ 13,023,444 ------------ Notes to Schedule of Investments 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 MONEY MARKET FUND March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities -- at value (Notes 1 and 3).. $13,055 Cash............................................... 21 Receivables Fund shares sold............................... 57 Interest....................................... 24 Prepaid insurance premium.......................... 1 ------- Total assets............................... 13,158 ------- LIABILITIES Payable to Fund shareholders....................... 106 Accrued shareholder servicing (Note 2)............. 3 Accrued accounting services fee (Note 2)........... 1 Accrued distribution fee (Note 2).................. 1 Dividends payable.................................. 1 Other.............................................. 23 ------- Total liabilities.......................... 135 ------- Total net assets....................... $13,023 ======= NET ASSETS $0.01 par value capital stock: Capital stock................................... $130 Additional paid-in capital...................... 12,893 ------- Net assets applicable to outstanding units of capital....................... $13,023 ======= Net asset value, redemption and offering price per share: Class A.............................................. $1.00 Class B.............................................. $1.00 Class C.............................................. $1.00 Capital shares outstanding: Class A.............................................. 5,317 Class B.............................................. 578 Class C.............................................. 7,128 Capital shares authorized.............................. 400,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS MONEY MARKET FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization............................ $475 ---- Expenses (Note 2): Distribution fee: Class B........................................... 4 Class C........................................... 64 Investment management fee............................. 56 Registration fees..................................... 55 Service fee: Class B........................................... 1 Class C........................................... 21 Shareholder servicing: Class A........................................... 6 Class B........................................... 1 Class C........................................... 12 Accounting services fee............................... 12 Custodian fees........................................ 10 Audit fee............................................. 8 Legal fees............................................ 2 Other................................................. 8 ---- Total............................................. 260 Less expenses in excess of voluntary waiver of investment management fee (Note 2).............................. (56) ---- Total expenses............................ 204 ---- Net investment income.............. 271 ---- Net increase in net assets resulting from operations............... $271 ==== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS MONEY MARKET FUND (In Thousands) For the fiscal For the period from fiscal June 30, year ended 2000* through March 31, March 31, 2002 2001 --------------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income..................... $ 271 $ 257 --------------------- Net increase in net assets resulting from operations................... 271 257 --------------------- Distributions to shareholders from net investment income (Note 1E):** Class A................................... (130) (154) Class B................................... (7) (6) Class C................................... (134) (97) --------------------- (271) (257) --------------------- Capital share transactions (Note 5)........... (2,179) 12,202 --------------------- Total increase (decrease)................. (2,179) 12,202 NET ASSETS Beginning of period........................... 15,202 3,000 --------------------- End of period................................. $13,023 $15,202 ===================== Undistributed net investment income........... $-- $-- ================== *Commencement of operations **See "Financial Highlights" on pages 142 - 144. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MONEY MARKET FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 6-30-00* ended to 3-31-02 3-31-01 ===================== Net asset value, beginning of period............ $1.00 $1.00 --------------------- Net investment income............................ 0.0259 0.0413 Less dividends declared......................... (0.0259) (0.0413) --------------------- Net asset value, end of period.................. $1.00 $1.00 ===================== Total return..................................... 2.70% 4.11% Net assets, end of period (in millions).......... $5 $5 Ratio of expenses to average net assets including voluntary expense waiver..................... 0.81% 0.92%** Ratio of net investment income to average net assets including voluntary expense waiver..................... 2.60% 5.49%** Ratio of expenses to average net assets excluding voluntary expense waiver..................... 1.03% 1.18%** Ratio of net investment income to average net assets excluding voluntary expense waiver..................... 2.38% 5.23%** *Commencement of operations. **Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MONEY MARKET FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-12-00* ended to 3-31-02 3-31-01 --------------------- Net asset value, beginning of period............... $1.00 $1.00 --------------------- Net investment income............................... 0.0147 0.0299 Less dividends declared............................ (0.0147) (0.0299) --------------------- Net asset value, end of period..................... $1.00 $1.00 ===================== Total return........................................ 1.55% 2.97% Net assets, end of period (000 omitted)............. $578 $431 Ratio of expenses to average net assets including voluntary expense waiver........................ 1.88% 2.29%** Ratio of net investment income to average net assets including voluntary expense waiver........................ 1.33% 4.05%** Ratio of expenses to average net assets excluding voluntary expense waiver........................ 2.39% 2.94%** Ratio of net investment income to average net assets excluding voluntary expense waiver........................ 0.82% 3.41%** *Commencement of operations. **Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MONEY MARKET FUND Class C Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 --------------------- Net asset value, beginning of period............ $1.00 $1.00 --------------------- Net investment income........................... 0.0157 0.0332 Less dividends declared......................... (0.0157) (0.0332) --------------------- Net asset value, end of period.................. $1.00 $1.00 ===================== Total return.................................... 1.63% 3.32% Net assets, end of period (in millions)......... $7 $10 Ratio of expenses to average net assets including voluntary expense waiver..................... 1.81% 1.98%** Ratio of net investment income to average net assets including voluntary expense waiver..................... 1.58% 4.34%** Ratio of expenses to average net assets excluding voluntary expense waiver..................... 2.31% 2.54%** Ratio of net investment income to average net assets excluding voluntary expense waiver..................... 1.08% 3.78%** *Commencement of operations. **Annualized. See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with Bryan J. Bailey, portfolio manager of W&R Funds, Inc. - Municipal Bond Fund This report relates to the operation of W&R Funds, Inc. - Municipal Bond Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? The Fund performed well during the fiscal year, outperforming its benchmark index. The Fund's Class C shares increased 4.40 percent for the fiscal year, compared with the Lehman Brothers Municipal Bond Index (reflecting the performance of securities that generally represent the municipal bond market), which increased 3.82 percent for the period, and the Lipper General Municipal Debt Funds Universe Average (reflecting the performance of funds with similar investment objectives), which increased 2.74 percent for the period. What helped the Fund outperform its benchmark index during the fiscal year? There were several factors that contributed positively to the Fund's performance throughout the fiscal year. The primary factor, we believe, that enabled the Fund to produce superior performance results was our ability to avoid many of the credit disasters that plagued the market during this very difficult period. The year was fraught with events that resulted in severe underperformance in several sectors. The terrorist attacks on September 11, and the subsequent fear of additional attacks, severely hampered the market for municipal bonds backed by the airline industry in the latter part of 2001. Accounting fraud and financial statement transparency concerns resulted in major markdowns for certain corporate-backed resource recovery issues. Additionally, many power bonds were pressured by the Enron debacle and the state of California energy crisis. Several paper companies were beaten down on concerns of litigation risk resulting from asbestos exposure. Fortunately, the Fund had very little exposure to these problem sectors, which served to enhance our relative performance. An overweight position in lower-tier investment grade hospitals also benefited the Fund, we believe. What other market conditions or events influenced the Fund's performance during the fiscal year? The Fund's defensive posture on interest rates helped preserve performance during the fourth calendar quarter of 2001, as the bond market sold off dramatically. A heavily underweight position in California municipal bonds also contributed positively to relative performance. What strategies and techniques did you employ that specifically affected the Fund's performance? Patience with our overweight position in lower-tier investment grade hospitals paid off quite nicely. We were early in identifying the sector, which produced disappointing results last year, but we were rewarded by being patient. Our management style is essentially top-down, with an emphasis on identifying relative value opportunities between sectors of the market. Ongoing analysis of global macro-economic data led us to conclude that the risks of interest rates moving higher began to outweigh the potential rewards of rates moving lower, as the year progressed. Fund duration was shortened throughout the year in an attempt to capitalize on the sell-off that materialized in the final quarter. A diligent approach to ongoing credit analysis and subsequent surveillance upon purchase enabled the Fund to avoid many of the credit disasters that, we believe, plagued peer group funds. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? We continue to feel that we are in an investment environment where the winners likely will be managers who can avoid the credit disasters. We are therefore proceeding with extreme caution. We expect to maintain the Fund's neutral-to-defensive exposure to interest rate risk. Going forward, we intend to continue to upgrade the credit quality of the Fund by moving out of some lower-rated hospital and industrial development revenue bonds and pollution control revenue bonds, when appropriate, and re-deploying assets into higher quality general obligation and essential-service revenue bonds. We expect to continue to lighten corporate municipal positions as liquidity continues to deteriorate. We feel that the Fund currently is well positioned relative to its peers. In order to most effectively pursue the Fund's objective, we plan to continue investing in intermediate and longer-term (when appropriate) investment grade municipal bonds, with an emphasis on quality and capital preservation and minimal yield sacrifice. Respectfully, /s/Bryan J. Bailey Bryan J. Bailey Manager W&R Municipal Bond Fund Comparison of Change in Value of $10,000 Investment W&R Lipper Municipal Lehman General Bond Brothers Municipal Fund, Municipal Debt Funds Class C Bond Universe Shares Index Average --------- --------- ---------- 09-30-92 10,000 10,000 10,000 03-31-93 10,700 10,560 10,593 03-31-94 10,782 10,805 10,785 03-31-95 11,469 11,608 11,457 03-31-96 12,327 12,581 12,280 03-31-97 12,983 13,269 12,865 03-31-98 14,397 14,691 14,239 03-31-99 15,065 15,602 14,940 03-31-00 14,129 15,589 14,586 03-31-01 15,291 17,293 16,036 03-31-02 15,959 17,953 16,476 ===== W&R Municipal Bond Fund, Class C Shares (1) (2)-- $15,959 +++++ Lehman Brothers Municipal Bond Index (1) -- $17,953 ----- Lipper General Municipal Debt Funds Universe Average (1) -- $16,476 (1)Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of the indexes are not available, the investments were effected as of September 30, 1992. (2)The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return* Class A Class B Class C** Class Y 1-year period ended 3-31-02 0.90% -0.03% 4.40% 5.10% 5-year period ended 3-31-02 -- -- 4.22% -- Since inception of Class through 3-31-02*** 3.38% 2.90% 5.07% 2.76% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. Class A shares carry a maximum front-end sales load of 4.25%. Class B and Class C shares carry maximum contingent deferred sales charges of 5% and 1%, respectively. Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. ***9-15-00 for Class A shares, 8-8-00 for Class B shares, 9-21-92 for Class C shares and 12-30-98 for Class Y shares (the date on which shares were first acquired and continuously held by shareholders). Past performance is not necessarily indicative of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF MUNICIPAL BOND FUND Municipal Bond Fund GOAL To seek income which is not subject to Federal income tax. (Income may be subject to state and local taxes, and a significant portion may be subject to the Federal alternative minimum tax.) Strategy Invests primarily in tax-exempt municipal bonds, mainly of investment grade. The Fund diversifies its holdings among two main types of municipal bonds: general obligation bonds and revenue bonds. Founded 1992 Scheduled Dividend Frequency Declared daily, paid monthly Performance Summary - Class C Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Dividends paid $0.37 ===== Net asset value on 3-31-02 $10.61 3-31-01 10.52 ------ Change per share $0.09 ====== Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF MUNICIPAL BOND FUND Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B ----------------------- --------------------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) ----------------- ---------- ---------- ------- -------- 1-year period ended 3-31-02.... 0.90% 5.38% -0.03% 3.97% 5-year period ended 3-31-02.... -- -- -- -- 10-year period ended 3-31-02.... -- -- -- -- Since inception of Class(F)...... 3.38% 6.34% 2.90% 5.27% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 4.25% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of each of the periods. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of each of the periods. (F)9-15-00 for Class A shares and 8-8-00 for Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return(A) Period Class C(B) Class Y(C) ----------------- ---------- ---------- 1-year period ended 3-31-02... 4.40% 5.10% 5-year period ended 3-31-02... 4.22% -- 10-year period ended 3-31-02... -- -- Since inception of Class(D)..... 5.07% 2.76% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)9-21-92 for Class C shares and 12-30-98 for Class Y shares (the date on which shares were first acquired and continuously held by shareholders). SHAREHOLDER SUMMARY OF MUNICIPAL BOND FUND Portfolio Highlights On March 31, 2002, Municipal Bond Fund had net assets totaling $26,508,924 invested in a diversified portfolio. As a shareholder of Municipal Bond Fund, for every $100 you had invested on March 31, 2002, your Fund owned: Hospital Revenue Bonds $20.13 Other Municipal Bonds $15.96 Education Revenue Bonds $10.25 Industrial Revenue Bonds $ 8.70 Housing Revenue Bonds $ 8.22 Special Tax Bonds $ 7.57 Water and Sewer Revenue Bonds $ 6.78 Sales Revenue Bonds $ 5.99 School General Obligation Bonds $ 5.74 City and County General Obligation Bonds $ 5.15 Lease/Certificate of Participation Bonds $ 4.87 Cash and Cash Equivalents $ 0.64 2002 TAX YEAR TAXABLE EQUIVALENT YIELDS* --------------------------------------------------------------------------- If your Taxable Income is: Your Equivalent Marginal Tax Free Yields Joint Single Tax --------------------------- return Return Bracket Is 5% 6% 7% 8% $ 0- 12,000 $ 0- 6,000 10% 5.56% 6.67% 7.78% 8.89% $ 12,001- 46,700 6,001- 27,950 15% 5.88% 7.06% 8.24% 9.41% $ 46,701-112,850 $ 27,951- 67,700 27% 6.85% 8.22% 9.59% 10.96% $112,851-171,950 $ 67,701-141,250 30% 7.14% 8.57% 10.00% 11.43% $171,951-307,050 $141,251-307,050 35% 7.69% 9.23% 10.77% 12.31% $307,051 and above $307,051 and above 38.6% 8.10% 9.72% 11.34% 12.96% *Table is for illustration only and does not represent the actual performance of W&R Funds, Inc. - Municipal Bond Fund. THE INVESTMENTS OF MUNICIPAL BOND FUND March 31, 2002 Principal Amount in MUNICIPAL BONDS Thousands Value Arizona - 1.05% City of Bullhead City, Arizona, Bullhead Parkway Improvement District, Improvement Bonds, 6.1%, 1-1-13....................... $270 $ 277,776 ------------ Arkansas - 1.60% Baxter County, Arkansas, Industrial Development Revenue Refunding Bonds (Aeroquip Corporation Project), Series 1993, 5.8%, 10-1-13...................... 400 423,768 ------------ Colorado - 7.39% City of Aspen, Colorado, Sales Tax Revenue Bonds, Series 1999, 5.25%, 11-1-15..................... 1,050 1,061,728 Boulder County, Colorado, Hospital Development Revenue Bonds (Longmont United Hospital Project), Series 1997, 5.6%, 12-1-27...................... 1,000 897,620 ------------ 1,959,348 ------------ Florida - 1.98% School District of Hillsborough County, Florida, Sales Tax Revenue Bonds, Series 2002, 5.375%, 10-1-13.................... 500 525,610 ------------ Illinois - 8.17% Village of Bedford Park, Cook County, Illinois, Water Revenue Bonds, Series 2000A, 6.0%, 12-15-12..................... 955 1,016,703 Bloomington-Normal Airport Authority of McLean County, Illinois, Central Illinois Regional Airport, Passenger Facility Charge Revenue Bonds, Series 2001, 6.05%, 12-15-19.................... 645 597,438 School District Number 116, Champaign County, Illinois (Urbana), General Obligation School Building Bonds, Series 1999C, 0.0%, 1-1-11....................... 850 552,296 ------------ 2,166,437 ------------ Indiana - 11.78% Dyer (Indiana) Redevelopment Authority, Economic Development Lease Rental Bonds, Series 1999, 6.5%, 1-15-24...................... 1,000 1,022,940 New Albany-Floyd County School Building Corporation First Mortgage Bonds,3 Series 2002 (Floyd County, Indiana), 5.75%, 7-15-17..................... 675 718,612 Ball State University Board of Trustees, Ball State University Student Fee Bonds, Series K, 5.75%, 7-1-18...................... 500 525,060 Westfield High School 1995 Building Corporation (Hamilton County, Indiana), First Mortgage Bonds, Series 2002, 5.5%, 7-15-16...................... 435 455,058 East Chicago Elementary School Building Corporation (Lake County, Indiana), First Mortgage Bonds, Series 1993A, 5.5%, 1-15-16...................... 400 401,180 ------------ 3,122,850 ------------ Iowa - 1.30% Scott County, Iowa, Refunding Certificates of Participation (County Golf Course Project, Series 1993), 6.2%, 5-1-13....................... 340 343,325 ------------ Kansas - 5.39% Chisholm Creek Utility Authority, Water and Wastewater Facilities Revenue Bonds (Cities of Bel Aire and Park City, Kansas Project), Series 2002, 5.25%, 9-1-15...................... 755 781,297 Sedgwick County, Kansas and Shawnee County, Kansas, Single Family Mortgage Revenue Bonds (Mortgage-Backed Securities Program), 2001 Series A-1 (AMT), 5.25%, 12-1-32..................... 470 497,847 Kansas Development Finance Authority, Athletic Facilities Revenue Bonds, Series 2002E (The Intercollegiate Athletic Council of Kansas State University, Inc. Project), 0.0%, 7-1-15....................... 300 149,664 ------------ 1,428,808 ------------ Maryland - 4.38% Montgomery County Revenue Authority (Maryland), Golf Course System Revenue Bonds, Series 1996A, 6.125%, 10-1-22.................... 650 648,115 Maryland Transportation Authority, Airport Parking Revenue Bonds, Series 2002B, Baltimore/Washington International Airport Projects (Qualified Airport Bonds - AMT), 5.375%, 3-1-15..................... 500 513,035 ------------ 1,161,150 ------------ Minnesota - 4.60% City of Victoria, Minnesota, Private School Facility Revenue Bonds (Holy Family Catholic High School Project), Series 1999A, 5.6%, 9-1-19....................... 750 736,875 City of Perham, Minnesota, General Obligation Disposal System Revenue Bonds, Series 2001, 6.0%, 5-1-22....................... 500 483,015 ------------ 1,219,890 ------------ Missouri - 6.97% The Industrial Development Authority of the County of Taney, Missouri, Hospital Revenue Bonds (The Skaggs Community Hospital Association), Series 1998, 5.3%, 5-15-18...................... 860 779,598 Tax Increment Financing Commission of Kansas City, Missouri, Tax Increment Revenue Bond Anticipation Bonds (Briarcliff West Project), Series 2001A, 6.75%, 4-1-02...................... 705 705,000 City of Kearney, Missouri, General Obligation Bonds, Series 2001, 5.5%, 3-1-16....................... 350 363,209 ------------ 1,847,807 ------------ Nebraska - 3.94% Nebraska Higher Education Loan Program, Inc., Senior Subordinate Bonds, 1993-2, Series A-5A, 6.2%, 6-1-13....................... 500 538,815 Municipal Energy Agency of Nebraska, Power Supply System Revenue Refunding Bonds, 2002 Series A, 5.25%, 4-1-17...................... 500 506,205 ------------ 1,045,020 ------------ Nevada - 0.98% Carson City, Nevada Hospital Revenue Bonds (Carson-Tahoe Hospital Project), Series 2002, 6.0%, 9-1-15....................... 255 260,266 ------------ New Mexico - 3.84% New Mexico Hospital Equipment Loan Council, Hospital Revenue Bonds (Memorial Medical Center, Inc. Project), Series 1998: 4.85%, 6-1-08...................... 750 716,835 5.375%, 6-1-18..................... 355 300,877 ------------ 1,017,712 ------------ Oklahoma - 3.53% Oklahoma Housing Finance Agency, Single Family Mortgage Revenue Bonds (Homeownership Loan Program), 1996 Series A, 7.05%, 9-1-26...................... 660 705,890 Tulsa Public Facilities Authority (Oklahoma), Assembly Center Lease Payment Revenue Bonds, Refunding Series 1985, 6.6%, 7-1-14....................... 200 229,158 ------------ 935,048 ------------ Pennsylvania - 1.94% The School District of Philadelphia, Pennsylvania General Obligation Bonds, Series A of 2002, 5.5%, 2-1-18....................... 500 514,100 ------------ Rhode Island - 4.04% Rhode Island Health and Educational Building Corporation, Hospital Financing Revenue Bonds, St. Joseph Health Services of Rhode Island Issue, Series 1999, 5.4%, 10-1-09...................... 1,100 1,072,258 ------------ South Carolina - 1.92% Tobacco Settlement Revenue Management Authority, Tobacco Settlement Asset-Backed Bonds, Series 2001B (Tax-Exempt), 6.375%, 5-15-28.................... 500 508,715 ------------ Texas - 11.87% Texas Department of Housing and Community Affairs, Single Family Mortgage Revenue Bonds, 1997 Series D (AMT) TEAMS Structure, 5.7%, 9-1-29....................... 975 975,526 Lufkin Health Facilities Development Corporation, Health System Revenue and Refunding Bonds (Memorial Health System of East Texas), Series 1995, 6.875%, 2-15-26.................... 740 688,881 Board of Regents of Texas Tech University System, Revenue Financing System Bonds, Seventh Series (2001), 5.5%, 8-15-17...................... 500 515,715 AllianceAirport Authority, Inc., Special Facilities Revenue Bonds, Series 1991 (American Airlines, Inc. Project), 7.0%, 12-1-11...................... 500 487,305 Dallas-Fort Worth International Airport, Facility Improvement Corporation, American Airlines, Inc., Revenue Refunding Bonds, Series 2000B, 6.05%, 5-1-29...................... 500 480,290 ------------ 3,147,717 ------------ Utah - 3.45% Tooele County, Utah, Hazardous Waste Treatment Revenue Bonds (Union Pacific Corporation/ USPCI, Inc. Project), Series A, 5.7%, 11-1-26...................... 1,000 914,620 ------------ Virginia - 1.96% City of Chesapeake, Virginia, General Obligation Public Improvement and Refunding Bonds, Series of 2001, 5.5%, 12-1-17...................... 500 518,935 ------------ Washington - 2.00% Energy Northwest, Project No. 1 Refunding Electric Revenue Bonds, Series 2002-A, 5.75%, 7-1-16...................... 500 528,910 ------------ Wisconsin - 2.34% Wisconsin Health and Educational Facilities Authority, Wheaton Franciscan Services, Inc. System, Revenue and Refunding Bonds, Series 2002, 6.0%, 8-15-15...................... 600 619,788 ------------ Wyoming - 2.94% Wyoming Student Loan Corporation, Student Loan Revenue Refunding Bonds, Series 1999A (Non-AMT), 6.2%, 6-1-24....................... $75 $ 779,115 ------------ TOTAL MUNICIPAL BONDS - 99.36% $ 26,338,973 (Cost: $26,488,142) ------------ TOTAL SHORT-TERM SECURITIES - 2.07% $ 550,000 (Cost: $550,000) ------------ TOTAL INVESTMENT SECURITIES - 101.43% $ 26,888,973 (Cost: $27,038,142) ------------ LIABILITIES, NET OF CASH AND OTHER ASSETS - (1.43%) (380,049) ------------ NET ASSETS - 100.00% $ 26,508,924 ------------ Notes to Schedule of Investments 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 MUNICIPAL BOND FUND March 31, 2002 (In Thousands, Except for Per Share and Share Amounts) ASSETS Investment securities -- at value (Notes 1 and 3)................ $26,889 Receivables: Interest................................................. 437 Fund shares sold......................................... 10 ------- Total assets........................................... 27,336 ------- LIABILITIES Payable for investment securities purchased...................... 711 Payable to Fund shareholders..................................... 75 Dividends payable................................................ 11 Accrued shareholder servicing (Note 2)........................... 7 Accrued accounting services fee (Note 2)......................... 2 Accrued distribution fee (Note 2)................................ 2 Accrued management fee (Note 2).................................. 2 Due to custodian................................................. 2 Accrued service fee (Note 2)..................................... 1 Other............................................................ 14 ------- Total liabilities...................................... 827 ------- Total net assets.................................. $26,509 ======= NET ASSETS $0.01 par value capital stock: Capital stock.............................................. $ 25 Additional paid-in capital................................. 27,582 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investments. (949) Net unrealized depreciation in value of securities......... (149) ------- Net assets applicable to outstanding units of capital.. $26,509 ======= Net asset value per share (net assets divided by shares outstanding): Class A.......................................................... $10.61 Class B.......................................................... $10.61 Class C.......................................................... $10.61 Class Y.......................................................... $10.61 Capital shares outstanding: Class A......................................................... 197,294 Class B......................................................... 11,289 Class C......................................................... 2,289,550 Class Y......................................................... 205 Capital shares authorized............................................ 200,000,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS MUNICIPAL BOND FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT INCOME Income (Note 1B): Interest and amortization................................. $1,503 ------ Expenses (Note 2): Distribution fee: Class A.................................................. 1 Class B.................................................. --* Class C.................................................. 190 Class Y.................................................. --* Investment management fee.................................. 142 Service fee: Class A.................................................. 3 Class B.................................................. --* Class C.................................................. 63 Shareholder servicing: Class A.................................................. 1 Class B.................................................. --* Class C.................................................. 57 Class Y.................................................. --* Registration fees.......................................... 45 Accounting services fee.................................... 24 Audit fees................................................. 12 Custodian fees............................................. 3 Other...................................................... 18 ------ Total expenses.......................................... 559 ------ Net investment income.............................. 944 ------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities.................................... (140) Realized net loss on futures contracts closed...................... (130) ------ Realized net loss on investments........................... (270) ------ Unrealized appreciation in value of investments during the period.......................................... 509 ------ Net gain on investments.................................. 239 ------ Net increase in net assets resulting from operations................................ $1,183 ====== *Not shown due to rounding. See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS MUNICIPAL BOND FUND (In Thousands) For the Fiscal Year Ended March 31, ---------------------- 2002 2001 --------------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income................... $ 944 $1,047 Realized net loss on investments........ (270) (600) Unrealized appreciation................. 509 1,634 --------------------- Net increase in net assets resulting from operations........ 1,183 2,081 --------------------- Distributions to shareholders from net investment income (Note 1E):* Class A................................ (70) (16) Class B................................ (2) (1) Class C................................ (872) (1,030) Class Y................................ --** --** --------------------- (944) (1,047) --------------------- Capital share transactions (Note 5).............. (748) (2,379) --------------------- Total decrease........................... (509) (1,345) NET ASSETS Beginning of period.............................. 27,018 28,363 --------------------- End of period.................................... $26,509 $27,018 ===================== Undistributed net investment income.............. $-- $-- ================= *See "Financial Highlights" on pages 160 - 163. **Not shown due to rounding. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MUNICIPAL BOND FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 9-15-00* ended to 3-31-02 3-31-01 ------------------------- Net asset value, beginning of period............. $10.52 $10.33 ------------------------- Income from investment operations: Net investment income....................... 0.47 0.26 Net realized and unrealized gain on investments...................... 0.09 0.19 ------------------------- Total from investment operations................. 0.56 0.45 ------------------------- Less distributions: Declared from net investment income......... (0.47) (0.26) From capital gains.......................... (0.00) (0.00) ------------------------- Total distributions.............................. (0.47) (0.26) ------------------------- Net asset value, end of period................... $10.61 $10.52 ========================= Total return**................................... 5.38% 4.32% Net assets, end of period (in millions).......... $2 $1 Ratio of expenses to average net assets.......... 1.17% 1.21%*** Ratio of net investment income to average net assets.................................. 4.37% 4.69%*** Portfolio turnover rate......................... 36.41% 34.78%**** *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. ****For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MUNICIPAL BOND FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 8-8-00* ended to 3-31-02 3-31-01 ------------------------- Net asset value, beginning of period.............. $10.52 $10.26 ------------------------- Income from investment operations: Net investment income........................ 0.32 0.22 Net realized and unrealized gain on investments....................... 0.09 0.26 ------------------------- Total from investment operations.................. 0.41 0.48 ------------------------- Less distributions: Declared from net investment income.......... (0.32) (0.22) From capital gains........................... (0.00) (0.00) ------------------------- Total distributions............................... (0.32) (0.22) ------------------------- Net asset value, end of period.................... $10.61 $10.52 ========================= Total return...................................... 3.97% 4.66% Net assets, end of period (000 omitted)........... $120 $37 Ratio of expenses to average net assets........... 2.44% 2.82%** Ratio of net investment income to average net assets................................... 3.09% 3.11%** Portfolio turnover rate........................... 36.41% 34.78%*** *Commencement of operations. **Annualized. ***For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MUNICIPAL BOND FUND Class C Shares (A) For a Share of Capital Stock Outstanding Throughout Each Period: For the fiscal year ended March 31, ----------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------- Net asset value, beginning of period... $10.52 $10.11 $11.24 $11.45 $10.74 ----------------------------------------------- Income (loss) from investment operations: Net investment income.. 0.37 0.40 0.42 0.42 0.44 Net realized and unrealized gain (loss) on investments 0.09 0.41 (1.11) 0.10 0.71 ----------------------------------------------- Total from investment operations............. 0.46 0.81 (0.69) 0.52 1.15 ----------------------------------------------- Less distributions: Declared from net investment income.. (0.37) (0.40) (0.42) (0.42) (0.44) From capital gains.... (0.00) (0.00) (0.02) (0.31) (0.00) ----------------------------------------------- Total distributions........ (0.37) (0.40) (0.44) (0.73) (0.44) ----------------------------------------------- Net asset value, end of period........ $10.61 $10.52 $10.11 $11.24 $11.45 =============================================== Total return.............. 4.40% 8.22% -6.21% 4.64% 10.89% Net assets, end of period (in millions) $24 $26 $28 $43 $40 Ratio of expenses to average net assets 2.13% 2.13% 1.98% 1.88% 1.89% Ratio of net investment income to average net assets............ 3.44% 3.94% 3.94% 3.68% 3.94% Portfolio turnover rate... 36.41% 34.78% 16.95% 41.53% 27.86% (A)See Note 5. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS MUNICIPAL BOND FUND Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the For the fiscal year period from period ended March 31, 12-30-98** from --------------------------- to 4-1-97 to 2002 2001 2000 3-31-99 6-23-97 ============================================== Net asset value, beginning of period.. $10.52 $10.11 $11.24 $11.58 $10.74 ----------------------------------------------- Income (loss) from investment operations: Net investment income 0.44 0.47 0.48 0.13 0.10 Net realized and unrealized gain (loss) on investments... 0.09 0.41 (1.11) (0.03) 0.29 ----------------------------------------------- Total from investment operations............ 0.53 0.88 (0.63) 0.10 0.39 ----------------------------------------------- Less distributions: Declared from net investment income (0.44) (0.47) (0.48) (0.13) (0.10) From capital gains... (0.00) (0.00) (0.02) (0.31) (0.00) ----------------------------------------------- Total distributions....... (0.44) (0.47) (0.50) (0.44) (0.10) ----------------------------------------------- Net asset value, end of period....... $10.61 $10.52 $10.11 $11.24 $11.03 =============================================== Total return.............. 5.10% 9.04% -5.69% 0.80% 3.22% Net assets, end of period (000 omitted)....... $2 $2 $2 $2 $0 Ratio of expenses to average net assets... 1.44% 1.47% 1.40% 1.00%*** 4.95%*** Ratio of net investment income to average net assets........... 4.09% 4.61% 4.52% 4.40%*** 4.12%*** Portfolio turnover rate.. 36.41% 34.78% 16.95% 41.53%*** 27.86%*** *All outstanding shares were redeemed on June 23, 1997 at the ending net asset value shown in the table. **Recommencement of operations. ***Annualized. See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with Zachary H. Shafran, portfolio manager of W&R Funds, Inc. - Science and Technology Fund This report relates to the operation of W&R Funds, Inc. - Science and Technology Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? Overall, the Fund performed relatively well, as it significantly outperformed its benchmark index. The Class C shares of the Fund increased 0.89 percent during the fiscal year, compared with the Goldman Sachs Technology Industry Composite Index (reflecting the performance of securities that generally represent the technology sector of the stock market), which declined 8.59 percent during the period, and the Lipper Science & Technology Funds Universe Average (generally reflecting the performance of the universe of funds with similar investment objectives), which decreased 12.29 percent for the year. What helped the Fund outperform its benchmark index during the fiscal year? We feel that we were able to outperform the benchmark during the fiscal year for two primary reasons. First, we remained relatively underweight in the technology sector. Second, we maintained a cash reserve that was higher than normal. What other market conditions or events influenced the Fund's performance during the fiscal year? No events or conditions during the fiscal year had a greater influence on the global community than the terrorist attacks of September 11. They were events to which we continue to work to understand and respond. They influenced global economic uncertainty and market volatility, which made for a challenging year. The technology sector continued to see the fallout from years of excess capital spending that, in turn, led to excess capacity in many areas. The science sector remained largely immune from many of the economic issues, in our opinion, but it did have its share of clinical disappointments and regulatory delays. What strategies and techniques did you employ that specifically affected the Fund's performance? We worked during the fiscal year to avoid investing in the wrong areas, and we feel that we were largely successful. Our underweight position in the technology sector served us well, we believe, despite the sector's strong performance during the latter part of the fiscal year. We were overweight in the science sector through much of the period, and that sector proved mostly to be disappointing. The science sector, specifically pharmaceuticals, has historically been much more defensive than it was this past year. Higher-than-normal cash reserves also played an important role in our portfolio during the period, allowing us to be both defensive and opportunistic. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? Our emphasis during the fiscal year was on pharmaceuticals, biotechnology, health care services and transaction processors, with a lesser focus on an array of technology companies. This likely will change in the coming year. We see signs of economic recovery, but remain cautious. During the last year, the consumer remained strong in the face of adversity, and so we wonder if spending can continue at the same rate. Interest rates were extremely low over the course of the year, and energy prices fell. We typically look to identify trends or themes when making investment decisions, but do not find any at present. The health care sector has been helped by very strong pricing in some areas, yet continues to encounter regulatory, clinical and competitive challenges. Technology suffers from overcapacity, in our opinion. Global competition is on the rise. All of this leads to a difficult pricing environment. So what do we do? We believe that the science and technology sectors of the market still hold great opportunities for wealth creation through change, creativity and innovation generated through substantial investments in research and development. Until we can identify what we believe to be solid themes or trends, we intend to focus on individual companies that we feel have the ability to prosper in this ever-changing environment. Respectfully, /s/Zachary H. Shafran Zachary H. Shafran Manager W&R Science and Technology Fund Comparison of Change in Value of $10,000 Investment Goldman Lipper Sachs Science & W&R Technology Technology Science and Industry Funds Technology Fund, Composite Universe Class C Shares Index Average ------------ --------- ------- 07-31-97 10,000 10,000 10,000 03-31-98 12,010 10,550 10,961 03-31-99 17,450 16,689 16,923 03-31-00 45,325 32,935 40,214 03-31-01 23,802 12,805 15,192 03-31-02 24,015 11,704 13,324 ===== W&R Science and Technology Fund, Class C Shares (1) - $24,015 ...... Goldman Sachs Technology Industry Composite Index - $11,704 ***** Lipper Science & Technology Funds Universe Average - $13,324 (1)The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return* Class A Class B Class C** Class Y 1-year period ended 3-31-02 -4.28% -3.44% 0.89% 1.92% Since inception of Class through 3-31-02*** -21.81% -21.24% 20.64% 20.28% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. Class A shares carry a maximum front-end sales load of 5.75%. Class B and Class C shares carry maximum contingent deferred sales charges of 5% and 1%, respectively. Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. ***7-3-00 for Class A and Class B shares, 7-31-97 for Class C shares and 6-9-98 for Class Y shares (the date on which shares were first acquired by shareholders). Past performance is not necessarily indicative of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF SCIENCE AND TECHNOLOGY FUND Science and Technology Fund GOAL To seek long-term capital growth. Strategy Invests primarily in the equity securities of U.S. and foreign science and technology companies. Science and technology companies have products, processes or services that are being or are expected to be significantly benefited by the use or commercial application of scientific or technological developments or discoveries. Founded 1997 Scheduled Dividend Frequency Annually (December) Performance Summary - Class C Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Capital gains distribution $0.02 ===== Net asset value on 3-31-02 $17.97 adjusted to: $17.99(A) 3-31-01 17.83 ------ Change per share $ 0.16 ====== (A)This number includes the capital gains distribution of $0.02 paid in December 2001 added to the actual net asset value on March 31, 2002. Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF SCIENCE AND TECHNOLOGY FUND Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B ---------------------------- -------------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) ----------------- ------------ ------------ ----------- -------- 1-year period ended 3-31-02... -4.28% 1.56% -3.44% 0.56% 5-year period ended 3-31-02... -- -- -- -- 10-year period ended 3-31-02... -- -- -- -- Since inception of Class(F)..... -21.81% -19.10% -21.24% -19.85% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 5.75% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of each of the periods. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of each of the periods. (F)7-3-00 for Class A shares and Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return(A) Period Class C(B) Class Y(C) ----------------- ---------- ---------- 1-year period ended 3-31-02... 0.89% 1.92% 5-year period ended 3-31-02... -- -- 10-year period ended 3-31-02... -- -- Since inception of Class(D)..... 20.64% 20.28% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)7-31-97 for Class C shares and 6-9-98 for Class Y shares (the date on which shares were first acquired by shareholders). Investing in companies involved in one specified sector may involve a greater degree of risk than an investment with greater diversification. SHAREHOLDER SUMMARY OF SCIENCE AND TECHNOLOGY FUND Portfolio Highlights On March 31, 2002, Science and Technology Fund had net assets totaling $130,843,987 invested in a diversified portfolio of: 81.70% Common Stocks 18.30% Cash and Cash Equivalents and Options As a shareholder of Science and Technology Fund, for every $100 you had invested on March 31, 2002, your Fund owned: Health Care Stocks $34.65 Cash and Cash Equivalents and Options $18.30 Business Equipment and Services Stocks $13.45 Technology Stocks $ 9.57 Energy Stocks $ 8.85 Utilities Stocks $ 5.44 Multi-Industry Stocks $ 4.25 Consumer Services Stocks $ 3.53 Raw Materials Stocks $ 1.43 Capital Goods Stocks $ 0.53 THE INVESTMENTS OF SCIENCE AND TECHNOLOGY FUND March 31, 2002 COMMON STOCKS Shares Value Broadcasting - 1.63% Adelphia Communications Corporation, Class A*........................... 142,900 $ 2,129,925 ------------ Business Equipment and Services - 5.37% Edison Schools Inc.*.................... 154,000 2,132,130 Euronet Worldwide, Inc.*................ 89,800 1,526,151 Euronet Worldwide, Inc. (A)*............ 31,000 526,845 Getty Images, Inc.*..................... 72,000 2,156,040 RSA Security Inc.*...................... 76,100 686,041 ------------ 7,027,207 ------------ Capital Equipment - 0.53% Cooper Cameron Corporation*............. 13,600 695,096 ------------ Chemicals - Specialty - 0.96% Pall Corporation........................ 61,500 1,260,135 ------------ Communications Equipment - 4.92% ADC Telecommunications, Inc.*........... 136,300 554,741 Cisco Systems, Inc.*.................... 95,000 1,607,875 NetScreen Technologies, Inc.*........... 14,000 231,490 QUALCOMM Incorporated*.................. 26,200 985,513 Symbol Technologies, Inc................ 204,575 2,299,423 Telefonaktiebolaget LM Ericsson, ADR, Class B............................ 181,100 756,093 ------------ 6,435,135 ------------ Computers - Micro - 0.65% Compaq Computer Corporation............. 80,700 843,315 ------------ Computers - Peripherals - 1.00% Microsoft Corporation*.................. 21,800 1,313,559 ------------ Electronic Components - 3.00% Agere Systems Inc.*..................... 385,500 1,499,595 IXYS Corporation*....................... 23,700 277,171 Taiwan Semiconductor Manufacturing Company Limited, ADR*.............. 67,800 1,406,850 United Microelectronics Corporation*.... 69,900 744,435 ------------ 3,928,051 ------------ Health Care - Drugs - 19.43% Alcon, Inc. *........................ 60,600 2,051,310 Biogen, Inc.*........................... 76,500 3,752,708 Cubist Pharmaceuticals, Inc.*........... 25,000 463,625 Forest Laboratories, Inc. (B)*.......... 59,100 4,828,470 Genzyme Corporation - General Division* 27,000 1,180,845 Incyte Pharmaceuticals, Inc.*........... 45,000 535,725 IVAX Corporation*....................... 104,600 1,678,830 Merck & Co., Inc........................ 21,800 1,255,244 Noven Pharmaceuticals, Inc.*............ 70,600 1,472,363 Pfizer Inc.............................. 64,500 2,563,230 Pharmacyclics, Inc.*.................... 50,500 396,425 Priority Healthcare Corporation, Class B* 21,700 563,983 QLT Inc.*............................... 39,600 674,388 SICOR Inc.*............................. 43,200 737,640 Transkaryotic Therapies, Inc.*.......... 75,850 3,265,343 ------------ 25,420,129 ------------ Health Care - General - 6.56% Bristol-Myers Squibb Company............ 62,200 2,518,478 Johnson & Johnson....................... 49,800 3,234,510 Wyeth................................... 43,100 2,829,515 ------------ 8,582,503 ------------ Hospital Supply and Management - 8.66% Anthem, Inc.*........................... 57,700 3,321,789 Cerner Corporation*..................... 20,200 963,641 Guidant Corporation*.................... 131,150 5,681,418 Health Management Associates, Inc., Class A*........................... 65,700 1,361,961 ------------ 11,328,809 ------------ Motion Pictures - 1.90% AOL Time Warner Inc.*................... 105,100 2,485,615 ------------ Multiple Industry - 4.25% Garmin Ltd.*............................ 30,000 687,750 Research In Motion Limited*............. 78,400 2,179,520 Samsung Electronics Co., Ltd............ 10,000 2,699,132 ------------ 5,566,402 ------------ Petroleum - Domestic - 7.69% Apache Corporation...................... 72,050 4,098,204 Burlington Resources Inc................ 35,809 1,435,583 Noble Affiliates, Inc................... 50,800 1,984,248 Phillips Petroleum Company.............. 14,400 904,320 Unocal Corporation...................... 42,200 1,643,690 ------------ 10,066,045 ------------ Petroleum - Services - 1.16% Baker Hughes Incorporated............... 39,700 1,518,525 ------------ Steel - 0.47% Lone Star Technologies, Inc.*........... 26,700 609,027 ------------ Timesharing and Software - 8.08% Concord EFS, Inc.*...................... 185,100 6,155,500 Eclipsys Corporation*................... 17,300 283,287 Micromuse Inc.*......................... 81,100 711,652 Paychex, Inc............................ 57,600 2,286,432 VeriSign, Inc.*......................... 42,200 1,139,611 ------------ 10,576,482 ------------ Utilities - Telephone - 5.44% Cox Communications, Inc., Class A*...... 63,500 2,390,140 Sprint Corporation - FON Group.......... 214,400 3,278,176 Vodafone Group Plc, ADR................. 78,500 1,446,755 ------------ 7,115,071 TOTAL COMMON STOCKS - 81.70% $106,901,031 (Cost: $113,543,569) ------------ Principal Amount in SHORT-TERM SECURITIES Thousands Electrical Equipment - 3.05% Emerson Electric Co., 1.78%, 04-22-02.................... $4,000 3,995,847 ------------ Food and Related - 3.99% General Mills, Inc., 2.0588004%, Master Note............ 5,220 5,220,000 ------------ Chemicals - Petroleum and Inorganic - 3.06% du Pont (E.I.) de Nemours and Company., 1.6963092%, Master Note............ 4,000 4,000,000 ------------ Restaurants - 3.82% McDonald's Corporation, 1.78%, 04-10-02.................... 5,000 4,997,775 ------------ Security and Commodity Brokers - 2.90% UBS Finance (DE) , 1.85%, 04-01-02.................... 3,793 3,793,000 ------------ TOTAL SHORT-TERM SECURITIES - 16.82% $ 22,006,622 (Cost: $22,006,622) ------------ TOTAL INVESTMENT SECURITIES - 98.52% $128,907,653 (Cost: $135,550,191) ------------ CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.48% 1,936,334 ------------ NET ASSETS - 100.00% $130,843,987 ------------ Notes to Schedule of Investments *No income dividends were paid during the preceding 12 months. (A)Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At March 31, 2002, the total value of this security amounted to 0.40% of net assets. (B)Security serves as cover for the following written call options outstanding at March 31, 2002. (See Note 6 to financial statements): Contracts Underlying Subject Expiration Month/ Premium Market Security to Call Exercise Price Received Value ----------------------------------------------------------------------------- Forest Laboratories, Inc. 95 May/85 $28,804 $20,900 ================= 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 SCIENCE AND TECHNOLOGY FUND March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities -- at value (Notes 1 and 3)............ $128,908 Cash......................................................... 1 Receivables: Investment securities sold............................... 2,328 Fund shares sold......................................... 270 Dividends and interest................................... 58 Prepaid insurance premium.................................... 1 -------- Total assets......................................... 131,566 -------- LIABILITIES Payable to Fund shareholders................................. 564 Accrued shareholder servicing (Note 2)....................... 83 Outstanding call options at market (Note 6).................. 21 Accrued management fee (Note 2).............................. 15 Accrued distribution fee (Note 2)............................ 10 Accrued accounting services fee (Note 2)..................... 4 Accrued service fee (Note 2)................................. 3 Other........................................................ 22 -------- Total liabilities.................................... 722 -------- Total net assets................................. $130,844 ======== NET ASSETS $0.01 par value capital stock: Capital stock............................................ $ 73 Additional paid-in capital............................... 160,825 Accumulated undistributed income (loss): Accumulated undistributed net investment loss............ (2) Accumulated undistributed net realized loss on investment transactions........................... (23,417) Net unrealized depreciation in value of securities........................................ (6,643) Net unrealized appreciation in value of written call options......................................... 8 -------- Net assets applicable to outstanding units of capital................................. $130,844 ======== Net asset value per share (net assets divided by shares outstanding): Class A...................................................... $18.19 Class B...................................................... $17.88 Class C...................................................... $17.97 Class Y...................................................... $18.54 Capital shares outstanding: Class A...................................................... 666 Class B...................................................... 240 Class C...................................................... 6,201 Class Y...................................................... 164 Capital shares authorized........................................ 400,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS SCIENCE AND TECHNOLOGY FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT LOSS Income (Note 1B): Interest and amortization................................ $ 967 Dividends (net of foreign withholding taxes of $5)......................................... 529 ------ Total income......................................... 1,496 ------ Expenses (Note 2):..... Investment management fee................................ 1,212 Distribution fee: Class A.............................................. 6 Class B.............................................. 29 Class C.............................................. 956 Class Y.............................................. 5 Shareholder servicing: Class A.............................................. 46 Class B.............................................. 30 Class C.............................................. 600 Class Y.............................................. 4 Service fee: Class A.............................................. 16 Class B.............................................. 10 Class C.............................................. 319 Accounting services fee.................................. 47 Custodian fees........................................... 24 Audit fees............................................... 12 Legal fees............................................... 2 Other.................................................... 100 ------ Total expenses....................................... 3,418 ------ Net investment loss.............................. (1,922) ------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on securities.............................. (21,999) Realized net gain from foreign currency transactions............................................. 8 Realized net loss on purchased call options.................. (255) Realized net gain on written call options.................... 199 Realized net loss on purchased put options................... (2) ------ Realized net loss on investments......................... (22,049) ------ Unrealized appreciation in value of securities during the period........................................ 25,105 Unrealized depreciation in value of written call options during the period........................... (91) ------ Unrealized appreciation in value of investments during the period.................................... 25,014 ------ Net gain on investments.............................. 2,965 ------ Net increase in net assets resulting from operations.............................. $1,043 ====== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS SCIENCE AND TECHNOLOGY FUND (In Thousands) For the Fiscal Year Ended March 31, ----------------------- 2002 2001 ------ ------ INCREASE (DECREASE) IN NET ASSETS Operations: Net investment loss.................... $ (1,922) $ (864) Realized net gain (loss) on investments..................... (22,049) 42,562 Unrealized appreciation (depreciation)..................... 25,014 (176,877) -------- -------- Net increase (decrease) in net assets resulting from operations................ 1,043 (135,179) -------- -------- Distributions to shareholders from realized net gain on investment transactions (Note 1E):* Class A................................ (12) (1,046) Class B................................ (4) (736) Class C................................ (134) (46,068) Class Y................................ (3) (361) -------- -------- (153) (48,211) -------- -------- Capital share transactions (Note 5)............................... (14,291) 42,654 -------- -------- Total decrease......................... (13,401) (140,736) NET ASSETS Beginning of period........................ 144,245 284,981 -------- -------- End of period.............................. $130,844 $144,245 ======== ======== Undistributed net investment loss........................ $(2) $(1) ==== === *See "Financial Highlights" on pages 177 - 180. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS SCIENCE AND TECHNOLOGY FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 ----------- ----------- Net asset value, beginning of period.................................. $17.93 $34.91 ------ ------ Income (loss) from investment operations: Net investment income (loss)............... (0.45) 0.02 Net realized and unrealized gain (loss) on investments.................. 0.73 (9.35) ------ ------ Total from investment operations............... 0.28 (9.33) ------ ------ Less distribution from capital gains.............................. (0.02) (7.65) ------ ------ Net asset value, end of period................. $18.19 $17.93 ====== ====== Total return**................................. 1.56% -31.95% Net assets, end of period (in millions).............................. $12 $6 Ratio of expenses to average net assets................................. 1.75% 1.70%*** Ratio of net investment income (loss) to average net assets...................... -0.76% 0.26%*** Portfolio turnover rate........................ 90.92% 111.25%**** *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. ****For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS SCIENCE AND TECHNOLOGY FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 ----------- ----------- Net asset value, beginning of period................................. $17.80 $34.91 ------ ------ Income (loss) from investment operations: Net investment loss....................... (0.38) (0.06) Net realized and unrealized gain (loss) on investments........................ 0.48 (9.40) ------ ------ Total from investment operations................................ 0.10 (9.46) ------ ------ Less distribution from capital gains............................. (0.02) (7.65) ------ ------ Net asset value, end of period................................. $17.88 $17.80 ====== ====== Total return.................................. 0.56% -32.37% Net assets, end of period (in millions)............................. $4 $3 Ratio of expenses to average net assets................................ 2.75% 2.53%** Ratio of net investment loss to average net assets................................ -1.73% -0.55%** Portfolio turnover rate....................... 90.92% 111.25%*** *Commencement of operations. **Annualized. ***For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS SCIENCE AND TECHNOLOGY FUND Class C Shares (A) For a Share of Capital Stock Outstanding Throughout Each Period: For the period For the fiscal from year ended March 31, 7-31-97* ------------------------------- to 2002 2001 2000 1999 3-31-98 ------ ------ ------ ------ --------- Net asset value, beginning of period....... $17.83 $45.03 $17.45 $12.01 $10.00 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment loss....... (0.24) (0.12) (0.95) (0.09) (0.07) Net realized and unrealized gain (loss) on investments........ 0.40 (19.43) 28.77 5.53 2.08 ------ ------ ------ ------ ------ Total from investment operations................ 0.16 (19.55) 27.82 5.44 2.01 ------ ------ ------ ------ ------ Less distribution from capital gains............. (0.02) (7.65) (0.24) (0.00) (0.00) ------ ------ ------ ------ ------ Net asset value, end of period............. $17.97 $17.83 $45.03 $17.45 $12.01 ====== ====== ====== ====== ====== Total return.................. 0.89% - 47.49% 159.75% 45.30% 20.10% Net assets, end of period (in millions)...... $112 $134 $283 $44 $8 Ratio of expenses to average net assets........ 2.45% 2.27% 2.20% 2.57% 3.20%** Ratio of net investment loss to average net assets................ -1.40% -0.44% -1.68% -1.26% -1.66%** Portfolio turnover rate....... 90.92% 111.25% 44.19% 51.00% 26.64% (A)See Note 5. *Commencement of operations. **Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS SCIENCE AND TECHNOLOGY FUND Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the fiscal period from year ended March 31, 6-9-98* ------------------------- to 2002 2001 2000 3-31-99 ------ ------ ------ ----------- Net asset value, beginning of period............... $18.21 $45.36 $17.65 $12.20 ------ ------ ------ ------ Income (loss) from investment operations: Net investment income (loss)................. (0.51) (0.01) (6.09) 0.01 Net realized and unrealized gain (loss) on investments................ 0.86 (19.49) 34.04 5.44 ------ ------ ------ ------ Total from investment operations........................ 0.35 (19.50) 27.95 5.45 ------ ------ ------ ------ Less distribution from capital gains..................... (0.02) (7.65) (0.24) 0.00) ------ ------ ------ ------ Net asset value, end of period..................... $18.54 $18.21 $45.36 $17.65 ====== ====== ====== ====== Total return.......................... 1.92% -47.00% 158.67% 44.67% Net assets, end of period (000 omitted).............. $3,035 $1,466 $2,108 $53 Ratio of expenses to average net assets................ 1.39% 1.35% 1.36% 0.62%** Ratio of net investment income (loss) to average net assets........................ -0.43% 0.47% -0.96% 0.54%** Portfolio turnover rate............... 90.92% 111.25% 44.19% 51.00%** *Commencement of operations. **Annualized. See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with Grant P. Sarris, portfolio manager of W&R Funds, Inc. - Small Cap Growth Fund This report relates to the operation of W&R Funds, Inc. - Small Cap Growth Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? The Fund performed quite well during the fiscal year, significantly outperforming its benchmark index. The Class C shares of the Fund increased 11.30 percent for the fiscal year, compared with the Russell 2000 Growth Index (reflecting the performance of securities that generally represent the small companies sector of the stock market), which increased 5.02 percent for the year, and the Lipper Small-Cap Growth Funds Universe Average (reflecting the performance of the universe of funds with similar investment objectives), which increased 6.52 percent for the same period. What helped the Fund outperform its benchmark index during the fiscal year? The Fund was helped, we believe, by a move away from high-growth, high-valuation stocks to what we felt were more reasonably valued, consistent growth stocks. We also reduced our exposure to companies that were exposed to capital spending, such as technology companies, which helped our relative performance. This was somewhat offset by low exposure to retail and other economically sensitive industrial stocks, which we feel hurt our performance on a relative basis. What other market conditions or events influenced the Fund's performance during the fiscal year? It obviously was a very tumultuous year, with the tragic events of September 11, an economic downturn, and the Enron accounting scandal all having a great influence on the markets and how we consequently managed the Fund. In the early to middle portion of the fiscal year, we felt that we needed to be defensive, focusing on risk avoidance, valuation and cash flow. Toward the end of 2001, the focus shifted to cyclical stocks, as the economy and interest rates appeared to have bottomed. Small cap stocks as a whole performed very well, on a relative basis, although most of that performance was in the value side of the market. Small cap value stocks have now outperformed growth stocks for more than two years, making up most of the ground that was lost in the late 1990s. What strategies and techniques did you employ that specifically affected the Fund's performance? We tried to emphasize consistent growth stocks at reasonable valuations. We also attempted to reduce the number of very small, speculative stocks that were in the start-up phase of their growth. We continued to carry sizable amounts of cash, due to what we felt were high levels of uncertainty last year, as well as to provide more flexibility to invest as visibility improved. What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? During the fiscal year, we tried to emphasize industries such as health care and consumer staples, whose fortunes were not tied to strength in the economy. We reduced exposure to capital goods and technology issues that we thought would be influenced poorly by over-capacity that was built into the system in the late '90s on the back of the stock market boom. We added some energy exposure that we have not had in the past. On the margin, we have become a little more aggressive recently. We anticipate looking at areas that have performed poorly in the past 12 months, such as technology and biotechnology, on the belief that some issues may be positioned for a rebound. Respectfully, /s/Grant P. Sarris Grant P. Sarris Manager W&R Small Cap Growth Fund Please note that, effective March 18, 2002, Grant Sarris is the sole portfolio manager for the Fund. Comparison of Change in Value of $10,000 Investment W&R Lipper Small Cap Small-Cap Growth Russell Growth Fund, 2000 Funds Class C Growth Universe Shares Index Average ------- --------- -------- 09-30-92 10,000 10,000 10,000 03-31-93 11,771 11,486 11,760 03-31-94 14,497 12,721 13,200 03-31-95 17,775 13,621 14,432 03-31-96 22,497 17,870 19,910 03-31-97 20,029 16,828 20,046 03-31-98 33,122 23,761 29,576 03-31-99 40,279 21,129 27,426 03-31-00 69,836 33,593 52,388 03-31-01 45,274 20,242 34,095 03-31-02 50,391 21,258 36,318 ===== W&R Small Cap Growth Fund, Class C Shares (1) (2) -- $50,391 ...... Russell 2000 Growth Index (1) -- $21,258 ----- Lipper Small-Cap Growth Funds Universe Average (1) -- $36,318 (1)Because the Fund commenced operations on a date other than at the end of a month, and partial month calculations of the performance of all the indexes are not available, the investments were effected as of September 30, 1992. (2)The value of the investment in the Fund is impacted by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return* Class A Class B Class C** Class Y 1-year period ended 3-31-02 5.84% 7.11% 11.30% 12.33% 5-year period ended 3-31-02 -- -- 20.26% 21.28% Since inception of Class through 3-31-02*** -14.64% -12.95% 18.50% 15.39% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. Class A shares carry a maximum front-end sales load of 5.75%. Class B and Class C shares carry maximum contingent deferred sales charges of 5% and 1%, respectively. Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. ***7-3-00 for Class A shares, 7-6-00 for Class B shares, 9-21-92 for Class C shares and 12-29-95 for Class Y shares (the date on which shares were first acquired by shareholders). Past performance is not necessarily indicative of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF SMALL CAP GROWTH FUND Small Cap Growth Fund GOAL To seek growth of capital. Strategy Invests primarily in common stocks of U.S. and foreign companies whose market capitalizations are within the range of capitalizations of companies included in the Lipper, Inc. Small Cap Category. The Fund emphasizes relatively new or unseasoned companies in the early stages of development or smaller companies positioned in new or emerging industries where there is an opportunity for rapid growth. Founded 1992 Scheduled Dividend Frequency Annually (December) Performance Summary - Class C Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Net asset value on 3-31-02 $10.44 3-31-01 9.38 ----- Change per share $ 1.06 ====== Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF SMALL CAP GROWTH FUND Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B ---------------------------- ------------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) ----------------- ------------ ------------ ------- ------- 1-year period ended 3-31-02... 5.84% 12.30% 7.11% 11.11% 5-year period ended 3-31-02... -- -- -- -- 10-year period ended 3-31-02... -- -- -- -- Since inception of Class(F).... -14.64% -11.69% -12.95% 11.58% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 5.75% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of each of the periods. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of each of the periods. (F)7-3-00 for Class A shares and 7-6-00 for Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return(A) Period Class C(B) Class Y(C) ----------------- ---------- ---------- 1-year period ended 3-31-02... 11.30% 12.33% 5-year period ended 3-31-02... 20.26% 21.28% 10-year period ended 3-31-02... -- -- Since inception of Class(D)..... 18.50% 15.39% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data from 3-24-00 represents the actual performance of Class C shares. Performance data prior to 3-24-00 represents the performance of the Fund's original Class B shares. The original Class B shares were combined with Class C shares effective 3-24-00, and redesignated as Class C shares. The original Class B's performance has been adjusted to reflect the current contingent deferred sales charge (CDSC) structure applicable to Class C (1.00% maximum and declining to zero at the end of the first year after investment). Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less. New Class B shares, with fees and expenses different from the original Class B shares, were added to the Fund on 6-30-00. (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)9-21-92 for Class C shares and 12-29-95 for Class Y shares (the date on which shares were first acquired by shareholders). Investing in small cap stocks may carry more risk than investing in stocks of larger, more well-established companies. SHAREHOLDER SUMMARY OF SMALL CAP GROWTH FUND Portfolio Highlights On March 31, 2002, Small Cap Growth Fund had net assets totaling $506,548,672 invested in a diversified portfolio of: 84.04% Common Stocks 15.88% Cash and Cash Equivalents 0.08% Corporate Debt Security As a shareholder of Small Cap Growth Fund, for every $100 you had invested on March 31, 2002, your Fund owned: Business Equipment and Services Stocks $26.16 Cash and Cash Equivalents $15.88 Health Care Stocks $15.86 Technology Stocks $12.04 Consumer Goods and Services Stocks $ 8.24 Retail Stocks $ 6.59 Energy Stocks $ 4.03 Multi-Industry Stocks $ 3.24 Financial Services Stocks $ 2.66 Raw Materials Stocks $ 2.24 Transportation Stocks $ 1.83 Utilities Stocks $ 0.68 Capital Goods Stocks $ 0.47 Corporate Debt Security $ 0.08 THE INVESTMENTS OF SMALL CAP GROWTH FUND March 31, 2002 COMMON STOCKS Shares Value Business Equipment and Services - 19.35% Acxiom Corporation*..................... 715,200 $ 12,258,528 Catalina Marketing Corporation*......... 319,500 11,661,750 CheckFree Corporation*.................. 538,994 8,265,473 Corporate Executive Board Company (The)* 213,400 8,004,634 Dendrite International, Inc.*........... 893,200 9,561,706 Getty Images, Inc.*..................... 620,000 18,565,900 ITT Educational Services, Inc.*......... 214,400 9,648,000 MAXIMUS, Inc.*.......................... 290,500 8,927,065 MemberWorks Incorporated*............... 380,800 7,202,832 ProBusiness Services, Inc.*............. 182,500 3,935,612 ------------ 98,031,500 ------------ Chemicals - Specialty - 2.24% IMC Global Inc.......................... 181,300 2,674,175 OM Group, Inc........................... 119,600 8,647,080 ------------ 11,321,255 ------------ Communications Equipment - 2.80% Advanced Fibre Communications, Inc.*.... 410,100 7,869,819 Tekelec*................................ 458,100 5,233,793 Tellium, Inc.*.......................... 466,400 1,079,716 ------------ 14,183,328 ------------ Computers - Peripherals - 4.52% Citrix Systems, Inc.*................... 302,000 5,214,030 Sanchez Computer Associates, Inc.*...... 468,000 3,191,760 Take-Two Interactive Software, Inc.*.... 384,200 7,724,341 Transaction Systems Architects, Inc., Class A*........................... 603,700 6,779,551 ------------ 22,909,682 ------------ Electrical Equipment - 0.47% Intermagnetics General Corp.*........... 87,200 2,376,636 ------------ Electronic Components - 1.13% Cree, Inc.*............................. 420,300 5,737,095 ------------ Electronic Instruments - 3.59% Lam Research Corporation*............... 417,500 12,243,187 PerkinElmer, Inc........................ 322,001 5,957,019 ------------ 18,200,206 ------------ Finance Companies - 2.66% Financial Federal Corporation*.......... 410,000 13,452,100 ------------ Food and Related - 3.71% American Italian Pasta Company, Class A* 414,300 18,809,220 ------------ Health Care - Drugs - 4.15% Affymetrix, Inc.*....................... 394,173 11,458,609 Cell Therapeutics, Inc.*................ 23,600 583,274 Gene Logic Inc.*........................ 462,400 9,000,616 ------------ 21,042,499 ------------ Health Care - General - 8.43% ArthroCare Corporation*................. 3,300 59,416 Cholestech Corporation*................. 39,700 713,409 IMPATH Inc.*............................ 148,000 6,076,140 Omnicare, Inc........................... 454,700 11,772,183 Urologix, Inc.*......................... 368,100 6,686,537 VISX, Incorporated*..................... 985,800 17,409,228 ------------ 42,716,913 ------------ Hospital Supply and Management - 3.28% American Healthways, Inc.*.............. 301,000 8,199,240 Cerner Corporation*..................... 176,500 8,419,932 ------------ 16,619,172 ------------ Hotels and Gaming - 0.34% VAIL RESORTS, INC.*..................... 81,000 1,719,630 ------------ Motor Vehicle Parts - 4.19% Gentex Corporation*..................... 714,700 21,198,002 ------------ Multiple Industry - 3.24% Amsurg Corp.*........................... 602,509 16,391,257 ------------ Petroleum - Domestic - 2.62% Newfield Exploration Company*........... 359,000 13,279,410 ------------ Petroleum - Services - 1.41% Global Industries, Ltd.*................ 767,100 7,122,524 ------------ Railroad - 1.83% Kansas City Southern Industries, Inc.*.. 583,000 9,293,020 ------------ Retail - General Merchandise - 4.04% MSC Industrial Direct Co., Inc., Class A*........................... 893,800 20,468,020 ------------ Retail - Specialty Stores - 2.55% O'Reilly Automotive, Inc.*.............. 411,600 12,913,950 ------------ Timesharing and Software - 6.81% Digital Insight Corporation*............ 525,000 14,437,500 FactSet Research Systems, Inc........... 338,000 13,638,300 OTG Software, Inc.*..................... 744,200 6,400,120 ------------ 34,475,920 ------------ Utilities - Telephone - 0.68% Commonwealth Telephone Enterprises, Inc.* 89,500 3,447,093 ------------ TOTAL COMMON STOCKS - 84.04% $425,708,432 (Cost: $373,859,892) ------------ Principal Amount in CORPORATE DEBT SECURITY - 0.08% Thousands Multiple Industry Kestrel Solutions, Inc., 5.5%, 7-15-05, Convertible (A)..... $3,000 $ 390,000 (Cost: $3,000,000) ----------- SHORT-TERM SECURITIES Beverages - 0.99% Anheuser-Busch Companies, Inc., 1.75%, 04-09-02.................... 5,000 4,998,055 ------------ Electrical Equipment - 1.97% Emerson Electric Co., 1.78%, 04-22-02.................... 10,000 9,989,617 ------------ Food and Related - 2.39% General Mills, Inc., 2.0588004%, Master Note............ 2,128 2,128,000 Unilever Capital Corporation, 1.80%, 05-15-02.................... 10,000 9,978,000 ------------ 12,106,000 ------------ Health Care - Drugs - 3.16% Abbott Laboratories, 1.81%, 05-08-02.................... 5,875 5,864,071 Pharmacia Corporation, 1.75%, 04-15-02.................... 10,135 10,128,103 ------------ 15,992,174 ------------ Household - General Products - 0.79% Kimberly-Clark Corporation, 2.45%, 10-15-01.................... 4,000 3,995,477 ------------ Retail - General Merchandise - 0.99% Wal-Mart Stores, Inc., 1.79%, 04-02-02.................... 5,000 4,999,751 ------------ Security and Commodity Brokers - 1.14% UBS Finance Delaware LLC, 1.85%, 04-01-02.................... 5,787 5,787,000 ------------ Utilities - Gas and Pipeline - 1.38% Northern Illinois Gas Company , 1.82%, 04-11-02.................... 7,000 6,996,461 ------------ Utilities - Telephone - 1.97% SBC Communications Inc., 1.75%, 04-03-02.................... 10,000 9,999,028 ------------ TOTAL SHORT-TERM SECURITIES - 14.78% $ 74,863,563 (Cost: $74,863,563) ------------ TOTAL INVESTMENT SECURITIES - 98.90% $500,961,995 (Cost: $451,723,455) ------------ CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.10% 5,586,677 ------------ NET ASSETS - 100.00% $506,548,672 ------------ Notes to Schedule of Investments *No income dividends were paid during the preceding 12 months. (A)Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At March 31, 2002, the value of this security amounted to 0.08% of net assets. 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 SMALL CAP GROWTH FUND March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities -- at value (Notes 1 and 3) $500,962 Receivables: Fund shares sold............................................ 7,795 Investment securities sold.................................. 4,351 Dividends and interest...................................... 39 Prepaid insurance premium........................................ 2 -------- Total assets........................................... 513,149 -------- LIABILITIES Payable for investment securities purchased...................... 4,853 Payable to Fund shareholders..................................... 1,412 Accrued shareholder servicing (Note 2)........................... 177 Accrued management fee (Note 2).................................. 56 Accrued distribution fee (Note 2)................................ 37 Accrued service fee (Note 2)..................................... 12 Accrued accounting services fee (Note 2)......................... 6 Due to custodian................................................. 3 Other............................................................ 44 -------- Total liabilities....................................... 6,600 -------- Total net assets................................... $506,549 ======== NET ASSETS $0.01 par value capital stock: Capital stock.............................................. $ 481 Additional paid-in capital................................. 527,393 Accumulated undistributed income (loss): Accumulated undistributed net investment loss.............. (7) Accumulated undistributed net realized loss on investment transactions............................... (70,557) Net unrealized appreciation in value of investments........ 49,239 -------- Net assets applicable to outstanding units of capital. $506,549 ======== Net asset value per share (net assets divided by shares outstanding): Class A...................................................... $10.59 Class B...................................................... $10.40 Class C...................................................... $10.44 Class Y...................................................... $11.39 Capital shares outstanding: Class A...................................................... 1,499 Class B...................................................... 769 Class C...................................................... 41,638 Class Y...................................................... 4,229 Capital shares authorized......................................... 400,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS SMALL CAP GROWTH FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT LOSS Income (Note 1B): Interest and amortization.................................. $ 2,408 Dividends.................................................. 164 -------- Total income.......................................... 2,572 -------- Expenses (Note 2): Investment management fee.................................. 4,409 Distribution fee: Class A............................................... 4 Class B............................................... 49 Class C............................................... 3,462 Class Y............................................... 92 Shareholder servicing: Class A............................................... 31 Class B............................................... 33 Class C............................................... 1,307 Class Y............................................... 55 Service fee: Class A............................................... 29 Class B............................................... 16 Class C............................................... 1,153 Accounting services fee.................................... 75 Custodian fees............................................. 30 Audit fees................................................. 18 Legal fees................................................. 5 Other...................................................... 212 -------- Total expenses........................................ 10,980 -------- Net investment loss.............................. (8,408) -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments................................ (51,517) Unrealized appreciation in value of investments during the period............................................... 111,638 -------- Net gain on investments............................... 60,121 -------- Net increase in net assets resulting from operations....................... $51,713 ======== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS SMALL CAP GROWTH FUND (In Thousands) For the Fiscal Year Ended March 31, ----------------- 2002 2001 ----------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment loss........................... $ (8,408) $ (5,174) Realized net gain (loss) on investments....... (51,517) 20,079 Unrealized appreciation (depreciation)........ 111,638 (292,313) ----------------- Net increase (decrease) in net assets resulting from operations........... 51,713 (277,408) ----------------- Distributions to shareholders from realized net gain on investment transactions (Note 1E):* Class A....................................... -- (1,030) Class B....................................... -- (1,447) Class C....................................... -- (187,675) Class Y....................................... -- (4,749) ----------------- -- (194,901) ----------------- Capital share transactions (Note 5)................ (34,621) 144,420 ----------------- Total increase (decrease)..................... 17,092 (327,889) NET ASSETS Beginning of period................................ 489,457 817,346 ----------------- End of period...................................... $506,549 $489,457 ================= Undistributed net investment loss.................. $(7) $(2) ================= *See "Financial Highlights" on pages 194 - 197. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS SMALL CAP GROWTH FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-3-00* ended to 3-31-02 3-31-01 ------------------------- Net asset value, beginning of period............... $9.43 $19.64 ------------------------- Income (loss) from investment operations: Net investment loss........................... (0.59) (0.02) Net realized and unrealized gain (loss) on investments.................... 1.75 (4.74) ------------------------- Total from investment operations................... 1.16 (4.76) ------------------------- Less distribution from capital gains............... (0.00) (5.45) ------------------------- Net asset value, end of period..................... $10.59 $9.43 ========================= Total return**..................................... 12.30% -28.30% Net assets, end of period (in millions)............ $16 $4 Ratio of expenses to average net assets............ 1.39% 1.49%*** Ratio of net investment loss to average net assets.................................... -0.93% -0.39%*** Portfolio turnover rate............................ 28.77% 47.85%**** *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. ****For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS SMALL CAP GROWTH FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the period from fiscal year 7-6-00* ended to 3-31-02 3-31-01 ------------------------- Net asset value, beginning of period............. $9.36 $19.26 ------------------------- Income (loss) from investment operations: Net investment loss......................... (0.26) (0.06) Net realized and unrealized gain (loss) on investments......................... 1.30 (4.39) ------------------------- Total from investment operations................. 1.04 (4.45) ------------------------- Less distribution from capital gains............. (0.00) (5.45) ------------------------- Net asset value, end of period................... $10.40 $9.36 ========================= Total return..................................... 11.11% -27.29% Net assets, end of period (in millions).......... $8 $5 Ratio of expenses to average net assets.......... 2.43% 2.31%** Ratio of net investment loss to average net assets.................................. -1.94% -1.18%** Portfolio turnover rate.......................... 28.77% 47.85%*** *Commencement of operations. **Annualized. ***For the fiscal year ended March 31, 2001. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS SMALL CAP GROWTH FUND(A) Class C Shares(B) For a Share of Capital Stock Outstanding Throughout Each Period:* For the fiscal year ended March 31, ---------------------------------------------- 2002 2001 2000 1999 1998 ---------------------------------------------- Net asset value, beginning of period........ $9.38 $21.64 $14.74 $14.29 $9.08 ---------------------------------------------- Income (loss) from investment operations: Net investment loss........ (0.16) (0.10) (0.18) (0.11) (0.13) Net realized and unrealized gain (loss) on investments.......... 1.22 (6.71) 10.22 2.91 5.91 ---------------------------------------------- Total from investment operations................. 1.06 (6.81) 10.04 2.80 5.78 ---------------------------------------------- Less distribution from capital gains......... (0.00) (5.45) (3.14) (2.35) (0.57) ---------------------------------------------- Net asset value, end of period.............. $10.44 $9.38 $21.64 $14.74 $14.29 =============================================== Total return.................... 11.30% -35.17% 73.38% 21.61% 65.37% Net assets, end of period (in millions)....... $435 $459 $801 $425 $330 Ratio of expenses to average net assets...... 2.20% 2.12% 2.11% 2.10% 2.13% Ratio of net investment loss to average net assets.. -1.70% -0.81% -0.90% -0.90% -1.12% Portfolio turnover rate......... 28.77% 47.85% 82.24% 51.41% 33.46% (A)Small Cap Growth Fund (formerly Growth Fund) changed its name effective June 30, 2000. (B)See Note 5. *Per-share amounts have been adjusted retroactively to reflect the 100% stock dividend effected June 26, 1998. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS SMALL CAP GROWTH FUND(A) Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period:* For the fiscal year ended March 31, ----------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------- Net asset value, beginning of period......... $10.14 $22.65 $15.21 $14.55 $9.16 ----------------------------------------------- Income (loss) from investment operations: Net investment income (loss).......... (0.34) (0.20) (0.15) 0.00 (0.03) Net realized and unrealized gain (loss) on investments......... 1.59 (6.86) 10.73 3.01 5.99 ----------------------------------------------- Total from investment operations.................. 1.25 (7.06) 10.58 3.01 5.96 ----------------------------------------------- Less distribution from capital gains.......... (0.00) (5.45) (3.14) (2.35) (0.57) ----------------------------------------------- Net asset value, end of period............... $11.39 $10.14 $22.65 $15.21 $14.55 =============================================== Total return..................... 12.33% -34.67% 74.71% 22.73% 66.78% Net assets, end of period (000 omitted)........ $48,165 $21,027 $16,770 $7,942 $633 Ratio of expenses to average net assets....... 1.31% 1.30% 1.30% 1.18% 1.30% Ratio of net investment income (loss) to average net assets.................. -0.83% -0.02% -0.09% 0.08% -0.30% Portfolio turnover rate.......... 28.77% 47.85% 82.24% 51.41% 33.46% (A)Small Cap Growth Fund (formerly Growth Fund) changed its name effective June 30, 2000. *Per-share amounts have been adjusted retroactively to reflect the 100% stock dividend effected June 26, 1998. See Notes to Financial Statements. MANAGER'S DISCUSSION March 31, 2002 An interview with Barry Ogden, portfolio manager of W&R Funds, Inc. - Tax-Managed Equity Fund This report relates to the operation of W&R Funds, Inc. - Tax-Managed Equity Fund for the fiscal year ended March 31, 2002. The following discussion, graphs and tables provide you with information regarding the Fund's performance during that period. How did the Fund perform during the last fiscal year? The Fund was impacted by the extremely difficult environment for stocks during the last year. For the fiscal year, the Fund's Class A shares declined 10.57 percent without the impact of sales load and, with the sales load impact, declined 15.71 percent. This compares with the S&P 500 Index (reflecting the performance of securities that generally represent the stock market), which increased 0.21 percent during the period, and the Lipper Large-Cap Growth Funds Universe Average (generally reflecting the performance of the universe of funds with similar investment objectives), which declined 5.88 percent during the period. It should be noted that, in the comparison charts, the values for the benchmark index and the Lipper category do not reflect a sales load. In addition, please note that the Fund's performance numbers do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or on the redemption of Fund shares. Why did the Fund lag its benchmark index during the fiscal year? We believe that the Fund lagged its benchmark primarily due to our positions in the telecommunications, advertising and cable TV sectors. Following the change in portfolio managers in early calendar year 2002, we largely eliminated our exposure to these sectors, with certain exceptions, and the Fund is now in a significant underweight position as it relates to these sectors. We believe the outlook for these areas remains challenging for the rest of the year, particularly within telecommunications. We intend to remain underweight in these areas until we see signs of a sustainable improvement in their fundamental outlook. What other market conditions or events influenced the Fund's performance during the fiscal year? This fiscal year brought at least two very important events that impacted the market. First, Fed policy was accommodative throughout the year and actually accelerated following the tragic attacks on September 11. The Fed aggressively cut interest rates 11 times for a total of 475 basis points during calendar year 2001 in an attempt to stimulate the U.S. economy and avoid a recession. By fiscal year-end in March 2002, Fed policy was changed, moving to a neutral bias, presumably because the Fed believes the risk of the U.S. economy spiraling into recession is low. We agree that the economy appears to have recovered from the lows around September, but we remain concerned that the market has become too optimistic regarding the slope of an eventual economic recovery and, as such, we remain cautious over the near-term. Second, the tragedy on September 11 surely impacted us all from a psychological standpoint, while it also temporarily slowed the spending patterns of corporate America and the consumer. Surprisingly, the consumer has proven extremely resilient, as evidenced by strong monthly retail sales, improving consumer confidence and continued demand for housing and new automobiles. However, we remain concerned that the demand from the consumer is being inflated by above-trend price discounting by the merchants. To date, we have not seen a sustainable improvement in the corporate profit outlook and, as such, we expect capital spending, advertising and technology spending to remain below the trend levels until the end of 2002, at the earliest. Ultimately, the decline in corporate spending and advertising throughout 2001 negatively impacted the performance of the Fund relative to its benchmark index. What strategies and techniques did you employ that specifically affected the Fund's performance? At the beginning of calendar year 2002, we made several strategic changes and positioned the Fund more defensively, as we remain concerned that the market's rebound following September 11 is discounting an overly optimistic economic recovery. Specifically, we increased positions in health care, aerospace/defense and retail, as we felt that all three sectors were trading at reasonable valuations. Health care and aerospace/defense are two sectors on which we remain bullish, due to the near-term and long-term fundamental outlook of each. Our retail exposure was increased as we expect consumer spending to remain above trend, due both to the surge in mortgage refinancing that occurred in 2001 and to overall lower interest rates. We also significantly increased the Fund's cash position, as we reduced our exposure to the telecommunications, technology, advertising and cable TV sectors. These strategies appear to have had a positive impact on the Fund during the last fiscal quarter, but unfortunately were not enough to improve the Fund's overall performance during the period What industries or sectors did you emphasize during the fiscal year, and what looks attractive to you going forward? As mentioned above, we were overweight in telecommunications, advertising and cable TV during much of the fiscal year, which unfortunately hurt the Fund's performance overall. Another area emphasized throughout the year was energy, which also may have hurt the Fund's performance slightly. Going forward, we remain bullish on health care, aerospace/defense, retail and energy and, near-term, would not hesitate to add to positions in these areas should the market warrant. The Fund currently is overweight in each of these sectors, as we remain positive on the near-term and long-term potential for these sectors. We believe that these sectors combine for a strong fundamental outlook at reasonable valuations, which we feel, over the long term, should provide solid investment returns. We intend to continue to focus our efforts on buying new stocks and sectors that exhibit these types of characteristics, while seeking to reduce our exposure to areas where the outlook is poor. We also remain committed to minimizing tax consequences for shareholders by limiting the turnover in the Fund, while investing in companies and ideas with a long-term perspective. Respectfully, /s/Barry M. Ogden Barry M. Ogden Manager W&R Tax-Managed Equity Fund Please note that, effective January 9, 2002, Mr. Ogden assumed portfolio management responsibilities for the Fund, replacing Cynthia Prince-Fox, who served as portfolio manager of the Fund since its inception. Comparison of Change in Value of $10,000 Investment W&R Lipper Tax- Large-Cap Managed Growth Equity S&P Funds Fund, 500 Universe Class A Index Average --------- --------- ---------- 06-30-00 Purchase $9,425 $10,000 $10,000 03-31-01 6,777 8,043 6,563 03-31-02 6,060 8,060 6,177 ===== W&R Tax-Managed Equity Fund, Class A Shares (1) -- $6,060 +++++ S&P 500 Index -- $8,060 ***** Lipper Large-Cap Growth Funds Universe Average -- $6,177 (1)The value of the investment in the Fund is impacted by the sales load at the time of the investment and by the ongoing expenses of the Fund and assumes reinvestment of dividends and distributions. Average Annual Total Return* Class A Class B Class C 1-year period ended 3-31-02 -15.71% -14.92% -11.36% Since inception of Class through 3-31-02** -24.88% -25.60% -23.29% *Performance data quoted represents past performance and is based on deduction of the maximum applicable sales load for each of the periods. 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 5% and 1%, respectively. (Accordingly, the Class C shares reflect no CDSC since it only applies to Class C shares held for twelve months or less.) Total returns reflect share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Investment return and principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. **6-30-00 for Class A shares, 7-13-00 for Class B shares and 7-6-00 for Class C shares (the date on which shares were first acquired by shareholders). Past performance is not predictive of future performance. Indexes are unmanaged. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. SHAREHOLDER SUMMARY OF TAX-MANAGED EQUITY FUND Tax-Managed Equity Fund GOAL To seek long-term growth of capital while minimizing taxable gains and income to shareholders. Strategy Invests primarily in a diversified portfolio of common stocks issued by large to medium sized U.S. and foreign companies. The Fund seeks stocks that are favorably priced in relation to their fundamental value and that will likely grow over time. Founded 2000 Scheduled Dividend Frequency Annually (December) Performance Summary - Class A Shares Per Share Data For the Fiscal Year Ended March 31, 2002 Net asset value on 3-31-02 $ 6.43 3-31-01 7.19 ------ Change per share $(0.76) ====== Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF TAX-MANAGED EQUITY FUND Portfolio Highlights On March 31, 2002, Tax-Managed Equity Fund had net assets totaling $5,648,925 invested in a diversified portfolio of: 74.97% Common Stock 13.26% U.S. Government Security 11.77% Cash and Cash Equivalents As a shareholder of Tax-Managed Equity Fund, for every $100 you had invested on March 31, 2002, your Fund owned: Health Care Stocks $21.74 Technology Stocks $15.25 U.S. Government Security $13.26 Cash and Cash Equivalents $11.77 Energy Stocks $10.40 Financial Services Stocks $10.03 Retail Stocks $ 7.68 Business Equipment and Services Stocks $ 5.98 Miscellaneous Stocks $ 3.89 THE INVESTMENTS OF TAX-MANAGED EQUITY FUND March 31, 2002 COMMON STOCKS Shares Value Air Transportation - 1.64% Continental Airlines, Inc., Class B*.... 600 $ 16,992 Southwest Airlines Co................... 3,900 75,465 ------------ 92,457 ------------ Aircraft - 4.47% Lockheed Martin Corporation............. 3,400 195,772 Northrop Grumman Corporation............ 500 56,525 ------------ 252,297 ------------ Banks - 1.49% Citigroup Inc........................... 1,700 84,184 ------------ Business Equipment and Services - 2.98% Accenture Ltd*.......................... 2,700 72,090 Anteon International Corporation*....... 1,800 37,440 KPMG Consulting, Inc.*.................. 2,900 58,711 ------------ 168,241 ------------ Communications Equipment - 1.63% Cisco Systems, Inc.*.................... 4,100 69,393 Nokia Corporation, Series A, ADR........ 1,100 22,814 ------------ 92,207 ------------ Computers - Main and Mini - 1.86% Hewlett-Packard Company................. 1,500 26,910 International Business Machines Corporation........................ 750 78,000 ------------ 104,910 ------------ Computers - Micro - 0.78% Dell Computer Corporation*.............. 1,700 44,361 ------------ Computers - Peripherals - 4.61% Lexmark International, Inc.*............ 1,600 91,488 Microsoft Corporation*.................. 2,800 168,714 ------------ 260,202 ------------ Electrical Equipment - 0.74% Tyco International Ltd.................. 1,300 42,016 ------------ Electronic Components - 1.90% Intel Corporation....................... 1,200 36,498 Linear Technology Corporation........... 1,600 70,792 ------------ 107,290 ------------ Health Care - Drugs - 16.72% Abbott Laboratories..................... 1,400 73,640 Alcon, Inc.*............................ 3,900 132,015 Allergan, Inc........................... 1,800 116,370 Forest Laboratories, Inc.*.............. 2,000 163,400 King Pharmaceuticals, Inc.*............. 5,500 192,555 Eli Lilly and Company................... 700 53,340 Pfizer Inc.............................. 4,000 158,960 Shire Pharmaceuticals Group plc, ADR*... 2,300 53,992 ------------ 944,272 ------------ Health Care - General - 0.86% Bristol-Myers Squibb Company............ 1,200 48,588 ------------ Hospital Supply and Management - 4.16% HCA - The Healthcare Company............ 4,300 189,544 Medtronic, Inc.......................... 1,000 45,210 ------------ 234,754 ------------ Insurance - Property and Casualty - 5.67% American International Group, Inc.*..... 2,800 201,992 Berkshire Hathaway Inc., Class B*....... 50 118,450 ------------ 320,442 ------------ Motor Vehicle Parts - 1.51% Danaher Corporation..................... 1,200 85,224 ------------ Petroleum - Domestic - 9.08% Anadarko Petroleum Corporation.......... 2,600 146,744 Apache Corporation...................... 2,500 142,200 Burlington Resources Inc................ 3,300 132,297 Spinnaker Exploration Company*.......... 2,200 91,630 ------------ 512,871 ------------ Petroleum - International - 1.32% Exxon Mobil Corporation................. 1,700 74,511 ------------ Retail - General Merchandise - 1.90% Kohl's Corporation*..................... 300 21,345 Target Corporation...................... 2,000 86,240 ------------ 107,585 ------------ Retail - Specialty Stores - 5.78% Best Buy Co., Inc.*..................... 1,300 102,960 Blockbuster Inc., Class A............... 4,100 96,227 Home Depot, Inc. (The).................. 1,100 53,471 Lowe's Companies, Inc................... 1,700 73,933 ------------ 326,591 ------------ Security and Commodity Brokers - 2.87% Goldman Sachs Group, Inc. (The)......... 1,100 99,275 Morgan Stanley Dean Witter & Co......... 1,100 63,041 ------------ 162,316 ------------ Timesharing and Software - 3.00% eBay Inc.*.............................. 3,000 $ 169,635 ------------ TOTAL COMMON STOCKS - 74.97% $ 4,234,954 (Cost: $4,134,040) ------------ Principal Amount in UNITED STATES GOVERNMENT SECURITY - 13.26% Thousands Federal Home Loan Bank, 1.775%, 4-23-02.................... $750 $ 749,189 (Cost: $749,189) ------------ SHORT-TERM SECURITIES Commercial Paper Chemicals - Petroleum and Inorganic - 4.09% du Pont (E.I.) de Nemours and Company, 1.69631%, Master Note.............. 231 231,000 Food and Related - 4.18% General Mills, Inc., 2.0588004%, Master Note............ 236 236,000 ------------ Total Commercial Paper - 8.27% 467,000 ------------ Repurchase Agreement - 6.99% J.P. Morgan Securities Inc., 1.73% Repurchase Agreement dated 3-28-02, to be repurchased at $395,076 on 4-1-02** 395 395,000 ------------ TOTAL SHORT-TERM SECURITIES - 15.26% $ 862,000 (Cost: $862,000) ------------ TOTAL INVESTMENT SECURITIES - 103.49% $ 5,846,143 (Cost: $5,745,229) ------------ LIABILITIES, NET OF CASH AND OTHER ASSETS - (3.49%) (197,218) ------------ NET ASSETS - 100.00% $ 5,648,925 ------------ Notes to Schedule of Investments *No income dividends were paid during the preceding 12 months. **Collateralized by $340,000 U.S. Treasury Bond, 7.625% due 2-15-25; market value and accrued interest aggregate $409,381. 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 March 31, 2002 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities -- at value (Notes 1 and 3).. $5,846 Cash............................................... 2 Receivables: Investment securities sold..................... 178 Dividends and interest receivable.............. 2 ------ Total assets............................... 6,028 ------ LIABILITIES Payable for investment securities purchased........ 364 Payable to Fund shareholders....................... 3 Accrued shareholder servicing (Note 2)............. 1 Other.............................................. 11 ------ Total liabilities.......................... 379 ------ Total net assets....................... $5,649 ====== NET ASSETS $0.01 par value capital stock: Capital stock.................................. $9 Additional paid-in capital..................... 8,220 Accumulated undistributed income (loss): Accumulated undistributed net realized loss on investment transactions.................... (2,681) Net unrealized appreciation in value of investments............................. 101 ------ Net assets applicable to outstanding units of capital....................... $5,649 ====== Net asset value per share (net assets divided by shares outstanding): Class A............................................. $6.43 Class B............................................. $6.31 Class C............................................. $6.32 Capital shares outstanding: Class A.............................................. 688 Class B.............................................. 57 Class C.............................................. 137 Capital shares authorized................................ 400,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS TAX-MANAGED EQUITY FUND For the Fiscal Year Ended March 31, 2002 (In Thousands) INVESTMENT LOSS Income (Note 1B): Dividends.......................................... $ 29 Interest and amortization.......................... 11 ------ Total income................................... 40 ------ Expenses (Note 2): Registration fees.................................. 59 Investment management fee.......................... 37 Distribution fee: Class A........................................ 2 Class B........................................ 3 Class C........................................ 10 Service fee: Class A........................................ 8 Class B........................................ 1 Class C........................................ 3 Audit fees......................................... 11 Shareholder servicing: Class A........................................ 4 Class B........................................ 1 Class C........................................ 4 Other.............................................. 4 ------ Total.............................................. 147 Less expenses in excess of voluntary waiver of investment management fee (Note 2)........ (37) ------ Total expenses............................ 110 ------ Net investment loss................... (70) ------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments................... (1,417) Unrealized appreciation in value of investments during the period................................. 828 ------ Net loss on investments...................... (589) ------ Net decrease in net assets resulting from operations..................... $(659) ===== See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS TAX-MANAGED EQUITY FUND (In Thousands) For the fiscal period from For the fiscal June 30, year ended 2000* through March 31, March 31, 2002 2001 -------------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment loss........................ $(70) $(18) Realized net loss on investments........... (1,417) (1,264) Unrealized appreciation (depreciation)..... 828 (727) -------------------- Net decrease in net assets resulting from operations.................... (659) (2,009) -------------------- Capital share transactions (Note 5)............ 570 4,747 -------------------- Total increase (decrease).................. (89) 2,738 NET ASSETS Beginning of period............................ 5,738 3,000 -------------------- End of period.................................. $5,649 $5,738 ==================== Undistributed net investment income............ $-- $-- ================== *Commencement of operations. 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 For the period from fiscal year 6-30-00* ended to 3-31-02 3-31-01 ------------------------ Net asset value, beginning of period........... $7.19 $10.00 ------------------------ Income (loss) from investment operations: Net investment loss........................ (0.08) (0.00) Net realized and unrealized loss on investments......................... (0.68) (2.81) ------------------------ Total from investment operations............... (0.76) (2.81) ------------------------ Less distributions: From net investment income................. (0.00) (0.00) From capital gains......................... (0.00) (0.00) ------------------------ Total distributions............................ (0.00) (0.00) ------------------------ Net asset value, end of period................. $6.43 $7.19 ======================== Total return**................................. -10.57% -28.10% Net assets, end of period (in millions)........ $4 $4 Ratio of expenses to average net assets including voluntary expense waiver......... 1.62% 1.27%*** Ratio of net investment loss to average net assets including voluntary expense waiver.. -0.92% -0.09%*** Ratio of expenses to average net assets excluding voluntary expense waiver......... 2.17% 1.80%*** Ratio of net investment loss to average net assets excluding voluntary expense waiver.. -1.46% -0.62%*** Portfolio turnover rate........................ 95.60% 73.46% *Commencement of operations. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***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 For the period from fiscal year 7-13-00* ended to 3-31-02 3-31-01 ------------------------ Net asset value, beginning of period............ $7.12 $10.06 ------------------------ Income (loss) from investment operations: Net investment loss......................... (0.13) (0.05) Net realized and unrealized loss on investments.......................... (0.68) (2.89) ------------------------ Total from investment operations................ (0.81) (2.94) ------------------------ Less distributions: From net investment income.................. (0.00) (0.00) From capital gains.......................... (0.00) (0.00) ------------------------ Total distributions............................. (0.00) (0.00) ------------------------ Net asset value, end of period.................. $6.31 $7.12 ======================== Total return.................................... -11.38% -29.22% Net assets, end of period (000 omitted)......... $358 $296 Ratio of expenses to average net assets including voluntary expense waiver.......... 2.56% 2.45%** Ratio of net investment loss to average net assets including voluntary expense waiver.. -1.86% -1.74%** Ratio of expenses to average net assets excluding voluntary expense waiver.......... 3.42% 3.48%** Ratio of net investment loss to average net assets excluding voluntary expense waiver.. -2.71% -2.77%** Portfolio turnover rate......................... 95.60% 73.46% *Commencement of operations. **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 For the period from fiscal year 7-6-00* ended to 3-31-02 3-31-01 ------------------------ Net asset value, beginning of period............... $7.13 $10.01 ------------------------ Income (loss) from investment operations: Net investment loss............................ (0.19) (0.06) Net realized and unrealized loss on investments............................. (0.62) (2.82) ------------------------ Total from investment operations................... (0.81) (2.88) ------------------------ Less distributions: From net investment income..................... (0.00) (0.00) From capital gains............................. (0.00) (0.00) ------------------------ Total distributions................................ (0.00) (0.00) ------------------------ Net asset value, end of period..................... $6.32 $7.13 ======================== Total return..................................... -11.36% -28.77% Net assets, end of period (000 omitted)............. $865 $2 Ratio of expenses to average net assets including voluntary expense waiver.............. 2.76% 2.35%** Ratio of net investment loss to average net assets including voluntary expense waiver...... -2.07% -1.52%** Ratio of expenses to average net assets excluding voluntary expense waiver.............. 3.69% 3.34%** Ratio of net investment loss to average net assets excluding voluntary expense waiver...... -2.99% -2.50%** Portfolio turnover rate............................ 95.60% 73.46% *Commencement of operations. **Annualized. See Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS March 31, 2002 Note 1 - Significant Accounting Policies W&R Funds, Inc. (the "Corporation") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Corporation issues twelve series of capital shares; each series represents ownership of a separate mutual fund. The assets belonging to each Fund are held separately by the custodian. The capital shares of each Fund represent a pro rata beneficial interest in the principal, net income and realized and unrealized capital gains or losses of its respective investments and other assets. The following is a summary of significant accounting policies consistently followed by the Corporation 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. Gold bullion is valued at the last settlement price for current delivery as calculated by the Commodity Exchange, Inc. as of the close of that exchange. Restricted securities and securities for which quotations are not readily available are valued as determined in good faith in accordance with procedures established by and under the general supervision of the Corporation's Board of Directors. Short-term debt securities are valued at amortized cost, which approximates market value. Short-term debt securities denominated in foreign currencies are valued at amortized cost in that currency. 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. Premium and discount on the purchase of bonds are amortized for both financial and tax reporting purposes over the remaining lives of the bonds. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis. See Note 3 - Investment Securities Transactions. C. Foreign currency translations - All assets and liabilities 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 Corporation combines fluctuations from currency exchange rates and fluctuations in market value when computing net realized and unrealized gain or loss from investments. D. Forward foreign currency exchange contracts - A forward foreign currency exchange contract (Forward Contract) is an obligation to purchase or sell a specific currency at a future date at a fixed price. Forward Contracts are "marked-to-market" daily at the applicable translation rates and the resulting unrealized gains or losses are reflected in the Corporation's financial statements. Gains or losses are realized by the Corporation at the time the forward contract is extinguished. Contracts may be extinguished either by entry into a closing transaction or by delivery of the currency. Risks may arise from the possibility that the other party will not complete the obligations of the contract and from unanticipated movements in the value of the foreign currency relative to the U.S. dollar. The Corporation used forward contracts to attempt to reduce the overall risk of its investments. E. Federal income taxes - It is the Corporation'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 Corporation 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. F. Dividends and distributions - Dividends and distributions to shareholders are recorded by each 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. At March 31, 2002, the following amounts were reclassified: Accumulated Undistributed Net Investment Additional Income Paid-in Capital Core Equity Fund $3,691,474 $(3,691,474) International Growth Fund 1,198,344 (1,198,344) Large Cap Growth Fund 195,791 (195,791) Science and Technology Fund 1,913,482 (1,913,482) Small Cap Growth Fund 8,402,760 (8,402,760) Tax-Managed Equity Fund 70,071 (70,071) G. Options - See Note 6 - Options H. Futures - See Note 7 - Futures. 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 Corporation's investment manager. WRIMCO provides advice and supervises investments for which services it is paid a fee. The fee is payable by each Fund at the following annual rates: Fund Net Assets Breakpoints Annual Rate W&R Asset Strategy Fund Up to $1 Billion .700% Over $1 Billion up to $2 Billion .650% Over $2 Billion up to $3 Billion .600% Over $3 Billion .550% W&R Core Equity Fund Up to $1 Billion .700% Over $1 Billion up to $2 Billion .650% Over $2 Billion up to $3 Billion .600% Over $3 Billion .550% W&R High Income Fund Up to $500 Million .625% Over $500 Million up to $1 Billion .600% Over $1 Billion up to $1.5 Billion .550% Over $1.5 Billion .500% W&R International Up to $1 Billion .850% Growth Fund Over $1 Billion up to $2 Billion .830% Over $2 Billion up to $3 Billion .800% Over $3 Billion .760% W&R Large Cap Growth Fund Up to $1 Billion .700% Over $1 Billion up to $2 Billion .650% Over $2 Billion up to $3 Billion .600% Over $3 Billion .550% W&R Limited-Term Bond Fund Up to $500 Million .500% Over $500 Million up to $1 Billion .450% Over $1 Billion up to $1.5 Billion .400% Over $1.5 Billion .350% W&R Mid Cap Growth Fund Up to $1 Billion .850% Over $1 Billion up to $2 Billion .830% Over $2 Billion up to $3 Billion .800% Over $3 Billion .760% Fund Net Assets Breakpoints Annual Rate W&R Money Market Fund All levels .400% W&R Municipal Bond Fund Up to $500 Million .525% Over $500 Million up to $1 Billion .500% Over $1 Billion up to $1.5 Billion .450% Over $1.5 Billion .400% W&R Science and Up to $1 Billion .850% Technology Fund Over $1 Billion up to $2 Billion .830% Over $2 Billion up to $3 Billion .800% Over $3 Billion .760% W&R Small Cap Growth Fund Up to $1 Billion .850% Over $1 Billion up to $2 Billion .830% Over $2 Billion up to $3 Billion .800% Over $3 Billion .760% W&R Tax-Managed Up to $1 Billion .650% Equity Fund Over $1 Billion up to $2 Billion .600% Over $2 Billion up to $3 Billion .550% Over $3 Billion .500% The fee is accrued and paid daily. However, WRIMCO has agreed to waive a Fund's management fee on any day that the Fund's net assets are less than $25 million, subject to WRIMCO's right to change or modify this waiver. During the period ended March 31, 2002, WRIMCO voluntarily waived its fee as shown in the following table: High Income Fund $123,648 Large Cap Growth Fund 35,950 Limited-Term Bond Fund 60,360 Mid Cap Growth Fund 165,432 Money Market Fund 56,110 Tax-Managed Equity Fund 36,744 The Corporation also reimburses WRIMCO for certain out-of-pocket costs. The Corporation 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 bookkeeping and accounting services and assistance to the Corporation, including maintenance of Fund records, pricing of Fund shares, preparation of prospectuses for existing shareholders, preparation of proxy statements and certain shareholder reports. For these services, each of the Funds pays WRSCO a monthly fee of one-twelfth of the annual fee shown in the following table. Accounting Services Fee Average Net Asset Level Annual Fee (all dollars in millions) Rate for Each Level From $ 0 to $ 10 $ 0 From $ 10 to $ 25 $ 11,000 From $ 25 to $ 50 $ 22,000 From $ 50 to $ 100 $ 33,000 From $ 100 to $ 200 $ 44,000 From $ 200 to $ 350 $ 55,000 From $ 350 to $ 550 $ 66,000 From $ 550 to $ 750 $ 77,000 From $ 750 to $1,000 $ 93,500 $1,000 and Over $110,000 In addition, for each class of shares in excess of one, each Fund pays the Agent a monthly per-class fee equal to 2.5% of the monthly base fee. Under the Shareholder Servicing Agreement, 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: Asset Strategy Fund pays the Agent a monthly fee of $1.5792; High Income Fund, Limited-Term Bond Fund and Municipal Bond Fund each pay the Agent a monthly fee of $1.6958; and Core Equity Fund, International Growth Fund, Large Cap Growth Fund, Mid Cap Growth Fund, Science and Technology Fund, Small Cap Growth Fund and Tax-Managed Equity Fund each pay the Agent a monthly fee of $1.5042. Money Market Fund pays the Agent a monthly fee of $1.75 for each shareholder account that was in existence at any time during the prior month plus, for Class A shareholder accounts, $0.75 for each shareholder check processed in the prior month. Prior to December 1, 2001, the monthly fee was as follows: Asset Strategy Fund - $1.4125; High Income Fund, Limited-Term Bond Fund and Municipal Bond Fund - $1.6125; and Core Equity Fund, International Growth Fund, Large Cap Growth Fund, Mid Cap Growth Fund, Science and Technology Fund, Small Cap Growth Fund and Tax-Managed Equity Fund - $1.3375. For Class Y shares, each Fund pays the Agent a monthly fee equal to one-twelfth of .15 of 1% of the average daily net assets of the class for the preceding month. Each Fund also reimburses W&R and WRSCO for certain out-of-pocket costs for all classes. As principal underwriter for the Corporation's shares, W&R receives gross sales commissions (which are not an expense of the Corporation) for Class A shares. A contingent deferred sales charge ("CDSC") may be assessed against a shareholder's redemption amount of Class B, Class C or certain Class A shares and is paid to W&R. During the period ended March 31, 2002, W&R received the following amounts in gross sales commissions and deferred sales charges: CDSC Gross Sales ---------------------------- Commissions Class A Class B Class C Asset Strategy Fund $49,220 $-- $ 9,074 $2,201 Core Equity Fund 99,876 -- 6,559 9,889 High Income Fund 26,214 -- 2,063 585 International Growth Fund 43,432 -- 5,074 1,901 Large Cap Growth Fund 93,171 -- 13,047 1,293 Limited-Term Bond Fund 76,997 -- 878 706 Mid Cap Growth Fund 94,488 -- 9,288 1,264 Money Market Fund -- -- 3,530 4,554 Municipal Bond Fund 9,628 -- -- 1,013 Science and Technology Fund 92,478 -- 8,035 4,189 Small Cap Growth Fund 151,481 -- 9,820 8,311 Tax-Managed Equity Fund 13,670 -- 1,081 241 With respect to Class A, Class B and Class C shares, W&R pays sales commissions and all expenses in connection with the sale of the Corporation's shares, except for registration fees and related expenses. During the period ended March 31, 2002, W&R paid the following amounts: Asset Strategy Fund $ 66,284 Core Equity Fund 185,842 High Income Fund 25,103 International Growth Fund 60,879 Large Cap Growth Fund 77,690 Limited-Term Bond Fund 62,674 Mid Cap Growth Fund 76,236 Money Market Fund 8,681 Municipal Bond Fund 13,452 Science and Technology Fund 134,673 Small Cap Growth Fund 232,344 Tax-Managed Equity Fund 10,029 Under a Distribution and Service Plan for Class A shares adopted by the Corporation pursuant to Rule 12b-1 under the Investment Company Act of 1940, each 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. Under the Distribution and Service Plan adopted by the Corporation for Class B shares and Class C shares, respectively, each Fund may pay W&R a service fee not to exceed 0.25% and a distribution fee not to exceed 0.75% of a 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 the service and/or maintenance of shareholder accounts of that class. The Class B Plan and the Class C Plan each permit W&R to receive compensation, through the distribution fee and service fee, respectively, for its distribution activities for that class, which are similar to the distribution activities described with respect to the Class A Plan, and for its activities in providing personal services to shareholders of that class and/or maintaining shareholder accounts of that class, which are similar to the corresponding activities for which it is entitled to compensation under the Class A Plan. Under the Class Y Plan, each Fund may pay W&R a fee of up to 0.25%, on an annual basis, of the average daily net assets of the Fund's Class Y shares to compensate W&R for, either directly or through third parties, distributing the Class Y shares of that Fund, providing personal service to Class Y shareholders and/or maintaining Class Y shareholder accounts. The Corporation paid Directors' fees of $53,813, which are 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 Investment securities transactions for the period ended March 31, 2002 are summarized as follows: Asset Core High Strategy Equity Income Fund Fund Fund Purchases of investment securities, excluding short-term and U.S. Government securities $ 46,395,859 $ 89,974,585 $ 16,395,476 Purchases of bullion 412,400 -- -- Purchases of U.S. Government securities 30,221,182 -- -- Purchases of short-term securities 246,077,637 655,394,655 200,609,752 Purchases of options 2,155,831 930,578 -- Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government securities 43,419,294 171,767,371 14,990,328 Proceeds from sales of bullion 120,400 -- -- Proceeds from maturities and sales of U.S. Government securities 27,111,690 -- -- Proceeds from maturities and sales of short-term securities 258,735,804 637,231,309 201,822,666 Proceeds from options 1,907,248 135,987 -- International Large Cap Limited- Growth Growth Term Bond Fund Fund Fund Purchases of investment securities, excluding short-term and U.S. Government securities $129,910,255 $ 24,816,004 $ 7,654,233 Purchases of U.S. Government securities -- -- 9,033,777 Purchases of short-term securities 947,157,637 130,150,878 25,717,045 Purchases of options -- -- -- Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government securities 134,285,796 23,588,020 4,519,473 Proceeds from maturities and sales of U.S. Government securities -- -- 3,003,197 Proceeds from maturities and sales of short-term securities 962,005,657 129,597,000 26,512,000 Proceeds from options -- -- -- Mid Cap Municipal Science and Growth Bond Technology Fund Fund Fund Purchases of investment securities, excluding short-term and U.S. Government securities $ 14,235,935 $10,033,592 $ 102,797,431 Purchases of U.S. Government securities -- -- -- Purchases of short-term securities 906,462,204 13,104,000 1,336,970,838 Purchases of options 187,317 -- 6,054,505 Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government securities 4,661,116 9,169,292 104,822,014 Proceeds from maturities and sales of U.S. Government securities -- -- -- Proceeds from maturities and sales of short-term securities 911,298,000 15,598,000 1,356,489,000 Proceeds from options 217,026 -- 6,606,949 Small Cap Tax-Managed Growth Equity Fund Fund Purchases of investment securities, excluding short- term and U.S. Government securities $ 127,929,627 $ 4,943,851 Purchases of U.S. Government securities -- -- Purchases of short-term securities 3,374,403,208 50,285,820 Purchases of options -- -- Proceeds from maturities and sales of investment securities, excluding short-term and U.S. Government securities 198,085,930 5,558,977 Proceeds from maturities and sales of U.S. Government securities -- -- Proceeds from maturities and sales of short-term securities 3,350,061,367 48,936,000 Proceeds from options -- -- For Federal income tax purposes, cost of investments owned at March 31, 2002 and the related unrealized appreciation (depreciation) were as follows: Aggregate Appreciation Cost Appreciation Depreciation (Depreciation) Asset Strategy Fund $ 49,184,745 $ 1,900,658 $ 308,259 $ 1,592,399 Core Equity Fund 292,738,048 94,964,991 13,190,017 81,774,974 High Income Fund 19,405,512 844,389 326,125 518,264 International Growth Fund 95,023,740 5,586,294 7,049,598 (1,463,304) Large Cap Growth Fund 27,447,059 2,927,443 1,182,826 1,744,617 Limited-Term Bond Fund 28,405,365 376,806 204,940 171,866 Mid Cap Growth Fund 21,728,152 1,685,949 1,739,866 (53,917) Money Market Fund 13,055,109 -- -- -- Municipal Bond Fund 27,154,950 212,787 478,764 (265,977) Science and Technology Fund 135,599,807 14,310,937 21,003,091 (6,692,154) Small Cap Growth Fund 455,619,372 109,806,962 64,464,339 45,342,623 Tax-Managed Equity Fund 5,781,391 274,543 209,791 64,752 NOTE 4 - Federal Income Tax Matters For Federal income tax purposes, the Funds' distributed and undistributed earnings and profit for the fiscal year ended March 31, 2002 and the related capital loss carryover and post-October activity were as follows: Asset Core High Strategy Equity Income Fund Fund Fund Net ordinary income $ 942,445 $ -- $1,595,664 Distributed ordinary income 867,328 -- 1,565,160 Undistributed ordinary income 75,117 -- 30,504 Realized long-term capital gains -- -- -- Distributed long-term capital gains -- -- -- Undistributed long-term capital gains -- -- -- Capital loss carryover 2,923,843 28,691,576 1,271,702 Post-October losses deferred 514,205 8,186,117 79,881 International Large Cap Limited- Growth Growth Term Bond Fund Fund Fund Net ordinary income $ -- $ -- $1,005,440 Distributed ordinary income -- -- 991,645 Undistributed ordinary income -- -- 13,795 Realized long-term capital gains -- -- -- Distributed long-term capital gains -- -- -- Undistributed long-term capital gains -- -- -- Capital loss carryover 31,762,625 7,188,151 -- Post-October losses deferred 9,029,721 2,056,060 17,620 Mid Cap Money Municipal Growth Market Bond Fund Fund Fund Net ordinary income $ 5,580 $270,865 $944,160 Distributed ordinary income 3,179 269,385 932,874 Undistributed ordinary income 2,401 1,480 11,286 Realized long-term capital gains -- -- -- Distributed long-term capital gains -- -- -- Undistributed long-term capital gains -- -- -- Capital loss carryover 2,752,716 -- 230,753 Post-October losses deferred 976,024 -- 82,079 Science and Small Cap Tax-Managed Technology Growth Equity Fund Fund Fund 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 21,421,176 60,539,358 1,914,377 Post-October losses deferred 1,946,612 6,121,311 671,390 Internal Revenue Code regulations permit each 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. Asset Core High International Strategy Equity Income Growth Fund Fund Fund Fund 2007 $ -- $ -- $ 501,692 $ -- 2008 -- -- 472,930 -- 2009 -- -- 2,581,600 -- 2010 2,923,843 28,691,576 1,271,702 31,762,625 ----------------------------------------------------- Total Carryover $2,923,843 $28,691,576 $4,827,924 $31,762,625 ===================================================== Large Cap Limited- Mid Cap Municipal Growth Term Bond Growth Bond Fund Fund Fund Fund 2007 $ -- $ 72,427 $ -- $ -- 2008 -- 64,500 -- -- 2009 -- 159,953 -- 519,288 2010 7,188,151 -- 2,752,716 230,753 ----------------------------------------------------- Total Carryover $7,188,151 $296,880 $2,752,716 $750,041 ===================================================== Science and Small Cap Tax-Managed Technology Growth Equity Fund Fund Fund 2009 $ -- $ -- $ 59,107 2010 21,421,176 60,539,358 1,914,377 ---------------------------------------- Total Carryover $21,421,176 $60,539,358 $1,973,484 ======================================== NOTE 5 - Multiclass Operations Each Fund within the Corporation (other than Money Market Fund which offers only Class A, Class B and Class C shares) currently offers four classes of shares, Class A, Class B, Class C and Class Y, each of which have equal rights as to assets and voting privileges. A comprehensive discussion of the terms under which shares of each class are offered is contained in the Prospectus and the Statement of Additional Information for the Corporation. 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. Class B shares were combined with Class C shares effective March 24, 2000 and were redesignated Class C shares. Transactions in capital stock for the fiscal year ended March 31, 2002 are summarized below. Amounts are in thousands. Asset Core High Strategy Equity Income Fund Fund Fund Shares issued from sale of shares: Class A 278 932 216 Class B 123 343 54 Class C 807 3,045 371 Class Y 17 215 11 Shares issued from reinvestment of dividends and/or capital gains distribution: Class A 13 28 10 Class B 8 23 7 Class C 154 1,474 164 Class Y 2 12 --* Shares redeemed: Class A (135) (335) (54) Class B (62) (145) (28) Class C (1,340) (10,459) (661) Class Y (10) (91) (5) ----------------------------------------- Increase (decrease) in outstanding capital shares (145) (4,958) 85 ========================================= Value issued from sale of shares: Class A $ 3,215 $ 8,461 $ 1,820 Class B 1,438 3,155 458 Class C 9,437 27,796 3,139 Class Y 195 2,087 93 Value issued from reinvestment of dividends and/or capital gains distribution: Class A 152 243 83 Class B 86 196 56 Class C 1,728 12,760 1,380 Class Y 26 111 2 Value redeemed: Class A (1,530) (2,990) (456) Class B (717) (1,284) (236) Class C (15,529) (94,385) (5,563) Class Y (109) (864) (43) ----------------------------------------- Increase (decrease) in outstanding capital $(1,608) $(44,714) $ 733 ========================================= *Not shown due to rounding. International Large Cap Limited- Growth Growth Term Bond Fund Fund Fund Shares issued from sale of shares: Class A 647 1,094 664 Class B 92 106 116 Class C 519 406 796 Class Y 1,834 171 15 Shares issued from reinvestment of dividends and/or capital gains distribution: Class A 2 -- 11 Class B 1 -- 3 Class C 26 -- 74 Class Y 2 -- 8 Shares redeemed: Class A (426) (965) (124) Class B (45) (92) (21) Class C (3,137) (390) (639) Class Y (1,560) (117) (115) ------------------------------------------ Increase (decrease) in outstanding capital shares (2,045) 213 788 ========================================== Value issued from sale of shares: Class A $ 6,829 $ 9,985 $ 6,852 Class B 979 968 1,191 Class C 5,559 3,717 8,205 Class Y 19,389 1,580 151 Value issued from reinvestment of dividends and/or capital gains distribution: Class A 20 -- 115 Class B 6 -- 31 Class C 258 -- 756 Class Y 19 -- 84 Value redeemed: Class A (4,428) (8,924) (1,275) Class B (461) (821) (220) Class C (32,705) (3,504) (6,573) Class Y (16,524) (1,067) (1,179) ------------------------------------------ Increase (decrease) in outstanding capital $(21,059) $ 1,934 $ 8,138 ========================================== Mid Cap Money Municipal Growth Market Bond Fund Fund Fund Shares issued from sale of shares: Class A 883 6,770 141 Class B 98 1,094 8 Class C 314 18,256 222 Class Y 150 n/a -- Shares issued from reinvestment of dividends and/or capital gains distribution: Class A 8 128 6 Class B -- 7 --* Class C -- 129 71 Class Y --* n/a --* Shares redeemed: Class A (507) (6,390) (63) Class B (60) (954) (1) Class C (232) (21,219) (455) Class Y (122) n/a -- ----------------------------------------- Increase (decrease) in outstanding capital shares 532 (2,179) (71) ========================================= Value issued from sale of shares: Class A $ 7,968 $ 6,770 $1,516 Class B 881 1,094 87 Class C 2,828 18,256 2,389 Class Y 1,337 n/a -- Value issued from reinvestment of dividends and/or capital gains distribution: Class A 75 128 61 Class B -- 7 2 Class C -- 129 758 Class Y 3 n/a --* Value redeemed: Class A (4,559) (6,390) (680) Class B (529) (954) (6) Class C (2,047) (21,219) (4,875) Class Y (1,046) n/a -- ----------------------------------------- Increase (decrease) in outstanding capital $ 4,911 $(2,179) $ (748) ========================================= *Not shown due to rounding. Science and Small Cap Tax-Managed Technology Growth Equity Fund Fund Fund Shares issued from sale of shares: Class A 566 5,892 248 Class B 129 396 26 Class C 720 3,337 63 Class Y 141 24,633 -- Shares issued from reinvestment of dividends and/or capital gains distribution: Class A --* -- -- Class B --* -- -- Class C 7 -- -- Class Y --* -- -- Shares redeemed: Class A (224) (4,819) (80) Class B (66) (158) (11) Class C (2,030) (10,698) (164) Class Y (58) (22,478) -- ------------------------------------------ Increase (decrease) in outstanding capital shares (815) (3,895) 82 ========================================== Value issued from sale of shares: Class A $ 10,531 $ 59,708 $ 1,672 Class B 2,365 4,011 181 Class C 13,288 33,660 441 Class Y 2,655 273,657 -- Value issued from reinvestment of dividends and/or capital gains distribution: Class A 11 -- -- Class B 4 -- -- Class C 129 -- -- Class Y 3 -- -- Value redeemed: Class A (4,148) (49,068) (540) Class B (1,191) (1,578) (77) Class C (36,830) (106,518) (1,107) Class Y (1,108) (248,493) -- ------------------------------------------ Increase (decrease) in outstanding capital $(14,291) $ (34,621) $ 570 ========================================== *Not shown due to rounding. Transactions in capital stock for the fiscal period ended March 31, 2001 are summarized below. Amounts are in thousands. Asset Core High Strategy Equity Income Fund Fund Fund Shares issued from sale of shares: Class A 236 515 71 Class B 154 445 80 Class C 1,013 3,310 269 Class Y 11 82 1 Shares issued from reinvestment of dividends and/or capital gains distribution: Class A 24 39 2 Class B 11 55 2 Class C 780 8,511 185 Class Y 8 36 --* Shares redeemed: Class A (54) (131) (21) Class B (6) (23) (2) Class C (711) (7,842) (753) Class Y (6) (28) --* ------------------------------------------ Increase (decrease) in outstanding capital shares 1,460 4,969 (166) ========================================== Value issued from sale of shares: Class A $ 3,253 $ 6,097 $ 611 Class B 2,098 5,544 696 Class C 14,492 41,573 2,351 Class Y 150 1,031 7 Value issued from reinvestment of dividends and/or capital gains distribution: Class A 300 426 17 Class B 144 600 19 Class C 9,813 93,199 1,622 Class Y 105 404 1 Value redeemed: Class A (678) (1,389) (180) Class B (82) (249) (14) Class C (10,041) (96,735) (6,635) Class Y (90) (371) (1) ------------------------------------------ Increase (decrease) in outstanding capital $19,464 $50,130 $(1,506) ========================================== *Not shown due to rounding. International Large Cap Limited- Growth Growth Term Bond Fund Fund Fund Shares issued from sale of shares: Class A 420 2,035 49 Class B 156 282 42 Class C 900 922 249 Class Y 362 30 58 Shares issued from reinvestment of dividends and/or capital gains distribution: Class A 66 19 --* Class B 39 1 1 Class C 3,184 4 87 Class Y 57 --* 8 Shares redeemed: Class A (38) (365) (1) Class B (23) (31) (1) Class C (1,996) (225) (504) Class Y (85) (1) (11) ------------------------------------------ Increase (decrease) in outstanding capital shares 3,042 2,671 (23) ========================================== Value issued from sale of shares: Class A $ 7,120 $24,251 $ 491 Class B 3,011 3,285 419 Class C 18,702 10,939 2,499 Class Y 5,880 335 578 Value issued from reinvestment of dividends and/or capital gains distribution: Class A 909 215 5 Class B 536 11 10 Class C 43,808 44 855 Class Y 849 3 82 Value redeemed: Class A (577) (4,225) (6) Class B (320) (355) (15) Class C (36,667) (2,492) (4,967) Class Y (2,038) (11) (112) ------------------------------------------ Increase (decrease) in outstanding capital $ 41,213 $32,000 $ (161) ========================================== *Not shown due to rounding. Mid Cap Money Municipal Growth Market Bond Fund Fund Fund Shares issued from sale of shares: Class A 1,017 3,165 113 Class B 204 653 4 Class C 622 22,623 94 Class Y 19 n/a --* Shares issued from reinvestment of dividends and/or capital gains distribution: Class A 31 146 1 Class B 4 5 --* Class C 9 83 156 Class Y 1 n/a --* Shares redeemed: Class A (75) (1,502) (1) Class B (24) (227) -- Class C (220) (12,744) (603) Class Y --* n/a -- ------------------------------------------ Increase (decrease) in outstanding capital shares 1,588 12,202 (236) ========================================== Value issued from sale of shares: Class A $11,044 $ 3,165 $ 1,176 Class B 2,209 653 37 Class C 6,846 22,623 1,687 Class Y 218 n/a --* Value issued from reinvestment of dividends and/or capital gains distribution: Class A 323 146 11 Class B 40 5 --* Class C 95 83 898 Class Y 6 n/a --* Value redeemed: Class A (761) (1,502) (13) Class B (244) (227) -- Class C (2,396) (12,744) (6,175) Class Y --* n/a -- ------------------------------------------ Increase (decrease) in outstanding capital $17,380 $12,202 $(2,379) ========================================== *Not shown due to rounding. Science and Small Cap Tax-Managed Technology Growth Equity Fund Fund Fund Shares issued from sale of shares: Class A 313 408 466 Class B 161 444 45 Class C 1,361 2,809 454 Class Y 71 2,450 -- Shares issued from reinvestment of dividends and/or capital gains distribution: Class A 44 93 -- Class B 31 130 -- Class C 1,930 16,665 -- Class Y 15 398 -- Shares redeemed: Class A (34) (74) (246) Class B (15) (43) (4) Class C (2,067) (7,479) (215) Class Y (52) (1,515) -- ------------------------------------ Increase (decrease) in outstanding capital shares 1,758 14,286 500 ===================================== Value issued from sale of shares: Class A $ 8,557 $ 6,082 $ 4,220 Class B 4,693 6,938 399 Class C 41,214 43,656 4,099 Class Y 2,138 33,613 -- Value issued from reinvestment of dividends and/or capital gains distribution: Class A 1,046 1,030 -- Class B 736 1,430 -- Class C 45,259 183,313 -- Class Y 361 4,728 -- Value redeemed: Class A (854) (1,032) (2,120) Class B (367) (584) (31) Class C (58,506) (112,387) (1,820) Class Y (1,623) (22,367) -- ------------------------------------- Increase (decrease) in outstanding capital $ 42,654 $144,420 $ 4,747 ===================================== NOTE 6 - Options Options purchased by a 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 at 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 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 is exercised, the cost basis of the securities purchased by the Fund is reduced by the amount of the premium received. For Asset Strategy Fund, transactions in call options written were as follows: Number of Premiums Contracts Received Outstanding at March 31, 2001 891 $ 220,704 Options written 8,398 1,750,106 Options terminated in closing purchase transactions (9,154) (1,922,295) Options exercised -- -- Options expired -- -- ----------------------- Outstanding at March 31, 2002 135 $ 48,515 ======================= For Core Equity Fund, transactions in call options written were as follows: Number of Premiums Contracts Received Outstanding at March 31, 2001 -- $ -- Options written 639 135,987 Options terminated in closing purchase transactions (639) (135,987) Options exercised -- -- Options expired -- -- ----------------------- Outstanding at March 31, 2002 -- $ -- ======================= For Mid Cap Growth Fund, transactions in call options written were as follows: Number of Premiums Contracts Received Outstanding at March 31, 2001 21 $ 6,258 Options written 1,140 210,521 Options terminated in closing purchase transactions (916) (175,282) Options exercised (55) (7,485) Options expired (53) (8,963) ----------------------- Outstanding at March 31, 2002 137 $ 25,049 ======================= For Mid Cap Growth Fund, transactions in put options written were as follows: Number of Premiums Contracts Received Outstanding at March 31, 2001 -- $ -- Options written 40 6,505 Options terminated in closing purchase transactions (22) (3,459) Options exercised (18) (3,046) Options expired -- -- ----------------------- Outstanding at March 31, 2002 -- $ -- ======================= For Science and Technology Fund, transactions in call options written were as follows: Number of Premiums Contracts Received Outstanding at March 31, 2001 930 $ 259,750 Options written 19,525 5,504,073 Options terminated in closing purchase transactions (15,377) (4,591,831) Options exercised (3,785) (841,287) Options expired (1,198) (301,901) ----------------------- Outstanding at March 31, 2002 95 $ 28,804 ======================= NOTE 7 - Futures The Corporation may engage in buying and selling interest rate futures contracts, but only Debt Futures and Municipal Bond Index Futures. Upon entering into a futures contract, the Corporation is required to deposit, in a segregated account, an amount of cash or U.S. Treasury Bills equal to a varying specified percentage of the contract amount. This amount is known as the initial margin. Subsequent payments ("variation margins") are made or received by the Corporation each day, dependent on the daily fluctuations in the value of the underlying debt security or index. These changes in the variation margins are recorded by the Corporation as unrealized gains or losses. Upon the closing of the contracts, the cumulative net change in the variation margin is recorded as realized gain or loss. The Corporation uses futures to attempt to reduce the overall risk of its investments. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, W&R Funds, Inc.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Asset Strategy Fund, Core Equity Fund, High Income Fund, International Growth Fund, Large Cap Growth Fund, Limited-Term Bond Fund, Mid Cap Growth Fund, Money Market Fund, Municipal Bond Fund, Science and Technology Fund, Small Cap Growth Fund and Tax-Managed Equity Fund (collectively the "Funds") comprising W&R Funds, Inc. as of March 31, 2002, and the related statements of operations for the fiscal year then ended, the statements of changes in net assets for each of the two fiscal years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Funds' 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of March 31, 2002, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of each of the respective Funds comprising W&R Funds, Inc., as of March 31, 2002, the results of their operations for the fiscal year then ended, the changes in their net assets for each of the two fiscal years in the period then ended, and their 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 May 10, 2002 INCOME TAX INFORMATION The amounts of the dividends and long-term capital gains below, multiplied by the number of shares owned by you in Asset Strategy Fund, Core Equity Fund, International Growth Fund, Mid Cap Growth Fund or Science and Technology Fund, respectively, on the record dates, will give you the total amounts to be reported in your Federal income tax return for the years in which they were received or reinvested. Per-Share Amounts Reportable As: ------------------------------------------------------------ For Individuals For Corporations ---------------------- ----------------------------------- Record Ordinary Long-Term Non- Long-Term Date Total Income Capital Gain Qualifying Qualifying Capital Gain ------ ------- ------- ------------ ---------- ---------- ------------- Asset Strategy Fund Class A 6-13-01 $0.0640 $0.0640 $ -- $0.0333 $0.0307 $ -- 9-19-01 0.0820 0.0820 -- 0.0075 0.0745 -- 12-12-01 0.2954 0.1265 0.1689 0.0091 0.1174 0.1689 03-13-02 0.0510 0.0510 -- 0.0060 0.0450 -- ------- ------- ------- ------- ------- ------- Total $0.4924 $0.3235 $0.1689 $0.0559 $0.2676 $0.1689 ======= ======= ======= ======= ======= ======= Asset Strategy Fund Class B 6-13-01 $0.0400 $0.0400 $ -- $0.0208 $0.0192 $ -- 9-19-01 0.0570 0.0570 -- 0.0052 0.0518 -- 12-12-01 0.2744 0.1055 0.1689 0.0072 0.0983 0.1689 03-13-02 0.0290 0.0290 -- 0.0034 0.0256 -- ------- ------- ------- ------- ------- ------- Total $0.4004 $0.2315 $0.1689 $0.0366 $0.1949 $0.1689 ======= ======= ======= ======= ======= ======= Asset Strategy Fund Class C 6-13-01 $0.0400 $0.0400 $ -- $0.0208 $0.0192 $ -- 9-19-01 0.0600 0.0600 -- 0.0055 0.0545 -- 12-12-01 0.2764 0.1075 0.1689 0.0074 0.1001 0.1689 03-13-02 0.0300 0.0300 -- 0.0035 0.0265 -- ------- ------- ------- ------- ------- ------- Total $0.4064 $0.2375 $0.1689 $0.0372 $0.2003 $0.1689 ======= ======= ======= ======= ======= ======= Asset Strategy Fund Class Y 6-13-01 $0.0640 $0.0640 $ -- $0.0333 $0.0307 $ -- 9-19-01 0.0880 0.0880 -- 0.0080 0.0800 -- 12-12-01 0.2984 0.1295 0.1689 0.0094 0.1201 0.1689 03-13-02 0.0550 0.0550 -- 0.0064 0.0486 -- ------- ------- ------- ------- ------- ------- Total $0.5054 $0.3365 $0.1689 $0.0571 $.02794 $0.1689 ======= ======= ======= ======= ======= ======= Core Equity Fund Class A, Class B, Class C and Class Y 12-12-01 $0.3136 $ -- $0.3136 $ -- $ -- $0.3136 ======= ======= ======= ======= ======= ======= International Growth Fund Class A, Class B, Class C and Class Y 12-12-01 $0.0311 $ -- $0.0311 $ -- $ -- $0.0311 Mid Cap Growth Fund Class A 12-12-01 $0.0476 $0.0476 $ -- $0.0041 $0.0435 $ -- ======= ======= ======= ======= ======= ======= Mid Cap Growth Fund Class Y 12-12-01 $0.0606 $0.0606 $ -- $0.0052 $0.0554 $ -- ======= ======= ======= ======= ======= ======= Science and Technology Fund Class A, Class B, Class C and Class Y 12-12-01 $0.0202 $0.0141 $0.0061 $ -- $0.0141 $0.0061 ======= ======= ======= ======= ======= ======= Dividends are declared and recorded by each Fund on each day the New York Stock Exchange is open for business. Dividends are paid monthly usually on the 27th of the month or on the preceding business day if the 27th is a weekend or holiday. Exempt Interest Dividends - The exempt interest portion of dividends paid represents the distribution of state and municipal bond interest and is exempt from Federal income taxation. The table below shows the taxability of dividends and long-term capital gains paid during the fiscal year ended March 31, 2001: Per-Share Amounts Reportable As: -------------------------------------------------------- For Individuals For Corporations --------------------- --------------------------------- Record Ordinary Long-Term Non- Long-Term Date Total Income Capital Gain Qualifying Qualifying Capital Gain ------- --------- -------- ------------ ---------- ---------- ------- ---- High Income Fund Class A, Class B, Class C and Class Y April 2001 through December 2001 100.0000% 100.0000% --% 9.8173% 90.1827% --% January 2002 through March 2002 100.0000% 100.0000% --% 5.2039% 94.7961% --% Limited-Term Bond Fund Class A, Class B, Class C and Class Y April 2001 through March 2002 100.0000% 100.0000% --% --% 100.0000% --% Money Market Fund Class A, Class B and Class C April 2000 through March 2002 100.0000% 100.0000% --% --% 100.0000% --% Municipal Bond Fund Class A, Class B, Class C and Class Y For Individuals For Corporations ------------------------------ -------------------------------- Record Ordinary Long-Term Exempt Non- Long-Term Exempt Date Total Income Capital Gain Interest Qualifying Capital Gain Interest ------ -------- -------- ------------ -------- ---------- ------------ -------- April 2001 through December 2001 100.0000% 1.9477% --% 98.0523% --% 1.9477% 98.0523% January 2002 through March 2002 100.0000% 0.8355% --% 99.1645% --% 0.8355% 99.1645% CORPORATION DEDUCTIONS - Under Federal tax law, the amounts reportable as Qualifying Dividends are eligible for the dividends received deduction in the year received as provided by Section 243 of the Internal Revenue Code. The tax status of dividends paid will be reported to you on Form 1099-DIV after the close of the applicable calendar year. Income from Municipal Bond Fund may be subject to the alternative minimum tax. Shareholders are advised to consult with their tax advisors concerning the tax treatment of dividends and distributions from all the Funds. The Board of Directors of W&R Funds, Inc. Each of the individuals listed below serves as a director for each of the portfolios within the Waddell & Reed Advisors Funds, W&R Funds, Inc., Waddell & Reed InvestEd Portfolios, Inc. and W&R Target Funds, Inc. for a total of 47 portfolios served. Four of the five interested directors are "interested" by virtue of their current or former engagement as officers of Waddell & Reed Financial, Inc. (WDR) or its wholly-owned subsidiaries, including the funds' investment advisor, Waddell & Reed Investment Management Company (WRIMCO); the funds' principal underwriter, Waddell & Reed, Inc. (W&R); and the funds' transfer agent, Waddell & Reed Services Company (WRSCO), as well as by virtue of their personal ownership of shares of WDR. The fifth interested director is a partner in a law firm that has represented W&R within the past two years. The other directors (more than a majority of the total number) are disinterested; that is, they are not employees or officers of, and have no financial interest in, WDR or any of its wholly-owned subsidiaries, including W&R, WRIMCO and WRSCO. Disinterested Directors James M. Concannon (54) Washburn Law School, 1700 College, Topeka, KS 66621 Position held with Fund: Director Director since: 1997 Principal Occupations During Past 5 Years: Professor of Law, Washburn Law School; formerly, Dean, Washburn Law School Other Directorships held by Director: Director, Am Vestors CBO II, Inc., a bond investment company John A. Dillingham (62) 6300 Lamar Avenue, Overland Park, KS 66202 Position held with Fund: Director Director since: 1997 Principal Occupations During Past 5 Years: President and Director, JoDill Corp. and Dillingham Enterprises, Inc., both farming enterprises; formerly, Instructor at Central Missouri State University; formerly, Consultant and Director, McDougal Construction Co. Other Directorships held by Director: Chairman, Clay Co. IDA and Kansas City Municipal Assistance Corp., both bonding authorities; Director, American Royal and Salvation Army David P. Gardner (68) 2441 Iron Canyon Drive, Park City UT 84060 Position held with Fund: Director Director since: 1998 Principal Occupation During Past 5 Years: formerly, President, William and Flora Hewlett Foundation Other Directorships held by Director: Chairman, J. Paul Getty Trust; Director, Fluor Corp., Campus Pipeline, John & Karen Huntsman Foundation and Huntsman Cancer Foundation; formerly, Chairman, George S. and Dolores Dor'e Eccles Foundation; formerly, Director, First Security Corp., Digital Ventures and Charitableway Linda K. Graves (48) 6300 Lamar Avenue, Overland Park, KS 66202 Position held with Fund: Director Director since: 1995 Principal Occupation During Past 5 Years: First Lady of Kansas Other Directorships held by Director: Chairman & Director, Community Foundation of Johnson County; Director, Greater Kansas City Community Foundation, and Friends of Cedar Crest Association; Director, American Guaranty Life Insurance Company Joseph Harroz, Jr. (34) 6300 Lamar Avenue, Overland Park, KS 66202 Position held with Fund: Director Director since: 1998 Principal Occupations During Past 5 Years: Vice President & General Counsel, Board of Regents, University of Oklahoma; Adjunct Professor, University of Oklahoma Law School; Managing Member, Harroz Investments, LLC, commercial enterprise investments Other Directorships held by Director: Treasurer, Oklahoma Appleseed (Center for Law and Justice) John F. Hayes (82) 6300 Lamar Avenue, Overland Park, KS 66202 Position held with Fund: Director Director since: 1988 Principal Occupation During Past 5 Years: Chairman, Gilliland & Hayes, PA, a law firm Other Directorships held by Director: Director, Central Bank & Trust and Central Financial Corp.; formerly, Director, Central Properties, Inc. Glendon E. Johnson (77) 13635 Deering Bay Drive, Unit 284, Miami, FL 33158 Position held with Fund: Director Director since: 1971 Principal Occupations During Past 5 Years: Retired; formerly, Chief Executive Officer and Director, John Alden Financial Corp. Other Directorships held by Director: Manager, Castle Valley Ranches LLC; Chairman, Wellness Council of America; Chairman, Bank Assurance Partners, marketing; Executive Board and Advisory Committee, Boy Scouts of America Eleanor B. Schwartz (64) 1213 W. 95th Ct., Chartwell #4, Kansas City, MO 64114 Position held with Fund: Director Director since: 1995 Principal Occupations During Past 5 Years: Professor, University of Missouri at Kansas City; formerly, Chancellor, University of Missouri at Kansas City Other Directorships held by Director: None Frederick Vogel III (66) 6300 Lamar Avenue, Overland Park, KS 66202 Position held with Fund: Director Director since: 1971 Principal Occupation During Past 5 Years: Retired Other Directorships held by Director: None Interested Directors Robert L. Hechler (65) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Director; formerly, President, Principal Financial Officer; formerly, Vice President Director since: 1998 Principal Occupations During Past 5 Years: Consultant of WDR and W&R (2001 to present); Director of WDR (1998 to present); Executive Vice President and Chief Operating Officer of WDR (1998 to 2001); Director, Principal Financial Officer and Treasurer of W&R (1981 to 2001); Chief Executive Officer and President of W&R (1993 to 2001); Director, Executive Vice President, Principal Financial Officer and Treasurer of WRIMCO (1985 to 2001); Director and Treasurer of WRSCO (1981 to 2001); President of WRSCO (1981 to 1999) Other Directorships held by Director: None Henry J. Herrmann (59) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Director and President; formerly, Vice President Director since: 1998; President since: 2001 Principal Occupation(s) During Past 5 Years: Director, President and Chief Investment Officer of WDR (1998 to present); Treasurer of WDR (1998 to 1999); Director of W&R (1993 to present); Director of WRIMCO (1992 to present); President and Chief Executive Officer of WRIMCO (1993 to present); Chief Investment Officer of WRIMCO (1991 to present) Other Directorships held by Director: None William T. Morgan (73) 928 Glorietta Blvd., Coronado, CA 92118 Position held with Fund: Director Director since: 1985 Principal Occupation(s) During Past 5 Years: Retired; Mr. Morgan retired as Chairman of the Board of Directors and President of each of the funds in the Fund Complex then in existence on April 30, 1993 Other Directorships held by Director: None Frank J. Ross, Jr. (48) Polsinelli, Shalton & Welte,700 West 47th Street, Suite 1000, Kansas City, MO 64112 Position held with Fund: Director Director since: 1996 Principal Occupation During Past 5 Years: Shareholder/Director, Polsinelli, Shalton & Welte, a law firm Other Directorships held by Director: Director, Columbian Bank & Trust Keith A. Tucker (56) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Chairman of the Board of Directors and Director; formerly, President Director since: 1993; Chairman of the Board of Directors since: 1998 Principal Occupation(s) During Past 5 Years: Chairman of the Board of Directors, Director and Chief Executive Officer of WDR (1998 to present); Principal Financial Officer of WDR (1998 to 1999); Chairman of the Board of Directors and Director of W&R, WRIMCO and WRSCO (1993 to present); Vice Chairman of the Board of Directors of Torchmark Corporation (1991 to 1998); Chairman of the Board of Directors of Torchmark Distributors, Inc. (1993 to 1997) Other Directorships held by Director: Director, Vesta Insurance Group (1996 to 1997) Officers Theodore W. Howard (59) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President, Treasurer, Principal Accounting Officer, and Principal Financial Officer Length of Time Served: Vice President, Treasurer and Principal Accounting Officer, 15 years; Principal Financial Officer, since 2002 Principal Occupation(s) During Past 5 Years: Senior Vice President of WRSCO (2001 to present); Vice President of WRSCO (1988 to 2001) Directorships held: None Kristen A. Richards (34) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President, Secretary and Associate General Counsel Length of Time Served: 2 years Principal Occupation(s) During Past 5 Years: Vice President, Associate General Counsel and Chief Compliance Officer of WRIMCO (2000 to present); Assistant Secretary of each of the funds in the Fund Complex (1998 to 2000); Compliance Officer of WRIMCO (1995 to 1998) Directorships held: None Daniel C. Schulte (36) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President, Assistant Secretary and General Counsel Length of Time Served: 2 years Principal Occupation(s) During Past 5 Years: Vice President, Secretary and General Counsel of WDR (2000 to present); Senior Vice President, Secretary and General Counsel of W&R, WRIMCO and WRSCO (2000 to present); Assistant Secretary of WDR (1998 to 2000); an attorney with Klenda, Mitchell, Austerman & Zuercher, L.L.C. (1994 to 1998) Directorships held: None Michael L. Avery (48) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 5 years Principal Occupation(s) During Past 5 Years: Senior Vice President/Vice President and Director of Research of WRIMCO (1987 to present); portfolio manager for investment companies managed by WRIMCO and its predecessor (1994 to present) Directorships held: None Bryan J. Bailey (38) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 2 years Principal Occupation(s) During Past 5 Years: Vice President of WRIMCO (2000 to present); assistant portfolio manager for investment companies managed by WRIMCO (1999 to 2000); employee of WRIMCO (1993 to present) Directorships held: None Daniel P. Becker (37) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 2 years Principal Occupation(s) During Past 5 Years: Senior Vice President of WRIMCO (2000 to present); Vice President of WRIMCO (1997 to 2000); portfolio manager for investment companies managed by WRIMCO (1997 to present) Directorships held: None Thomas A. Mengel (44) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 6 years Principal Occupation(s) During Past 5 Years: Senior Vice President of WRIMCO (2000 to present); Vice President of WRIMCO (1996 to 2000) Directorships held: None Barry M. Ogden (32) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: since 2002 Principal Occupation(s) During Past 5 Years: Vice President of WRIMCO (2000 to present); assistant portfolio manager for investment companies managed by WRIMCO (1999 to present); employee of WRIMCO (1994 to present) Directorships held: None Louise D. Rieke (52) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 5 years Principal Occupation(s) During Past 5 Years: Senior Vice President/Vice President of WRIMCO (1986 to present); portfolio manager for investment companies managed by WRIMCO and its predecessor (1986 to present) Directorships held: None Grant P. Sarris (35) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 4 years Principal Occupation(s) During Past 5 Years: Senior Vice President of WRIMCO (2000 to present); Vice President of WRIMCO (1998 to 2000); assistant portfolio manager for investment companies managed by WRIMCO (1996 to 1998) Directorships held: None Kimberly Scott (41) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 1 year Principal Occupation(s) During Past 5 Years: Vice President of WRIMCO (2001 to present); investment analyst for WRIMCO (1999 to 2001); equity analyst for Bartlett & Company (1994 to 1999) Directorships held: None Zachary H. Shafran (36) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 1 year Principal Occupation(s) During Past 5 Years: Senior Vice President of WRIMCO (2000 to present); Vice President of WRIMCO (1996 to 2000); portfolio manager for investment companies managed by WRIMCO (1996 to present) Directorships held: None W. Patrick Sterner (52) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 10 years Principal Occupation(s) During Past 5 Years: Senior Vice President of WRIMCO (2000 to present); Vice President of WRIMCO (1992 to 2000) Directorships held: None Mira Stevovich (48) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President, Assistant Treasurer and portfolio manager Length of Time Served: 2 years Principal Occupation(s) During Past 5 Years: Vice President of WRIMCO (1998 to present); assistant portfolio manager for investment companies managed by WRIMCO and its predecessor (1989 to 1998) Directorships held: None Daniel J. Vrabac (47) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 5 years Principal Occupation(s) During Past 5 Years: Senior Vice President and Head of Fixed Income for WRIMCO (2000 to present); Vice President of WRIMCO (1994 to 2000) Directorships held: None James D. Wineland (50) 6300 Lamar Avenue, Overland Park, KS 66202 Positions held with Fund: Vice President and portfolio manager Length of Time Served: 5 years Principal Occupation(s) During Past 5 Years: Senior Vice President/Vice President of WRIMCO (1988 to present); portfolio manager for investment companies managed by WRIMCO and its predecessor (1988 to present) Directorships held: None DIRECTORS Keith A. Tucker Overland Park, Kansas Chairman of the Board James M. Concannon Topeka, Kansas John A. Dillingham Kansas City, Missouri David P. Gardner San Mateo, California Linda K. Graves Topeka, Kansas Joseph Harroz, Jr. Norman, Oklahoma John F. Hayes Hutchinson, Kansas Robert L. Hechler Overland Park, Kansas Henry J. Herrmann Overland Park, Kansas Glendon E. Johnson Miami, Florida William T. Morgan Coronado, California Frank J. Ross, Jr. Kansas City, Missouri Eleanor B. Schwartz Kansas City, Missouri Frederick Vogel III Milwaukee, Wisconsin OFFICERS Henry J. Herrmann President Michael L. Avery Vice President Bryan J. Bailey Vice President Daniel P. Becker Vice President Theodore W. Howard Vice President and Treasurer Thomas A. Mengel Vice President Cynthia P. Prince-Fox Vice President Kristen A. Richards Vice President and Secretary Louise D. Rieke Vice President Grant P. Sarris Vice President Daniel C. Schulte Vice President Kimberly A. Scott Vice President Zachary H. Shafran Vice President W. Patrick Sterner Vice President Mira Stevovich Vice President Daniel J. Vrabac Vice President James D. Wineland Vice President Annual Privacy Notice Waddell & Reed, Inc., Waddell & Reed Advisors Group of Mutual Funds, W&R Funds, Inc. and Waddell & Reed InvestEd Portfolios, Inc. ("Waddell & Reed") are committed to ensuring their customers have access to a broad range of products and services to help them achieve their personal financial goals. In the course of doing business with Waddell & Reed, customers are requested to share financial information and they may be asked to provide other personal details. Customers can be assured that Waddell & Reed is diligent in its efforts to keep such information confidential. Recognition of a Customer's Expectation of Privacy At Waddell & Reed, we believe the confidentiality and protection of customer information is one of our fundamental responsibilities. And while information is critical to providing quality service, we recognize that one of our most important assets is our customers' trust. Thus, the safekeeping of customer information is a priority for Waddell & Reed. Information Collected In order to tailor available financial products to your specific needs, Waddell & Reed may request that you complete a variety of forms that require nonpublic personal information about your financial history and other personal details, including but not limited to, your name, address, social security number, assets, income and investments. Waddell & Reed may also gather information about your transactions with us, our affiliates and others. Categories of Information that may be Disclosed While Waddell & Reed may disclose information it collects from applications and other forms, as described above, we at Waddell & Reed also want to assure all of our customers that whenever information is used, it is done with discretion. The safeguarding of customer information is an issue we take seriously. Categories of Parties to whom we disclose nonpublic personal information Waddell & Reed may disclose nonpublic personal information about you to the following types of third parties: selectively chosen financial service providers, whom we believe have valuable products or services that could benefit you. Whenever we do this, we carefully review the company and the product or service to make sure that it provides value to our customers. We share the minimum amount of information necessary for that company to offer its product or service. We may also share information with unaffiliated companies that assist us in providing our products and services to our customers; in the normal course of our business (for example, with consumer reporting agencies and government agencies); when legally required or permitted in connection with fraud investigations and litigation; and at the request or with the permission of a customer. Opt Out Right If you prefer that we not disclose nonpublic personal information about you to nonaffiliated third parties, you may opt out of those disclosures, that is, you may direct us not to make those disclosures (other than disclosures permitted by law). If you wish to opt out of disclosures to nonaffiliated third parties, please provide a written request to opt-out with your name and account number(s) or social security number to: Waddell & Reed, Attn: Opt Out Notices, P.O. Box 29220, Shawnee Mission, Kansas 66201. You may also call 1-888-Waddell and a Client Services Representative will assist you. Confidentiality and Security We restrict access to nonpublic personal information about you to those employees who need to know that information to provide products and services to you. We maintain physical, electronic, and procedural safeguards that comply with federal standards to guard your nonpublic personal information. If you decide to close your account(s) or become an inactive customer, we will adhere to the privacy policies and practices as described in this notice. Householding Notice If you currently receive one copy of the shareholder reports and prospectus for your household (even if more than one person in your household owns shares of the Fund) and you would prefer to receive separate shareholder reports and prospectuses for each account holder living at your address, you can do either of the following: Fax your request to 800-532-2749. Write to us at the address listed on the inside back cover for Waddell & Reed, Inc. Please list each account for which you would like to receive separate shareholder reports and prospectus mailings. We will resume sending separate documents within 30 days of receiving your request. To all traditional IRA Planholders: As required by law, income tax will automatically be withheld from any distribution or withdrawal from a traditional IRA unless you make a written election not to have taxes withheld. The election may be made on the distribution/withdrawal form provided by Waddell & Reed, Inc. which can be obtained from your Waddell & Reed representative or by submitting Internal Revenue Service Form W-4P. Once made, an election can be revoked by providing written notice to Waddell & Reed, Inc. If you elect not to have tax withheld you may be required to make payments of estimated tax. Penalties may be imposed by the IRS if withholding and estimated tax payments are not adequate. This page for your notes and calculations. W&R Funds, Inc. Asset Strategy Fund Core Equity Fund High Income Fund International Growth Fund Large Cap Growth Fund Limited-Term Bond Fund Mid Cap Growth Fund Money Market Fund Municipal Bond Fund Science and Technology Fund Small Cap Growth Fund Tax-Managed Equity Fund FOR MORE INFORMATION: Contact your representative, or your local office as listed on your Account Statement, or contact: WADDELL & REED CLIENT SERVICES 6300 Lamar Avenue P.O. Box 29217 Shawnee Mission, KS 66201-9217 (888) WADDELL (888) 923-3355 Our INTERNET address is: http://www.waddell.com For more complete information regarding any of the mutual funds in W&R Funds, Inc., including charges and expenses, please obtain the Corporation's prospectus by calling or writing to the number or address listed above. Please read the prospectus carefully before investing. W&R Funds, Inc. 6300 Lamar Avenue P.O. Box 29217 Shawnee Mission, Kansas 66201-9217 WRR3000A(3-02) printed on recycled paper